What’s so Great about Free Trade?

Free trade is about as close to a sacred tenet as can be found in classical and neoclassical economic theory. And there is no economic heresy more sacrilegious than protectionism. An important part of what endears free trade to economists, it seems to me, is that it is both logically compelling and counter-intuitive. There is something both self-evident, yet paradoxical, about saying that the gains from trade consist in what you receive not in what you give up, in what you import not in what you export. And there is something even more paradoxical and counter-intuitive — and logically inescapable — in the idea of comparative advantage which teaches that every country, no matter how meager its resources and how unproductive its workers, will always be the lowest-cost producer of something, while every country, no matter how well-endowed with resources and how productive its workers, will always be the highest-cost producer of something.

Despite the love and devotion that the doctrine of free trade inspires in economists, the doctrine has had indifferent success in rallying public opinion to its side. Free trade has never been popular among the masses. Supporting free trade has sometimes been a way for politicians to establish that they are “serious,” high-minded, and principled, and therefore worthy of the support those who fancy themselves as “serious,” high-minded and principled. And so there is a kind of moral pressure on politicians to pronounce themselves as free traders, though with the immediate qualification tacked on that they also believe in fair trade. So even that scourge of political correctness, and you know who I mean, felt obligated to say “I’m a free-trader.”

Although free trade has never been a position calculated to attract a popular following, protectionism has usually not been a winning issue either. But it has, on occasion, been an effective strategy by which political outsiders, or those like Pat Buchanan and Ross Perot, posing as political outsiders, could attract a following. In fact, it is remarkable how closely the message of economic nationalism, control of the borders, disengagement from international treaties and alliances, trumpeted by the Politically Incorrect One resembles the message propagated by Buchanan in his 1992 and 1996 campaigns.

And the protectionist anti-free-trade message clearly appeals to both ends of the political spectrum. Opposition to NAFTA and other free-trade agreements has been fueling the Sanders campaign just as much as it has fueled the campaign of the Golden-Haired One. The latter, of course, has benefited from being able to push a number of other hot-button issues that Sanders would not want to be associated with, and, above all, from having shrewdly chosen a group of incredibly weak opponents (AKA the deep Republican bench that we used to hear so much about) to run against. So the question that I want to explore is why there is such a disconnect between the public and professional economists (with a few noteworthy exceptions to be sure, but they are just that — exceptional) about free trade?

The key to understanding that disconnect is, I suggest, the way in which economists have been trained to think about individual and social welfare, which, it seems to me, is totally different from how most people think about their well-being. In the standard utility-maximization framework, individual well-being is a monotonically increasing function of individual consumption, leisure being one of the “goods” being consumed, so that reductions in hours worked is, when consumption of everything else is held constant, welfare-increasing. Even at a superficial level, this seems totally wrong. While it is certainly true that people do value consumption, and increased consumption does tend to increase overall levels of well-being, I think that changes in consumption have a relatively minor effect on how people perceive the quality of their lives.

What people do is a far more important determinant of their overall estimation of how well-off they are than what they consume. When you meet someone, you are likely, if you are at all interested in finding out about the person, to ask him or her about what he or she does, not about what he or she consumes. Most of the waking hours of an adult person are spent in work-related activities. If people are miserable in their jobs, their estimation of their well-being is likely to be low and if they are happy or fulfilled or challenged in their jobs, their estimation of their well-being is likely to be high.

And maybe I’m clueless, but I find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on how much they consume. It seems to me that what matters to most people is the nature of their relationships with their family and friends and the people they work with, and whether they get satisfaction from their jobs or from a sense that they are accomplishing or are on their way to accomplish some important life goals. Compared to the satisfaction derived from their close personal relationships and from a sense of personal accomplishment, levels of consumption don’t seem to matter all that much.

Moreover, insofar as people depend on being employed in order to finance their routine consumption purchases, they know that being employed is a necessary condition for maintaining their current standard of living. For many if not most people, the unplanned loss of their current job would be a personal disaster, which means that being employed is the dominant – the overwhelming – determinant of their well-being. Ordinary people seem to understand how closely their well-being is tied to the stability of their employment, which is why people are so viscerally opposed to policies that, they fear, could increase the likelihood of losing their jobs.

To think that an increased chance of losing one’s job in exchange for a slight gain in purchasing power owing to the availability of low-cost imports is an acceptable trade-off for most workers does not seem at all realistic. Questioning the acceptability of this trade-off doesn’t mean that I am denying that, in principle, free trade increases aggregate income or that there are corresponding employment gains associated with the increased export opportunities created by free trade. Nor does it mean that I deny that, in principle, the gains from free trade are large enough to provide monetary compensation to workers who lose their jobs, but I do question whether such compensation is possible in practice or that the compensation would be adequate for the loss of psychic well-being associated with losing one’s job, even if money income is maintained.

Losing a job may cause a demoralization for which monetary compensation cannot compensate, because the compensation is incommensurate with the loss. The psychic effects of losing a job (an increase in leisure!) are ignored by the standard calculations of welfare effects in which well-being is identified with, and measured by, consumption. And these losses are compounded and amplified when they are concentrated in specific communities and regions, causing substantial further losses to the businesses dependent on the demand of newly unemployed workers. The hollowing out of large parts of the industrial northeast and midwest is sad testimony to these wider effects, which include the irreparable loss of intangible infrastructural capital resulting from the withering away of communities in which complex and extensive social networks formerly thrived.

The goal of this post is not to make an argument for protectionist policies, let alone for any of the candidates arguing for protectionist policies. The aim is to show how inadequate the standard arguments for free trade are in responding to the concerns of the people who feel that they have been hurt by free-trade policies or feel that the jobs that they have now are vulnerable to continued free trade and ever-increasing globalization. I don’t say that responses can’t be made, just that they haven’t been made.

The larger philosophical or methodological point is that although the theory of utility maximization underlying neoclassical theory is certainly useful as a basis for deriving what Samuelson called meaningful theorems – or, in philosophically more defensible terms, refutable predictions — about the effects of changes in specified exogenous variables on prices and output. Thus, economic theory can tell us that an excise tax on sugar tends to cause an increase in the price, and a reduction in output, of sugar. But the idea that we can reliably make welfare comparisons between alternative states of the world when welfare is assumed to be a function of consumption, and that nothing else matters, is simply preposterous. And it’s about time that economists enlarged their notions of what constitutes well-being if they want to make useful recommendations about the welfare implications of public policy, especially trade policy.

43 Responses to “What’s so Great about Free Trade?”


  1. 1 Frank Restly March 31, 2016 at 7:15 pm

    David,

    “But the idea that we can reliably make welfare comparisons between alternative states of the world when welfare is assumed to be a function of consumption, and that nothing else matters, is simply preposterous. And it’s about time that economists enlarged their notions of what constitutes well-being if they want to make useful recommendations about the welfare implications of public policy, especially trade policy.”

    Well said.

  2. 2 Kevin Erdmann March 31, 2016 at 8:11 pm

    Good points. I would point out, though, that an argument explicitly about trade which could be applied to progress in general, should be applied to progress in general. And the most pertinent question may be why the argument tends to be framed around the more specific case.

  3. 3 John S March 31, 2016 at 11:31 pm

    Next post: “What’s so great–or even remotely desirable–about open borders?”

    With Bryan Caplan in the crosshairs.

  4. 4 Jerry Brown April 1, 2016 at 1:05 am

    What a great post, thank you for writing it.

    Often it seems that economists forget that the economy consists of actual people who really don’t base their happiness on some consumption function or abstract utility curve. It is important, at least to me, when an economist shows that they are studying the behavior of human beings who usually have some other motivations besides maximizing their own personal consumption. I think that is the mark of a social scientist as opposed to someone assuming they are studying automatons.

    Anyways, to summarize- Thanks. Think its a great post.

  5. 5 acarraro April 1, 2016 at 1:06 am

    I think Kevin makes a wonderful argument. Should we stop subsidizing basic research? Technological innovation could disrupt current production methods and cause some people to lose their jobs. Very few people explicitly luddites, but there are close parallels between those and protectionists. are The real issue is not the welfare function, but the distribution: some big losers and a lot of small winners. It’s a kind of prisoners dilemma. Government are supposed to facilitate choosing such solutions, by making sure we don’t fall in the suboptimal rational scenario…

    I honestly don’t buy the moral/psychic value of work: I think it might be true for university professors, but it hardly applies to a large part of the population. And it’s a lot more linked with relative position than absolute anyway…

  6. 6 foosion April 1, 2016 at 3:03 am

    Excellent post.

    Another issue is that the label “free trade” is often used as a talisman to ward off criticism of trade agreements that have features other than decreasing protectionism.

    For example, the current TPP would greatly increase patent and other intellectual property protections. This is a form of protectionism which could be as contrary to classical free trade as tariffs, yet because it’s part of a “free trade” agreement, it gets a pass.

    Also, modern trade agreements tend to continue protections that help some high income workers. Factory workers have to compete with foreigners, but doctors and lawyers (some of the highest income workers) are protected by licensing laws, even when foreign standards are as good as domestic standards.

  7. 7 Ben Southwood April 1, 2016 at 4:41 am

    Seems to me that “having a decent job” is a very important good for most people, but conceding that shouldn’t shake our framework & views about free trade *that much*.

    So long as there’s no AD problem, and we’re at or close to full employment, then any particular use of labour is still a bad that we’d like to reduce, because we can do something else with the labour.

    Now, if workers start being zero marginal product, then we are approximately in the same situation except we need to subsidise jobs (first remove all the taxes on it!) to get the large benefits of “having a decent job”. But we still don’t want to subsidise/protect any particular sector or job (i.e. the sectors or jobs that would be producing the stuff we’d otherwise import).

    This even holds if not all jobs are viewed as “decent”—we find some way of identifying & subsidising those. I’ll admit that protectionism might be a 20th-best way of getting to this situation, but I don’t think that acknowledging that being employed is a good fundamentally undermines utility maximisation at all.

  8. 8 peterschaeffer April 1, 2016 at 4:50 am

    Mr. Glasner,

    Your comments on this subject (trade) are much appreciated.

    Dani Rodrik offered some similar observations a few years ago. Actually, he commented on Robert Driskill’s paper “Deconstructing the Argument for Free Trade”.

    See below and “Deconstructing economists’ take on free trade” (http://rodrik.typepad.com/dani_rodriks_weblog/2007/09/deconstructing-.html) for Professor Rodrik’s notes.

    Thank you

    Peter Schaeffer

    September 22, 2007

    Deconstructing economists’ take on free trade

    Once in a while you come across a paper that makes you nod in agreement and go “yes!” with every sentence you read. Robert Driskill’s Deconstructing the Argument for Free Trade is such a paper. Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions

    gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be “good for the nation as a whole”, even when some members of that nation are hurt by the change?

    In other words, instead of sticking to what they are good at–analyzing trade-offs–economists typically engage in amateur normative political theorizing about what is good for society.

    Driskill also makes a more fundamental point:

    Consider a scene in the movie Dead Poets Society, in which the all-boys-school poetry teacher portrayed by the actor Robin Williams asks his students: What is the purpose of language? They predictably answered: to communicate. Their teacher then corrected them: the purpose of language, he claimed, is to “woo women!”

    Of course, in some contexts, wooing women is a worthy goal. But scientific writing about policy issues shouldn’t be like writing poetry. Unfortunately, most economic writing on the welfare implications of trade are not a balanced weighing of the evidence or a critical evaluation of the pros and cons of arguments, but rather are more akin to a zealous prosecutor’s advocacy of a point of view. As such, this writing is designed to persuade rather than to give the reader the information needed to form an educated point of view….

    My point is not that the economics profession is not on the side of angels in the policy debate over trade liberalization–although I will argue that a more careful argument should lead to a more nuanced view–but that the argument is poorly made. This reflects negatively on the credibility of the economics profession as a whole: critical thinkers might believe all economic arguments are as poorly supported as is the one in support of free trade; others might believe economists are mere propagandists and handmaidens in service of some philosophical or political goal. Furthermore, it obscures some key ideas that should be part of a persuasive argument in support of free trade. And finally, it has confused many people into false beliefs about what economic analysis really says about the effects of international trade.

    A pervasive such false belief, for example, is that trade necessarily benefits more people than it hurts.

    Driskill illustrates his arguments by drawing on the writings of a range of economists, from Deirdre McCloskey to Paul Krugman. You must read this paper if you are an economist (or keep their company).

  9. 9 Tim Worstall (@worstall) April 1, 2016 at 6:30 am

    “will always be the lowest-cost producer of something, while every country, no matter how well-endowed with resources and how productive its workers, will always be the highest-cost producer of something.”

    Err, no, that’s absolute advantage

  10. 10 David Glasner April 1, 2016 at 6:37 am

    Tim, No it’s comparative advantage. One country has an absolute advantage in everything, but a comparative disadvantage in at least one thing. The other country has an absolute advantage in everything, but a comparative advantage in at least one thing.

  11. 11 Anonymous April 1, 2016 at 9:21 am

    You’ve explained this issue well, but I think you give too much credit to a subset of the economics profession that rejects the implications of formal analysis. The economics profession has been at war with itself for almost half a century — ever since the formal critiques of general equilibrium theory were written (e.g. Aumann, Sonnenschein-Debreu-Mantel). Thus, what you are referring to as the “economist”‘s point of view really belongs to a subset of economists who cling to out-dated maxims and are unwilling to accept the implications of formal analysis.

  12. 12 Bryan Atkins April 1, 2016 at 10:11 am

    Greets Mr. Glasner.
    My first read of yours, like the evident humanity in your writing. And wholly agree with thee re: “It seems to me that what matters to most people is the nature of their relationships with their family and friends and the people they work with, and whether they get satisfaction from their jobs or from a sense that they are accomplishing or are on their way to accomplish some important life goals.”

    “The most fundamental phenomenon of the universe is relationship.” Jonas Salk — “Anatomy of Reality” (delicious title)

    “And it’s about time that economists enlarged their notions of what constitutes well-being if they want to make useful recommendations about the welfare implications of public policy, especially trade policy.”

    Verily!
    From my perspective, the myopia of economists’ “notions of what constitutes well-being” is profound, and dangerous.

    In addition, I think economists don’t understand code in a physics / evolution context, including monetary code.

    “The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil – “How to Create a Mind”

    Arguing thusly: Exponentially accelerating complexity has crushed the efficacy of our cultural genome, the coding structures the cultural organism deploys for its relationship interface, internally, and with the geo, eco, bio & tech networks.

    It ain’t rocket science; if your culture’s relationship with the sky and ocean are deadly, your cultural genome sucks.

    For people interested in brave new variations in “monetary policy”, please see Culture, Complexity and Code: http://ow.ly/Zny2a

    The daring may be interested in Larry Chang’s new econ app, the Planetary Index. It is NOT a command-and-control, central planning structure. As we know, that can’t work. Nor is it hands off. We’re too powerful a species for that. It’s a fractal-based model. Here’s an interview I did with Mr. Chang: http://ow.ly/10bozA

    An immune system responding to an unknown pathogen generates simultaneous variation because what response might work is also unknown. Given that it’s Triage Time, along with the continuing onslaught of complexity, I think simultaneous variation is a path to pursue.

  13. 13 Miguel Navascués April 1, 2016 at 10:11 am

    Illuminating post. It questions how far away are our preposterous theory from non-economist people. What replenish the vacuum between the elitist theories on one hand, and confidence of people when he goes to vote, on the other? A melange of ideology, mistery, illusions -also resignation- and so on, that permits the play of what we nominate “democracy”. But economics is surely the last contributor to electoral result. Democracy and civilization are quite delicate plants, I suppose.
    And David is right, absolutely. The main contributor to happiness, satisfaction with our lives, is neither consumption, nor leisurely. Surely it is most more important the anxiety to our future (and the future of our family) related with the security of labor.
    In this sense, I see more plausible and compelling to promote free trade a well explained international trade policy of mutual interest with our partners, than a elitist an minoritary theory.

  14. 14 Fred Beloit April 1, 2016 at 1:15 pm

    What is so great about free trade? (1) Lower prices for goods here. (2) Competition makes businesses work harder on quality issues.

  15. 15 Shahid April 1, 2016 at 2:09 pm

    David, besides writing a very illuminating post about a very important issue, you’ve written something that brought back some very personal memories. A few years ago, I lost my job and remained jobless for 6 months. I cannot tell you how horrible and psychologically painful it was. It kills you from the inside, and no amount of expansion in consumption choices could heal that wound. Even today, I feel the pain of that time. I lost my standing, prestige and lost my ability to connect socially. Your hypothetical illustration of the psychic trauma struck close to home and i recalled my earlier time.

    No, it wasn’t free trade that caused me to lose my job. But the story easily applies to labour which is dislocated from their work in this manner. A few years ago, i was researching the implications of more open trade in a border town. This forum is not the place to discuss the findings in detail, but in short, the winners from free trade were the government (more tax money from duties) and a few big traders with monopoly like power. The losers: a substantial number of villagers whose lives were based on agriculture. The opening of trade meant that their products were no longer in much demand (here’s the funny thing: there wasn’t much difference between their products and the one’s imported. The foreign products sold because for the consumers, it was socially more acceptable and prestigious to buy something foreign). Subsequently, already living on meager earnings, this meant the loss of their livelihood. No amount of government assurances about helping, relocating or subsidizing their loss proved helpful. A few of them, who had spent their lifetimes toiling in the fields, committed suicide. The trauma was just too difficult to bear. How could one realistically expect 60 or 70 year old’s to ‘relocate’ to other jobs?

    That time was one of reflection for me, about the idea that the welfare of a few may be built upon the miseries of others. While the urban consumer folks may realize more variety and choices in terms of consumption, there are other folks whose lives might well be destroyed. Those who end up on the losing side of free trade may find another job somewhere, but it may be difficult to recover from the psychological scars.

    Free Trade, in short, is not a ‘winners all’ situation. We’ve been living under the assumption that ‘free trade benefits all and hurts none’ for long. Time to revisit this philosophy, as well as to reconsider basing criterion for welfare enhancement on mere consumption.

  16. 16 Patrick R. Sullivan April 1, 2016 at 3:10 pm

    Funny that the Soviet Union had such a big problem with absenteeism if ‘what you do’ is more important than consumption.

    But, speaking of comparative advantage, most people are really bad at articulated rationality. That’s why, as some 18th century Scot put it, it’s amazing that interested sophists can get away with confounding the common sense of mankind. Yet those same people have no problem at all finding what is in their self-interest when they go shopping.

  17. 17 dajeeps April 1, 2016 at 7:17 pm

    Excellent post! I was a supply-sider in another life which makes it easier to imagine that having free trade with along with other policies that are popular, like regulated labor, prohibitive environmental policies, and reams of red tape involved starting up and bringing new products to market, to name a few, would result in productive capacity moving around based on the cost of doing business in real terms. Free trade isn’t really the kind of thing that can be done in half measures, yet those kinds of policies that reduce competitiveness never seem to end up as the object of scorn. It’s always someone else responsible for job loss instead of the people in the mirror who imagine that it’s possible to have one’s cake and eat it too.

  18. 18 JKH April 1, 2016 at 8:57 pm

    It seems as if your argument applies more generally than the case of free trade.

    Related question:

    Does the idea of comparative advantage in free trade apply abstractly to subsets of a closed economy?

    If so, how is the issue of international free trade (and your analysis of it) special in this context?

  19. 19 Tim Worstall (@worstall) April 2, 2016 at 4:55 am

    “Tim, No it’s comparative advantage. One country has an absolute advantage in everything, but a comparative disadvantage in at least one thing. The other country has an absolute advantage in everything, but a comparative advantage in at least one thing.”

    What you actually said was:

    “will always be the lowest-cost producer of something, while every country, no matter how well-endowed with resources and how productive its workers, will always be the highest-cost producer of something.””

    Which is indeed absolute advantage. The lowest or highest cost producer.

    Comparative advantage is nothing to do with my costs versus your costs. It’s my costs doing something compared to my costs doing something else.

  20. 20 Michael John April 2, 2016 at 5:35 am

    Isn’t this discussion of psychic effects a rejection of opportunity cost, and therefore scarcity, as the sole determinate of prices? Hasn’t the profession already walked this road in the real cost / alternative cost debate a century ago?

  21. 21 DMXRoid April 2, 2016 at 7:07 am

    I don’t think that changing the metric by which you evaluate the welfare impact of trade really does anything to the overall analysis of whether or not free trade is good. The benefits to trade don’t _stop_ at cheaper per-unit consumption, that cheaper consumption allows for more savings/investment, or increased consumption of other goods, both of which spur increased production (and usually increased employment) in those industries. Every dollar I don’t have to spend on tomatos or bananas or cars is a dollar I can either save for future consumption or a dollar I can spend on remodeling my house. Add to that the positive employment impacts of foreign direct investment, and it’s really hard to maintain that free trade has a net negative welfare impact. Yes, some people suffer job loss or underemployment, but there are also significantly greater opportunities for present and future workers to find meaningful employment in higher productivity industries.

  22. 22 David R Henderson April 2, 2016 at 7:13 am

    Actually, Tim, David is right on the comparative advantage point. The cost of your doing X rather than Y IS the value of the foregone Y.

  23. 23 Becky Hargrove April 2, 2016 at 2:09 pm

    David, I really enjoyed this post. In Scott Sumner’s reply, he noted the fact that automation is the real problem for potential job losses as opposed to free trade. However the two are not easy to separate in the public’s mind, especially given the fact policy makers have already had decades to respond productively to changing automation realities. Their lack of response could now mean losses in worldwide trade, in the years ahead.

    I continue to hope such losses will not occur, and that people have reason once again to support worldwide tradable sectors. How so? Through broader support of local non tradable sectors on monetary rather than fiscal terms. A marketplace for time value, would give people a chance to produce and consume in relation to one another, and it would help to restore wealth to areas and regions which have been hit hard by the losses of tradable sectors.

    It’s difficult for people to respond positively to free trade gains in tradable sectors, when they haven’t had the chance to locally create a truly free marketplace for knowledge use and related time based services.

  24. 24 cardiffkook April 2, 2016 at 3:33 pm

    I think Acarro nailed it in his response. Free markets and free trade face a situation quite similar, or exactly like a prisoner’s dilemma. Long term, on average, we tend to gain (see McCloskey’s last three books). But short term, we risk the very real risk of job loss, recessions and other forms of creative destruction. Thus the “logical” move for each of us, shorter term, is to defect from the free market paradigm. We seek protection for our job, our industry, or those which we care about.

    It is penny wise and pound foolish.

    Shifting the conversation from prosperity to job quality doesn’t change that either. Longer term the creative areas with change are going to have the interesting jobs too.

    Free trade is a prisoner’s dilemma.

  25. 25 Benjamin Cole April 2, 2016 at 5:41 pm

    Great post.
    Some observations:
    1. Economists tell the public that running federal deficits forever will incur large debts which are not beneficial.
    2. But they say that incurring large debts to foreigners through chronic trade deficits is ok. That when the foreigners buy Treasuries, that is an “investment” or capital flow. And so incurring increasing debts to other nations is ok.

    3. They say that protecting Silicon Valley by importing labor is good. This implies that offshoring tech software and manufacturing to India and China is bad in the case of the tech industry. Keeping an industry and jobs in the US is good, in the case of Silicon Valley.

    4. Something the same happens in shale oil. There is a lot of hullabaloo that jobs were created in Texas and South Dakota. Obviously, there were a lot of high-paying jobs associated with shale oil production.

    5. Unfortunately, the US Federal Reserve does not take advantage of the modern-day fact that supply lines are global. Capital, services, goods, even labor are imported to meet demand. Foreign trade does inoculate the US against inflation. This argument is rarely made.

    6. The public might resent establishment economists a little less if the issues were not always how great immigration and free trade are.There are huge structural impediments in the US economy, including ubiquitous property zoning and a large “national security” archipelago. How about the ubiquitous ban on push-cart vending which prevents millions of Americans from starting up their own businesses?

    I am sorry to say that most establishment economists are…well, they are establishment economists.

  26. 26 Benjamin Cole April 2, 2016 at 7:22 pm

    Add on: this post, and the post on Scalia, are two of the most intelligent pieces of writing in recent times. I do not see how David Glasner can top this!

  27. 27 Dustin Irwin April 3, 2016 at 2:23 pm

    “To think that an increased chance of losing one’s job in exchange for a slight gain in purchasing power owing to the availability of low-cost imports is an acceptable trade-off for most workers does not seem at all realistic. ”

    I agree that this does not seem realistic, but this framing doesn’t reflect the free trade game. Very respectfully (I sincerely believe that you are an great and original thinker), your argument sounds a bit like a restatement of Luddism. When I learned economics, the benefits of free trade were not framed as simply a slight gain in purchasing power offset by unemployment. Rather, while there is an instant reduction in prices, free trade leads to competition, which in turn leads to innovation. Prices will become cheaper, but technology also increases, and these benefits accrue exponentially over time. ‘Stuff’ becomes the more, better, and cheaper, while in the end, we’ll have the same level of unemployment.

    In reality, the only loss from free trade is transitional unemployment. While I agree with your sentiment regarding the sting of unemployment, the problem seems highly manageable via national policy. So why not enjoy the benefits and manage the downside?

    Also, these effects aren’t limited to international free trade arrangements, so why constrain the argument to international free trade? The same scenario plays out when any form of competition is introduced to an equilibrium state – whether or not that competition exists across or within taxable jurisdictions. Other than xenophobia, why is it OK for Kentucky to freely trade with Tennessee but not China?

    Take a few real-world scenarios:
    – Banks are ‘off-shoring’ back office support functions from Manhattan to Salt Lake City (among other locations)
    – Uber is doing what incumbent taxi services find so difficult, provide good service
    – Amazon is disrupting almost every segment of retail and distribution

    All are an example intranational competition, and all lead to transitional unemployment. Yet we are all (mostly, I suppose) in favor of this evolution because we know that in the long run we are all better off.

  28. 28 Ray Lopez April 4, 2016 at 11:35 pm

    Shorter version: free trade only works with rising prices, as an anti-inflation mechanism, not during bad deflation. Economists are historians and their opinions are functions of the state of the economy at any time. Next!

  29. 29 Jose Poncela April 5, 2016 at 12:35 am

    An extraordinary and easy to read article. Congratulations

  30. 30 3rdMoment April 5, 2016 at 8:30 pm

    Probably few people will notice, but many of the points here also apply to discussion about minimum wages. The standard story from proponents seems to be that, as long as employment losses are small, they are outweighed by the wage gains for the low-wage workers who remain employed.

    This piece shows that the harms to those few who become unemployed may be larger, and the benefits for those who don’t smaller, than is typically supposed.

  31. 31 Jerry Brown April 5, 2016 at 10:47 pm

    3rdMoment, it would seem to me that you would have to show that there would in fact be more jobs if there was no minimum wage. And that if there was in fact a loss of jobs, that the would be holders of those sub-minimum wage jobs suffered some more than proportional loss of ‘utility’ compared to consumption from the theoretical loss of those almost guaranteed to be really crummy jobs. Because I think David Glasner is really questioning how economists measure human welfare based on utility theory and consumption. I base that on a comment he made at Scott Sumner’s blog, TheMoneyIllusion, discussing this post.

  32. 32 hanmeng April 6, 2016 at 9:14 am

    You “find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on how much they consume.” WIll you give me all your stuff, then, and spend the rest of your days consuming only the bare minimum?

  33. 33 David Glasner April 6, 2016 at 9:50 am

    hangmeng, No I wouldn’t give you anything. It would be really annoying to give all my stuff to a perfect stranger who is not someone that I even know or care about or who cares about me. Try being a lot — I mean a whole lot — nicer to me, and I might consider it if you convinced me that you were being nice to me for some reason other than wanting to get all my stuff.

  34. 34 notsont April 7, 2016 at 1:38 pm

    That isn’t why working people do not like “free trade”, free trade as you describe it would in fact be fine, the problem comes in when entities outside of a government that is looking out for its own best interests are directing things. We don’t have free trade right now and none of our agreements NAFTA or any other so called “free trade” agreements accomplish anything close to what would be free trade. Free trade can not occur between what amounts to conquered and conqueror.

  35. 35 David Glasner April 7, 2016 at 7:58 pm

    Frank, Thanks.

    Kevin, The crux of my argument is about how economists conceive of utility and welfare, which strikes me as being very limited and distorted. It seemed to me, given all the attention that free trade has been receiving of late, to use free trade as the showcase for my views about utility. But I don’t disagree that the argument could be applied to a much broader set of issues than just trade.

    John S, I am afraid that you are mistaken about my motivation for this post, which is not necessarily your fault. I am also the wrong person to ask for an attack on immigration; I am an anchor baby.

    Jerry, Very kind of you to say so. Thanks.

    acarraro, I am not making a policy argument; I am making an argument about how to think about what matters to people. Luddites were wrong about a lot of things, but does that mean they had no legitimate concerns? Maybe if we thought about what really matters to people in a slightly different way, we would come to different conclusions about policy. I don’t know, but I don’t think we should simply dismiss the possibility just because it might suggest that Luddites actually had a legitimate concern despite their counterproductive method of addressing the concerns.

    foosion, I totally agree that there is a lot of bad stuff included in trade agreements that is thereby legitimized as advancing the cause of free trade. I am especially concerned about the enhanced enforcement of so-called intellectual property. And you make a good point about the legal protections that doctors and lawyers have built up against foreign competition.

    Ben, I don’t agree that any use of labor is a bad just because there is full employment. Just as there are products that encompass both positive and negative effects – automobiles move people from point a to point b but also emit bad stuff into the atmosphere – the jobs that people do can have positive and negative effects. I am not arguing against utility maximization, I am arguing that thinking about utility as a function of consumption alone is a huge oversimplification, though it can be justified, like many other simplifications, as an approach to problem solving. But we shouldn’t think that every problem is usefully solved using that simplification.

    Peter, Thanks for the reference to Driskill’s paper. I agee with what Rodrik has to say about it.

    Anonymous, I agree that it is dangerous to generalize about what “economists” believe. We are an eclectic and ragtag collection.

    Bryan, Thanks for your comment, with which I am very sympathetic, but based on what little I know of his work, I think Ray Kurzweil is completely misguided in his writings about mind. See Colin McGinn’s devastating takedown of him in the NYRB.
    http://www.nybooks.com/articles/2013/03/21/homunculism/

    Miguel, Unfortunately, we are not likely to see such a trade policy any time soon.

    Fred, To be sure those are benefits of free trade, but we should not dismiss the downside quite so casually.

    Shahid, Thanks for sharing your personal experiences, which are certainly sobering.

    Patrick, I think people like to work in an environment in which what they do is perceived as useful and they are treated with some respect. Do you think that’s what work was like in the Soviet Union? Ordinary people often have a good idea of their self-interest, but not always. Why was lead still used in paint and in gasoline until the 1970s even though the poisonous effects of lead had been well known for decades?

    dajeeps, We want many things and many of the things that we want involve trade offs with other things that we want. So it’s no surprise that policies often seem at cross purposes. The world is complicated.

    JKH, Yes it does. I just used free trade because it has become such a big issue in this election cycle.

    Michael, I think the point that I am making goes beyond the real cost opportunity cost debate, but you are right to point out the relationship. The profession did not really reach a definitive conclusion on the debate either, see Viner’s Studies in the Theory of International Trade. It depends on what assumptions are built into the analysis.

    DMXRoid, The losses of people with specific human or physical capital investments that are rendered less valuable by new competition are generally difficult if not impossible to compensate. So there are large losses borne by particular unlucky individuals, and these losses are more profound than just the financial or pecuniary loss. There is a severe psychic toll for those people that are unable to earn a livelihood at all or on the same level as they used to. For many workers, especially those in middle age, there is little hope of retraining that would enable them to restore their previous earning capacity. It’s possible to diversify one’s portfolio of physical capital; it’s much harder to diversify one’s portfolio of human capital.

    Becky, I agree the problems are very similar. Of course the “classical” arguments for free trade were about pure allocative efficiency not about growth and technical progress.

    cardiffkook, It’s not that hard to understand. The losses are concentrated on a relatively few and the gains are spread out. That’s a scenario that calls for insurance. But I am suggesting that the psychic losses are underestimated, so that the net gains may be overestimated.

    Benjamin, Just for those kind words about me, I am almost ready to forgive you for supporting you know who.

    Dustin, I also appreciate your kind words about me. At the risk of of own self-discreditation, I will just say that even though Luddism is now universally discredited, it does mean that the concerns that motivated the Luddites were imaginary. The losses imposed on those unfortunate ones whose livelihoods and much else are destroyed by progress is not necessarily recouped by those who have suffered. For some (many?) people the suffering is permanent not just transitional. Do we just write them off as if they are of no account? You say the problem is manageable. Do you think we have managed it well so far? I agree that the phenomenon is not restricted to international trade. When you say we are all better off, don’t you mean all, except for those that I am not going to notice.

    Ray, thanks for summarizing whatever it was that you summarized.

    Jose, Thanks.

    3rdMoment, The question that we are still struggling to answer is what is the magnitude of the job losses caused by minimum wage laws. It looks like we are going to have a number of natural experiments to study over the next few years. Whatever their effects, one hopes it will at least lead to a better understanding of how labor markets operate.

    notsont, I agree it is very hard to define what free trade actually means. One could easily make an argument against NAFTA and other bilateral and multilateral free trade agreements as being anti-free trade because they increase rather than decrease trade distortions. The free trade ideal would be better served by uniform tariffs across all countries than by a series of trading blocks with internal free trade and external protection.

  36. 36 Patrick R. Sullivan April 8, 2016 at 7:57 am

    ‘Patrick, I think people like to work in an environment in which what they do is perceived as useful and they are treated with some respect. Do you think that’s what work was like in the Soviet Union?’

    I think it was like the joke from the time, ‘We pretend to work, and they pretend to pay us.’ I.e., it was about consumption.

  37. 37 cardiffkook April 8, 2016 at 8:04 am

    David,

    Thanks for the reply. Yeah, the losses are both concentrated and underestimated. Agreed.

    But you are just adding to the ledger of *costs of creative destruction.*

    It doesn’t change the underlying long term logic that creative destruction and the uncertainty of competition and change is what drives the system forward, and that failure to drive the system forward is on net a longer term loss for all of us. Each of us logically wants to be part of a progressive system, but we want the privilege of not being personally at risk. This is a type of cooperative defection, and if we all did it, the system would become sclerotic and collapse.

    To be more specific, the job this supposed victim is losing is the same job created by 250 years of people who didn’t defect on the game. And the other unseen loser will be all our descendants who no longer gain good jobs and prosperity because we all chose to defect on the competition.

    You are effectively assuming the job which then gets destroyed. If its loss costs far more, so too does is its creation worth more, and the creation comes out of the system which gets undermined by protecting the job. And the same logic holds going forward.

    In the end, we need to decide what type of society we want to live in and bequeath to those who follow us. A static one where we don’t worry about creative destruction or one capable of creating jobs and prosperity in the future. In the mean time, if we choose the path toward economic progress, well designed insurance and safety nets can be funded with the proceeds.

  38. 38 kaleberg April 8, 2016 at 3:41 pm

    If someone loses a $20 an hour job and is replaced by someone in another country working for $5 an hour, exactly how does this increase the overall number of goods that people can buy? At least with the minimum wage one knows that every additional penny received will get spent and go to other workers and businesses. With free trade, it looks like demand just vanishes.

  39. 39 kaleberg April 8, 2016 at 3:43 pm

    By the way, it is great to see more economists actually looking at the typical policy arguments we hear. Having recently discovered Joan Robinson, I realized that an awful lot of the economic nonsense I had been exposed to was indeed nonsense promulgated to justify certain political classes.

  40. 40 Patrick R. Sullivan April 9, 2016 at 9:23 am

    kaleberg, demand doesn’t vanish unless the central bank withdraws money from circulation.

    In the situation you describe–imported products displacing domestically produced goods–the prices of the consumed goods will decline and the purchasing power of the domestic money supply will increase as a result. That’s step one in increased consumption, or as you put it, ‘the overall number of goods that people can buy.’

    If people had been paying $20 for a domestically produced T-shirt and now it only costs $5 for an imported one, they have $15 left over to spend on restaurant meals or whatever they choose to use their greater purchasing power on.

    PLUS; the foreigners who shipped us their goods now have good ol’ American greenbacks to spend on American produced goods. Or, to invest in American businesses (and create jobs!).

    I”d suggest you read less Joan Robinson, and substitute Russ Roberts’ ‘The Choice: A Fable of Free Trade and Protection’;

    http://www.amazon.com/The-Choice-Fable-Protection-Edition/dp/0131433547

  41. 41 susupply April 9, 2016 at 9:28 am

    ‘o be more specific, the job this supposed victim is losing is the same job created by 250 years of people who didn’t defect on the game.’

    Nicely put, cardiffkook. Did Henry Ford’s employees have to compensate the bicycle and buggy-whip workers they displaced?

  42. 42 David Glasner April 11, 2016 at 4:28 pm

    Patrick, It was a joke and it was a funny one; it’s hard to draw a clear inference about what motivated the joke. And even if it was just consumption, my point was not that consumption is irrelevant to satisfaction, just that it is not necessarily the most important factor in determining who well-off, fulfilled, and happy people feel about their lives.

    Cardiffkook, I understand that progress inevitably entails creative destruction. Does that mean that we should not take into account those whose lives are destroyed in the process of creation? Does the price system appropriately take into account all the costs associated with progress? We simply don’t know, because not all values are reflected in the price system.

    Kaleberg, Most economists arguing on behalf of free trade would argue that the problem of maintaining aggregate demand and full employment is logically distinct from the problem of reallocating labor in response to job losses caused by import competition. There may be situations in which increased imports do cause a net loss of jobs, but in principle, aggregate demand could be increased to avoid any net job loss. My argument is focused on the question whether we are properly measuring the costs of job losses suffered by those who had been employed and whether the new jobs created do in fact compensate for the loss of old jobs. I’m not taking a position one way or the other; I’m just saying that our estimates may be understating the losses associated with the loss of existing jobs. Joan Robinson was an extraordinary economist, but she was far from being a model of objectivity. She was very good at seeing the hidden biases underlying the positions she was arguing against, but she had very strong left-wing biases that colored her own positions.


  1. 1 How Liberalism in America Became Synonymous with its Antithesis | Uneasy Money Trackback on July 31, 2016 at 10:20 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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