Archive for the 'welfare economics' Category

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.

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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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