Free Trade

Economists believe in free trade almost as much as physical scientists believe in the first and second laws of thermodynamics. Free trade, they believe, makes both partners in the trade better off. There is both theoretical and empirical support for this notion. The theoretical support, to the extent that I understand it, is based on Adam Smith’s idea of economy of scale and David Ricardo’s theory of comparative advantage. It makes sense to produce capital intensive products in countries with abundant capital and labor intensive products in countries with abundant labor. The same notion underlies all trade – if I have more X than I need or want and less Y, and you have more Y than you want, but less X, we are each better off if I exchange my surplus X for your surplus Y.

Tyler Cowen has a scorecard:

More than 400 million Chinese climbed out of poverty between 1990 and 2004, according to the World Bank. India has become a rapidly growing economy, the middle class in Brazil and Mexico is flourishing, and recent successes of Ghana and Tanzania show that parts of Africa may be turning the corner as well.

Despite these enormous advances, however, there is a backlash against globalization and a widespread belief that it requires moderation. Ordinary people often question the benefits of international trade, and now many intellectuals are turning more skeptical, too. Yet the facts on the ground show that the current climate of economic doom and gloom simply isn’t warranted. The classic economic recipes of trade, investment and good incentives have never been more successful in generating huge gains in human welfare.

Oddly enough, the general populace is deeply suspicious of free trade. They see the layoffs and erosion of salaries, but, say economists, don’t fully appreciate the advantage of all that cheap Wal-Mart junk they could buy if they still had jobs. This, say economists like Tyler Cowan and Brad DeLong, is irrational.

Cowen again:

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

Brad DeLong has a nuanced analysis, but doesn’t conclude differently, and Dani Rodrik has yet another theory of why we make the mistake.

For me, though, the problem is that people tend to think of the economy as a zero sum game – if somebody gains, somebody else, probably me, lost. That, say the economists, is their irrational error.

So why should so many make that error? Well, say I, there is the fact that 3.5 billion years of biological evolution have taught us that, to a very high degree of approximation, life is indeed a zero sum game in the long run. Economists say that technological and economic progress trump that, but I personally am very suspicious of any notion that conflicts with Darwin. It’s all very well for economists to worship at the altars of Smith and Ricardo, but if they forget Malthus, not so much.

The problem is that there really are scarce and non-renewable resources. Without doubt, many Chinese, Indians, Brazilians, and others are benefitted by our appetite for their products. It is equally likely that at least some Americans are benefitted by the cheap goods they sell us and cheap money they lend us, at least in the short term. The Darwinian must take a longer and gloomier view, because in the long run we and our descendants are in competition with all those others (and each other) for living space, food, and what will remain of those scarce resources. The older generations of Americans who still remember a time when Chinese and Americans were killing each other.

There is only one obvious way out of that Malthusian box – limited reproduction. When we buy from China, we get not only cheaper clothing and electronics, but more expensive gasoline. Without population control, we need to see all our trading partners not just as sources for our goods and sinks of our products, but as future competitors for that last drop of oil or crust of bread.