Does Trade Make People Better Off?

Often times when talking about free trade, protectionists argue that trade does not necessarily make people better off. They often point to those who lose their jobs to more efficient and less costly foreigners as a detrimental result of free trade. However, this view misunderstands what economists mean by “gains from trade.”

Suppose I am in the market for a new laptop computer. If I am permitted to trade freely with anyone in the world, I will choose the computer that best fits my preferences. Now suppose that I have narrowed my selection to either an HP or a Sony. Absent trade restrictions, I decide to purchase the Sony because I can get the same quality computer for a lower price. Thus I am better off and so is Sony. However, if someone at HP lost their job as a result of this purchase, protectionists would claim that society is not better off.

Now consider the alternative. Suppose that the government has prior knowledge of my intentions of purchasing the Sony laptop. Protectionists in the walls of Congress decide that they need to save the jobs of those working at HP and imposes a trade restriction on Japanese made computers. Since I still need a computer, I may purchase my second choice, the HP, or withhold my purchase until a later date. The man at HP who kept his job is better off. Unfortunately, neither I nor Sony can be considered better off.

All too often protectionists attempt to view trade with what can best be described as a social utility function. Equally important to their analysis is the fact that workers are given much more weight than consumers, which results in favoring higher prices and possibly lower efficiency. Unfortunately for protectionists, we cannot aggregate the preferences of society (see Arrow’s Impossibility Theorem).

When we discuss trade, we must only be concerned with those involved in the transaction. Thus, although it is a favorite phrase used by protectionists, there are no “winners” or “losers” involved in freely traded commodities because one will not trade with others if it will make him worse off (the “loser”). Therefore, if trade takes place it must be true that each participant is better off. We can make no such generalization about society, nor should we.

This argument is by no means an argument against buying domestic goods. It is perfectly acceptable for individuals to purchase goods within their own country or community if that increases their own utility. However, it is not acceptable for those same individuals to impose their preferences on others.

Site Recognition

I am happy to announce that this blog has been named one of the “Top 100 Academic Blogs Every Professional Investor Should Read” by CurrencyTrading.net.

Other economics bloggers recognized include James D. Miller, Greg Mankiw, Brad DeLong, Tyler Cowen and Alex Tabarrok, Russ Roberts and Don Boudreaux, Steven Levitt and Stephen Dubner, James Hamilton and Menzie Chinn, Arnold Kling and Bryan Caplan, Dani Rodrik, and Mark Thoma.

Comparing Health Systems in the U.S. and Canada

A recent paper from NBER by June E. O’Neill and Dave M. O’Neill compares health outcomes and equitability of resources in the U.S. and Canada. Here is the abstract:

Does Canada’s publicly funded, single payer health care system deliver better health outcomes and distribute health resources more equitably than the multi-payer heavily private U.S. system? We show that the efficacy of health care systems cannot be usefully evaluated by comparisons of infant mortality and life expectancy. We analyze several alternative measures of health status using JCUSH (The Joint Canada/U.S. Survey of Health) and other surveys. We find a somewhat higher incidence of chronic health conditions in the U.S. than in Canada but somewhat greater U.S. access to treatment for these conditions. Moreover, a significantly higher percentage of U.S. women and men are screened for major forms of cancer. Although health status, measured in various ways is similar in both countries, mortality/incidence ratios for various cancers tend to be higher in Canada. The need to ration resources in Canada, where care is delivered “free”, ultimately leads to long waits. In the U.S., costs are more often a source of unmet needs. We also find that Canada has no more abolished the tendency for health status to improve with income than have other countries. Indeed, the health-income gradient is slightly steeper in Canada than it is in the U.S. [Emphasis added.]

Quote of the Day

“In our days, certain sentimentalist schools reject as false all social science that does not go the length of establishing a system by means of which suffering may be banished from the world. They pass a severe judgment on Political Economy because it admits what it is impossible to deny, the existence of suffering. They go farther—they make Political Economy responsible for it. It is as if they were to attribute the frailty of our organs to the physician who makes them the object of his study.”

— Frederic Bastiat, Harmonies of Political Economy

Markets and Repugnance

Al Roth has written a provocative article in the Journal of Economic Perspectives on markets and moral repugnance, particularly as it relates to organ sales. Here is a sample:

Apparently, some kinds of transactions are repugnant in some times and places and not in others. This essay examines repugnance and its consequences for what transactions and markets we see. When my colleagues and I have helped design markets and allocation procedures, we have often found that distaste for certain kinds of transactions can be a real constraint on markets and how they are designed, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency.

[...]

The persistence of repugnance in many markets doesn’t mean that economists should give up on the important educational role of pointing to inefficiencies and tradeoffs, and costs and benefits. But neither should economists expect such arguments to win every debate immediately.

The article outlines the role repugnance has played in markets over time and how, in some cases, public opinion has changed and allowed markets to prosper. Roth does a great job thoroughly discussing both arguments for and against organ markets. In addition, and quite importantly, Roth points out that organ markets will not be a panacea to solve organ shortages. Overall, I found this article to be very thought-provoking.

Here is a non-gated version of the paper.

Also, for those interested, here is an article I wrote on organ sales.

In Defense of Free Commerce

In response to my op-ed regarding trade with China, a reader writes:

[The op-ed] is wholly simplistic, written from the usual academia point of view.

I will admit that my argument regarding free trade is simplistic. It should be. On its very core, free trade ensures that individuals have the freedom to interact and trade with one another without obstacles created by the government. There is no economic or moral reason why individuals should only be allowed to trade with only those within arbitrary lines on a map.

Additionally, calling my piece the typical academic point of view is no better an argument than if I were to call his view the non-academic point of view. I am unaware of any circumstance under which an academic point of view is any less credible than the alternative. In fact, I find it quite ironic that academics that favor free trade are derided for their academic point of view, while those academics who specialize in climate change are treated as though their word is gospel.

More substantively, he goes on to claim that I am wrong to assert that the Chinese are only buying U.S. Treasuries and that the Chinese are using government and private funds to purchase U.S. assets. Unfortunately, he apparently wasn’t reading closely enough because I never claimed otherwise in the piece. In fact, my discussion of U.S. Treasuries was merely used to point out that the federal government creates debt, not the trade deficit.

Finally, and most amusing, is the gentleman’s arguments regarding why we should not trade with the Chinese:

The communist leaders trade using predatory trade; they target industry after industry using any and all unfair trade practices at hand: currency manipulation, intellectual piracy, industrial espionage, counterfeiting and requiring products sold in-country to be produced in-country.

Point by point:

1.) I acknowledged that counterfeit goods should be of concern.

2.) Pegging a currency to another currency — or basket of currencies — is not currency manipulation. As an economist and a supporter of free markets, I would always prefer that the value of currencies be determined on the open market. However, if a state wants to outsource their central banking to another country — or group of countries — they are free to do so at their own risk.

3.) The most ironic argument is his claim that we should resist trade with China because they require that products sold within the country should be produced within the country. So should we retaliate by requiring that products purchased here should be produced here?

Carrying protectionist logic to the fullest extent would require self-sufficiency. If I should not trade with someone in a different country, why should I trade with someone in another state? Or city? Or on another street? Or in another house? Self-sufficiency is the road to poverty. Utilizing specialization and the division of labor will only lead to greater prosperity.

China is an easy target for protectionists. They can easily point to the corrupt, authoritarian government. However, I suspect if this discussion were in regards to another country, the rhetoric from the other side would be the same because the Chinese government merely serves as a red herring.

Quote of the Day

“If you want to know what’s wrong with economics education in America, go here. It’s a web site created by Wal-Mart to convince viewers that Wal-Mart is good for America because lower prices free up income for people to enjoy other things. How bizarre is it that a company has to spend thousands if not millions of dollars on this web site and elsewhere making the case that low prices are good?”

— Russ Roberts

Moral Hazard

The Wall Street Journal reports:

When the Federal Reserve cut rates yesterday, Wall Street held a party. But the Fed’s move could backfire, helping spur another round of carefree borrowing that ends with an even bigger credit-market hangover.

The cuts were a shot of adrenaline for the credit markets, driving up prices of risky bonds and lubricating the sputtering deals machine. The risk is that the Fed’s move reignites the debt-driven euphoria of the past few years and sets the stage for a nastier crash down the road.

The Economics of the Ku Klux Klan

Steven Levitt’s lastest paper (co-authored by Roland Fryer) looks at the Ku Klux Klan. Here is the abstract:

The Ku Klux Klan reached its heyday in the mid-1920s, claiming millions of members. In this paper, we analyze the 1920s Klan, those who joined it, and the social and political impact that it had. We utilize a wide range of newly discovered data sources including information from Klan membership roles, applications, robe-order forms, an internal audit of the Klan by Ernst and Ernst, and a census that the Klan conducted after an internal scandal. Combining these sources with data from the 1920 and 1930 U.S. Censuses, we find that individuals who joined the Klan were better educated and more likely to hold professional jobs than the typical American. Surprisingly, we find few tangible social or political impacts of the Klan. There is little evidence that the Klan had an effect on black or foreign born residential mobility, or on lynching patterns. Historians have argued that the Klan was successful in getting candidates they favored elected. Statistical analysis, however, suggests that any direct impact of the Klan was likely to be small. Furthermore, those who were elected had little discernible effect on legislation passed. Rather than a terrorist organization, the 1920s Klan is best described as a social organization built through a wildly successful pyramid scheme fueled by an army of highly-incentivized sales agents selling hatred, religious intolerance, and fraternity in a time and place where there was tremendous demand.

Ouch!

Our friend Jimmy P. writes:

It’s an old inside-the-beltway joke that every Washington memoir should really be subtitled: “If Only They Had Listened to Me.” And it certainly looks as if former Federal Reserve Chairman Alan Greenspan’s new book, The Age of Turbulence: Adventures in a New World, is yet another magnum opus in that grand literary tradition.