I talked about one area where we disagree and one area where we agree.
Let’s start with where we disagree. I take the conventional economic view in favor of international trade, and you differ.
Let me see if I can steel-man your argument. You say that American workers, as citizens of this country, should have a right to access to job opportunities that give them a decent way of life. If we are willing to have their family members go off to fight wars in the name of protecting the rest of us from terrorists, then we certainly owe them protection from having their jobs taken away by outsourcing to Chinese factories.
My counter will be that international trade is isomorphic with other economic actions that you are more likely to approve. Outsourcing to a factory in China and taking away a factory worker’s job is not very different from developing Uber and taking away a taxi driver’s job or a rental-car agent’s job.
Our prosperity comes from breaking production down into steps. When you break the process down into steps, you get more efficiency. This goes back to Adam Smith’s pin factory. Breaking a process into steps can involve what most economists call capital, but the Austrian economists use the term “roundabout production,” which I like. When a farmer uses a tractor instead of a horse to pull a plow, this is roundabout production–manufacturing the tractor becomes a step in the farming process.
International trade is another form of roundabout production. As David Friedman put it, one way to manufacture an automobile is to grow wheat, put it on a ship to Japan, and have the ship turn around carrying an automobile.
The process of breaking production down into steps is mind-boggling in its complexity. There are so many conceivable ways to break down a production process into different steps. How are we to know which is best? The answer is that the price system co-ordinates the process. Prices inform entrepreneurs about the costs of alternative patterns of specialization.
The profit system directs the evolution of the process. As new ideas are tried, the most efficient ones prove sustainable, as indicated by profitability. Less efficient patterns of specialization and trade are weeded out by losses.
Thus, progress proceeds by creative destruction. Ways of life that are tied to a particular step in the production process are bound to be undermined if a new production process emerges that is more efficient. A society cannot enjoy the benefits of economic progress without incurring the cost of job destruction. The market treats work as a bug, not a feature, and it tries to get rid of it.
Back to the comparison of outsourcing to a factory in China or developing Uber. You might be tempted to say that when Uber changes the process of providing people with car rides, at least it doesn’t use Chinese labor in the process. But is that really the case? For Uber to work, somebody has to take the step of adding computer and communications capacity, and that probably uses components imported from China. Consumers need smart phones in order to hail rides, and those phones are partially manufactured in China. And even if there were no Chinese workers involved in the steps to create Uber rides, would that be any consolation to the taxi drivers and rental-car agents who lose their jobs?
If you want to suggest policies for making economic progress less painful for people whose jobs are displaced, that would be very constructive. But insinuating that economists are engaged in a conspiracy to hide the truth about international trade isn’t constructive–it’s just scapegoating.
On the area where we agree, I said,
I’m more in agreement with you on what you call the DISC, which I believe stands for Distributed Information Suppression Complex. Although once again, it sounds a bit too conspiratorial for my taste, and I prefer to think of it in terms of an emergent phenomenon.
Think of life in academic research as consisting of two games. If you play Game One, you pose important questions within your field and try to answer them. If you play Game Two, you try to climb the ladder of prestige by participating in the latest fads and fashions and by ingratiating yourself to people who are in a position to help you get jobs and publication acceptances. Let me use the Game One, Game Two model to offer my take on the DISC.
1. I can imagine a world in which the strategies for playing Game One and Game Two are basically the same. When that sort of Divine Coincidence exists, you will see a very vibrant academic discipline.
2. I don’t think that anyone ever consciously chooses between playing Game One and Game Two. We just go with our instincts. When I was in grad school in the late 1970s, my instinct just happened to be to play Game One. But by that point in time in economics, the profession was selecting away from Game One types and in favor of particularly ruthless Game Two types.
[Note: As John Cochrane wrote recently,
Self-interest, for people to preserve hard-won human capital, and for institutions to support research that keeps them going, is a powerful explanatory force. Even if individuals do not respond to this incentive, and are all pure in their pursuit of ideas, selection is a powerful explanatory force. Economics is a good way to explain economics!
]
The Game Twoers of my era wrote dissertations on Rational Expectations Macroeconomics, which I thought was a dead end. Nothing that has happened since has changed my mind about that.
When I was on the job market, an assistant professor from Amherst came to MIT to interview all of us on the market that year. I gave him a copy of my job market paper, and I talked about it with him. He never offered me an opportunity to audition for a job at Amherst. But he did subsequently publish my exact idea, including a new term that I introduced, called “reputation price,” meaning the price that consumers would expect to see at a store based on their last purchase there. He published it in the Quarterly Journal of Economics, which has typically been a top-five journal, although at that time it was more in the 6-10 tier. No attribution to me of course. I was lucky just to get a version of my dissertation published in Economic Inquiry, a much lower-tier journal.
Why didn’t I go after the guy? My dissertation supervisor, Robert Solow, advised me not to. Even though I am still bitter about the Amherst guy (who got tenure), and bitter about Solow’s nonchalance about it, I have to admit that there is nothing that going after the guy would have done to improve my life, which has turned out pretty well if I may say so.
Anyway, such was my introduction to Game Two.
3. I think that in the last half of the twentieth century, Game Two economics produced little gain from a Game One perspective, and arguably a net loss.
4. I agree very much with your view that academic economists have been slow to come to terms with the fact that the Internet enables businesses to deliver content to consumers at essentially zero marginal cost, but with some fixed costs. One of my lines is that “Information wants to be free, but people need to get paid.” If you want to say that this implies widespread market failure in a textbook sense, I could agree to that. But widespread market failure in no way ensures widespread government success.
Note that there is no link, because this conversation only took place in my imagination.
If we are willing to have their family members go off to fight wars in the name of protecting the rest of us from terrorists, then we certainly owe them protection from having their jobs taken away by outsourcing to Chinese factories.
This is attempting to create a correlation by connecting two different concepts in a sentence, but does nothing to explain why a correlation should exist. Setting aside the question of any true motivations for these wars and their efficacy, being willing to go to war to protect people from bodily harm is completely different from the question of outsourcing jobs. I’m always suspicious of “If-Then” reasoning when there’s no real correlation between the compared activities. What moral reasoning is at play here?
Outsourcing to a factory in China and taking away a factory worker’s job is not very different from developing Uber and taking away a taxi driver’s job or a rental-car agent’s job.
The words “not very different” make this statement technically true, but the (hopefully obvious) differences between these two examples are enough to show that they are completely different economic activities and in no way “isomorphic”.
Why does it matter that they are completely different economic activities? In both cases, the value of a previously stable working class profession is significantly diminished within a few years.
The debate here is whether our country owes it to their workers to ensure worker roles, whether it is possible, and whether it is a good idea. Just how a stable profession dissolves only matters so much.
The process of breaking production down into steps is mind-boggling in its complexity. There are so many conceivable ways to break down a production process into different steps. How are we to know which is best?
“Perfect is the enemy of good”
I think a more steely steel-manning of the argument would be to say that one generally favors international trade and presumed it to be beneficial to general welfare for all the typical reasons in the usual economic arguments. It’s not actually necessary to recite the theories of gains from trade and specialization, or of comparative advantage, again and again, because all that’s generally accepted and not really the nature of the dispute. Yeah, don’t try to grow pineapples in greenhouses in Alaska or raise crabs in giant aquariums in Hawaii: just trade instead.
Instead, the dispute is about avoiding certain failure modes and predictable problems that arise from the current regime of international trade. It is a reasonable function of the state to try and tell whether there are acceptable preparations, plans, provisions, and arrangements to deal with particular dangerous contingencies as a form of ‘insurance’, and, if the market is, for whatever reasons, not making those arrangements spontaneously, then the state should step in, sometimes to regulate, and sometimes to deregulate and get out of the way, if that turns out to be the problem.
There is the expression “throw the baby out with the bathwater”. But what happens in these debates is that someone makes a reasonable complaint about some dirt in the bathwater, which mind lend itself to some Hartfordian narrowly-tailored, keyhole-surgery remedies, (metaphorically, perhaps some filter which sifts out the dirt, allowing one to keep the baby and salvage the bathwater) and opponents start arguing as if someone is suggesting tossing out babies. That’s a form of all-or-nothing strawmanning, which avoids having to engage intellectually with real problems. It would be like someone complaining about a lot of traffic-related fatalities, and maybe we should consider speed limits, and opponents saying, “You can’t just eliminate automobiles, which are extremely useful and beneficial!” Yes, of course, but not one is talking about banning automobiles, just moving a superior equilibrium of a society with automobiles.
So, one obvious potential failure mode is war. If your economy relies on a “just in time” stream of deliveries of some essential good the production of which is heavily concentrated in just one potential rival, then in the event of war, you face a big problem. And in the event of needing to go to war to defend ones interests, security, or allies, one is deterred by that prospect, which can thus be used as an instrument of geopolitical leverage by that rival.
That issue might be dealt with via stockpiling, or some form of taxes or subsidies that maintains a reserve capacity of domestic production which can quickly scale-up and surge to meet shortfalls of these essentials for a long time at reasonable cost.
Another potential problem is counterproductive regulatory unfairness. If I place a carbon tax that only applies to domestic business, then all one does is drive local business into bankruptcy, move that business abroad into a regulatory sanctuary, where production is dirtier, and with even more fuel burnt and pollution emitted in transporting it back to shore. Again, subsidies or tariffs trying to establish a “level playing field” could address this issue, but merely arguing “tariffs bad, free trade good” is making a claim not in general contention and is not actually addressing the specific, special matter at issue.
I get the ‘PR’ point about slippery slopes and defending the basic principle and worrying about public tendencies to abandon the economically critical general presumption in the face of talking about exceptions, but at least in circles for intellectual debate one has to choose between that kind of politicking on the one hand and not giving one’s opponents the impression one is just talking past them and failing to grasp their valid points.
Besides supply chain security and disruption-risk, and regulatory arbitrage, there are also questions about the long term risks of persistently negative trade balances and accumulation of debts to, or accumulation of domestic assets by, foreign entities (see, e.g., Buffett’s Import Certificate proposal), and the matter of domestic intangibles like trade secrets and the preservation of a cadre of experts with practical, going-concern know-how on how cutting-edge production in any particular field is accomplished, managed, and able to be evaluated, lest one lose all ability to redevelop an industry once domestic production is lost.
I could go on, but the point is, it is no argument against international free trade in general to point out that, like anything, occassionally it creates major problems and that it is reasonable to complain about and wish to address these problems without being lumped in with anti-trade economics denialists.
+1
A more Trump-China steely steel man is this:
Does China practice free trade? or at least freer trade than America?
If Arnold (& Tyler of MR) want to complain about Trump tariffs, they are implicitly claiming that China’s trade is more free than America’s, more market driven. I haven’t seen serious economists, nor these two, make that claim.
The “conventional view” does NOT have a consensus on what to do in response to unfree trading practices by other countries. It’s not clear that tariffs are worse than dishonest acceptance of unfree barriers while implying that they are “free” when they are commie gov’t managed.
Trump has called for total Free Trade. That seems the right goal. And more likely to be achieved, over time, with nearly balanced, and increasing, trade. And tariffs in practice seem to be leading towards less unbalanced trade.
On jobs overall, it is a far better responsibility for the gov’t to offer all folk a job, rather than a “livable” Universal Basic Income, and many rich country voters are calling for.
Outsourcing to a factory in China and taking away a factory worker’s job is not very different from developing Uber and taking away a taxi driver’s job or a rental-car agent’s job.
It’s very different in that the latter takes place within a single legal regime and the former does not.
The steel-man argument against free trade that economists rarely attempt to address is this legal disparity.
1. The assumption that voluntary exchange is beneficial rests an assumption of common property rights.
2.But property rights are determined (largely) at the national level.
3. So as the rights of the parties to a trade diverge diverge, the assumption that voluntary exchange is beneficial falls apart.
That is, with Uber, one can rely on the standard economic first assumptions. With international trade, between a relatively free nation and a totalitarian one, one cannot.
Your point two has some large issues. I agree that in the IP field in particular, legal determination of rights by the relevant governments matter a great deal. There doesn’t seem to be a common understanding of those sorts of things among folk.
With regards to physical objects, however, ownership is understood very well, with very little legislation required. Typically legislation simply codifies the already existing norms. So if I buy a box of nails from someone, both of us know what that means, regardless of who that someone is. I suspect this holds with services as well, but I am not so sure.
At any rate, your conclusion in point three may hold with regards to IP concerns, but not with physical goods. Even with IP, one would have to ask if those selling/buying are aware of the IP risks; it is totally possible to decide a trade is beneficial even if you know your IP is going to be misused.
Beyond a textbook (or in a sufficiently advanced one) we concede that at a fundamental level there’s no distinction between physical goods and no way to truly decompose a good or service into the components that go into it.
That is, saying that we are dealing in physical goods makes no difference. Technically speaking even a simple physical good like a nail is composed of the labor that’s applied to the iron to make the nails and get them to market rather than just the iron itself.
That labor (and further, all of the ancillary sort of environmental factors) are, basically legally created constructs.
What do property rights have to do with this? We are talking about jobs and outsourcing, not protecting property. A job is not a form of property.
If anything it is Uber that is violating property rights, by ignoring limited licensing requirements in municipalities, and then daring those municipalities to stop them.
Very true, and if there were no monetary incentives involved we would call it Civil Disobedience.
From a legal perspective, property is just a collection of rights. So in a way, you’re correct, that it’s redundant to say “property right” when, in practice, we could simplify it to rights.
“Property right” is simply shorthand for those rights pertaining to economic transactions.
Consider your example. You are saying that a job is not a property, but then in the next sentence you say that a license authorizing one to do a job is a property right. If so, the job is a property.
Individual laws are complicated and contradictory, but ultimately what is legal (or what is “against the law”) is only one thing.
Yes, in a given US city, there may be a special property right conveyed to particular taxi license holders. But the laws have also been interpreted to allow pretty much anyone to be an Uber driver. And ultimately, everyone is operating under the same legal framework.
So in thinking about the emergence of Uber, there are two ways to look at this change.
1. The special rights to certain jobs (e.g. jobs are property!) are weakened. That’s good from an economic efficiency perspective.
2. The legal framework within which we operate is changing and becoming more similar (we moved from a system in which a few people had a vested right to a job and which many people were formally barred, to a system in which everyone has basically the same rights to work in that field).
Now, returning to my point, the legal system changed, but it’s still a single system that defines the rights of those within it.
This is not the case with international trade. The more our legal systems diverge, the more our rights differ, the less efficient the market is likely to be.
This really isn’t specific to international trade. I’m just applying a general principle that everyone believes to international trade.
We all understand that licensing for taxis suck because they’re a barrier to entry. This makes for an inefficient market. Reducing that barrier to entry is a good thing. This is generally applicable though, by saying that when we are operating within vastly different legal systems, our rights, e.g. our property rights, are different in a lot of different ways, and we can’t presume efficiency when we’re not operating with equal rights.
“This is not the case with international trade. The more our legal systems diverge, the more our rights differ, the less efficient the market is likely to be.
This really isn’t specific to international trade. I’m just applying a general principle that everyone believes to international trade.”
I don’t see how any of that follows from your arguments. Trade and exchange happens all the time without governmental oversight or definition of rights, and often in defiance of the official rules and definitions. (See Order without Law for example, or any of the work on prison gangs, black markets, etc.)
In particular, the link between differences in legally defined rights and market efficiency is not supported at all. One might just as easily say that the only rights that matter are the rights that those trading agree to exchange, and thus the efficiency is unaffected.
Trade and exchange happens all the time without governmental oversight or definition of rights, and often in defiance of the official rules and definitions. (See Order without Law for example, or any of the work on prison gangs, black markets, etc.)
In particular, the link between differences in legally defined rights and market efficiency is not supported at all. One might just as easily say that the only rights that matter are the rights that those trading agree to exchange, and thus the efficiency is unaffected.
No. To put it as simply as possible
1. We would agree, right, that a (negative) externality creates an inefficiency?
2. And the best means of accounting for an externality is to force the participants to every exchange to fully account for the costs.
3. Thus, when you say “the only rights that matter are the rights that those trading agree to exchange, and thus the efficiency is unaffected” this cannot be true. Being ignorant of costs does not make a transaction efficient.
4. You are right that this is universally applicable. Even though there’s not a set of formal laws governing prisoners trading in cigarettes the costs, benefits, and punishments for breaking these contracts are well understood by the participants. There’s limited scope for externalities.
5. You are wrong because, in the situation where citizens of countries with vastly different rights are trading with each other, that is no longer the case.
Note, this is not a poverty issue, but a rights issue. Trading between a rich American and a poor Chinese is efficient. Trading between a rich American and a Chinese slave is inefficient, just like trading between a rich American and an American slave would be inefficient.
Unless, you know, you want to say that slavery is economically efficient. Which I would not.
No, legal disparities or different regimes of property rights has nothing to do with the idea of gains from trade, which define voluntary in terms of all parties perceiving improvements to their own positions, for whatever system in which they happen to operate, else the trade would not happen.
Now, it may happen that a producer overseas is able to benefit from unfair subsidies and protections from competition (i.e., their exports are cheaper abroad, while competing imports are more expensive domestically), but that is a different issue.
Indeed, sectors exposed to competition with international trade are much more likely to have tight margins, large consumer surplus, and have regular improvements to value in terms of quality per price, specifically because they are harder markets for domestic governments to insulate, subsidize, mandate, distort, or otherwise ensure the collection of rents by special interests.
As it happens, the example of Uber is somewhat ironic. In that case, in almost any jurisdiction in the US, there were well-established, formal property rights in providing taxi-like services. Uber decided to take a chance by simply breaking that law, and, depending on local rules, usually many others too.
And most local governments decided to simply let Uber get away with it, without going to the trouble of actually changing the law or compensating the holders of medallions, who had reasonable, investment-backed expectations and reliance in the government keeping its promise to enforce the system in exchange for the medallion money and special taxi taxes, but who got wiped out instead.
(Whether or not the situation was Hicks Optimal in which there was no way to fully compensate their losses with taxes on gains from new surplus is, as far as I can tell, an unresolved question. This can usually be done in instances of price-discrimination, but I don’t know if Uber does PD.)
Now, I like and use Uber, I’m glad it exists, and I dislike taxis and hate the heavily-regulated quota system. Nevertheless, to the extent Uber ‘disrupted’ the industry, it did so by completely dumping on any notion of following the rule of law or respecting established property rights and rules regarding provision of taxi services and provision of required benefits for employees / contractors.
The irony is that Uber is in reality closer to the case usually made against foreign suppliers, that they have unfair advantages via regulatory arbitrage (for example, being cheaper by not providing benefits, or more profitable from not obeying pricing regulations), and are ‘dumping’, that is, consciously pursuing a strategy of short-term losses in order to drive their competitors completely out of business and then to recoup those losses with enhanced market power once the competition is dead.
My apologies, but that was supposed to be in reply to MikeDC above. Please move when you can, thanks.
No, legal disparities or different regimes of property rights has nothing to do with the idea of gains from trade, which define voluntary in terms of all parties perceiving improvements to their own positions, for whatever system in which they happen to operate, else the trade would not happen.
No. It’s obvious with even a moment’s reflection that in practice these perceptions require that the more “whatever system in which they happen to operate” diverges, the more potential there is for private costs to diverge from social costs.
To be efficient, Cp has to approach Cs.
Otherwise, of course, externalities can and will arise and the transaction isn’t necessarily beneficial.
And, it’s pretty obvious that what counts as Cs gets defined by the legal regime. So again, the more the legal regimes diverge, the less likely it is that the trade is efficient. The more externalities are likely to exist.
That is, dealing across an international border with a country that has poorly defined property rights doesn’t magically make externalities go away.
No one agrees, or could agree on what Cs actually is. Most policies don’t even both trying to estimate the costs of the externalities they are claimed to correct. Presumably that is because measuring those costs is really difficult, and because it would mean that policies would obviously fail now and again.
Further, asserting that Cs is defined by legal regimes, and therefore different regimes are more likely to separate Cp and Cs is specious. Cs is an independent thing, a function of the utility of all the individuals in society. Governments may attempt to pass legislation to bring Cp closer to Cs, but that isn’t done by fiat, stating that Cs now equals Cp. It is done by changing people’s behaviors.
Indeed, if specific governments are better at understanding Cp for their own people than foreign governments, having multiple divergent regimes is more likely to get Cp closer to Cs. If China has the regulations that get Cp close to Cs for its people, and likewise the US, then it makes perfect sense to buy things from China for which their Cs is lower than the US, because it is literally true.
In all cases, your argument is not internally consistent, unless one country can identify Cs for the entire world, and produce regulations that minimize the difference between Cp and Cs. And that country has to be the one that you live in, in this case. I doubt the USA has a great idea of how to minimize Cs-Cp, or maximize Bs for that matter (make your own joke) for its own citizens, much less for the world, even if that is the goal of policy. China probably doesn’t either. I would go so far as to say that most policies increase Cs at the cost of Bs, and have negative societal value. Sugar quotas come to mind.
But pretending that people need government rules and regulations to define property rights before they can trade, that’s just silly. I can see why lawyers would like the idea, but it is empirically false.
You have the theory right, but are foundering on the practice.
Obviously in the real world we don’t have perfect knowledge of Cs.
But… that doesn’t mean that Cs doesn’t exist. We know it does.
So how can we go about estimating Cs? Well actually seems to be a fundamental role of government, whether it emerges as a form of convention or gets formally deliberated and applied from the top down.
As you say, we don’t know how good of a job we do. Probably a pretty bad one. Just like with everything else when it comes to government, free and democratic governments look terrible. It’s just that they look less terrible than the other types of governments.
And that is really my point. No, the US doesn’t have a monopoly on the right way to do it, but the fact that we do it in a relatively free way in which we are all parties to the decision (at least formally) gives the result some standing.
So, as I said, when we trade within the US, or even within the population of our prison cell block, there’s some “social” process in action that’s pointing toward Cs that’s shared amongst the participants.
Now, when it comes to international trade, you don’t have as much of that. You’re basically trading between members of a different society, so notions of Cs will diverge.
The more different the societies are, the more different the legal rights, the more likely it is that there will be inefficiency and externalities.
That is, trading between the US and Western Europe, even though they’re difference governments, we can at least say that they’re relatively free and participatory, and that implies their measure of Cs should be treated with more validity.
Well played, Kling. My disappointment is palpable. I really wanted that link.
He never offered me an opportunity to audition for a job at Amherst. But he did subsequently publish my exact idea, including a new term that I introduced, called “reputation price,” meaning the price that consumers would expect to see at a store based on their last purchase there. He published it in the Quarterly Journal of Economics, which has typically been a top-five journal, although at that time it was more in the 6-10 tier. No attribution to me of course.
Given the anecdotes of this kind of scholarly IP theft I’ve heard from Eric, Brett, and now you, I have to say that they rather undermine Dr. Jones’ case that I should trust our elites a bit more. I mean, since they seem to think nothing of stabbing each other in the back…what does that imply about what they’re prepared to do to the rest of us?
Excellent point.
I absolutely agree. Include “elected officials and bureaucrats” in the definition of elites, and you have basically sketched out my story of the last 100 years.
Trade policy is made by government and should be designed to benefit domestic citizens. It is not an emergent process like technological innovation. Forcing low income labour to compete with people in the third world is great for capital owners and theoretically for society as a whole as production becomes more efficient. For this to be beneficial for poor people domestically the aggregate of the reduced cost of goods needs to makes up for the reduction in bargaining power, or there needs to be a re-distributive policy in their favour. Since 1970 all gains have gone to the capital owning class, so clearly these conditions haven’t been met.
No one said to workers when trade deals were negotiated: many of you will lose jobs your industries as they are off-shored never to return. You will then have to compete with everyone else who suffered the same fate for the remaining jobs (driving down your wages). If you want to work, you will likely have to move away from your extended family and re-skill. BUT, the stuff you make will be a bit cheaper and the owners of the company you work at will make a lot more profit. Informed consent was never obtained. And if they had tried, they would likely have failed.
Humans have taken slaves for thousands of years. It is pretty well within normal psychology for people to exploit others even when they are faced with their own cruelty daily. The ability to abstract exploitation to something like trade policy makes it easier and relatively more abundant, given current social norms (which are doubtlessly more anti-exploitation than times past). Given that the economics profession didn’t explain the obvious costs of free trade policies to the working class and build in mechanisms to mitigate them I think it is beyond fair to say they conspired to hide the truth (by omission).
And now we see the obvious consequences politically. It is important that the people whose job it is to advocate in your interest actually do, otherwise trust in the system breaks down justifiably.