Economists and the reality of trade

If you read this interview with Dave Donaldson, a young economist who had won the John Bates Medal given to outstanding economists-academics below 40 years of age, you might get a clue on why economists are out of touch with reality and hence, not very popular with the media. Just sample this question and the answer. Economists have a long way to go.

Q: Obviously foreign trade is an especially important topic right now in Washington and capitals around the world. Do you think there are policy lessons that your research offers leaders in the U.S. and elsewhere?

A: I’ve worked on fairly high-level issues. I certainly haven’t tried to work on some of the complex trade agreements and trade policies that we and other countries sign and negotiate. But I think there’s a number of high-level points that my work has tried to quantify and illustrate.

Trade is rarely bad on the aggregate. … Those gains are important, at least according to the estimates I and others have come across and tried to develop. Railroads have enabled trade and railroads had a big impact on living standards. At some level, that doesn’t surprise a lot of people. But again, there’s no difference between building railroads to enable trade with other members of our country and lowering tariffs to enable trade with other members of the world. They’re the same basic principle. You’re trading with others and reducing barriers to enable more trade.

Joan Robinson was a famous economist between the wars and she talked about how, I’m paraphrasing, but how it was ludicrous to fill up our harbors with rocks. We don’t do that and if our trading partners start filling up their harbors with rocks, that’s not a good reason to start filling our harbors up with rocks, too. This idea that … the nation wins at trade or the nation succeeds by imposing tariffs – there are special circumstances where that possibly helps. But by and large, we on the whole are better off when we trade more. That basic instinct, I don’t think is controversial, because we don’t stand in the way of trade with California and Colorado. …

I’ve stressed the aggregate benefits. Of course, within those aggregate benefits, there are winners as well as losers within the same country. Obviously things would be better if that weren’t true, but unfortunately that sad truth is also the same sad truth about all of economic life. When Amazon entered the retail sector and made it harder for Wal-Mart and Kmart to do business and that led Wal-Mart and Kmart to close down some establishments, that of course is not good for the workers of those establishments. But it is good for other workers elsewhere, and it’s good for consumers on the aggregate.

That kind of churn and evolution of a market economy of course generates winners and losers all the time. We all wish that wasn’t the case. But because the gains on aggregate are large, those kinds of things are by and large worth permitting, allowing, and that’s why we allow them when they happen within the country. And as I tried to stress, I don’t think there’s anything fundamentally different about the kinds of shocks that create the aggregate benefits but nevertheless, unfortunately, have some domestic winners and losers. The fact that there are domestic losers does not per se mean that we should prevent those kinds of trades.

We should do what we can to help mitigate the losses. But the essence of economic growth involves, as [Joseph] Schumpeter called it, creative destruction. The act of creating growth, the act of making living standards better on aggregate, does just inevitably involve some people losing. And we need to find ways to mitigate that, but standing in the way of progress is unlikely to be the best way to do that mitigation.

In contrast, read the comment below by one Graham Lovell from Australia on the article by Gillian Tett on financial markets and political risks.

In a well-reasoned article, Jillian Tett has failed to mentioned one very likely possibility. That is the possibility that “protectionism” will not hurt growth, but will encourage it. It was nice to get a recognition that monetary policy is now taking a lower place and structural reform is beginning to happen.

Yet what is this structural reform to which she refers? Perhaps she meant spending on infrastructure. If so, one has to protest that that is not really reform, just a replaying of well-established Keynesian economics. The real reform, which has to come if the world is to really recover from 2008, is one that means that investment in ordinary businesses can recommence in the West. That cannot happen at the levels that are required while the West has to compete with wages in the rest of the world at a simple fraction of Western wages.

A trade re-alignment, called here “protectionism,” is required. This is a long way from “mercantilism,” a fact that is missed by many commentators. (I say that, not because Jillian Tett has confounded the two things, but because others do.) The fact is that there is little investment activity happening in the West because there is a shortage of investment opportunities. This could be why the US stock market is showing signs of exuberance – maybe investor hope that there will be things in the US in which US companies can invest, instead of trying to find the currently partly exhausted opportunities in the “emerging world.”

If this is happening, it can be put at Donald Trump’s feet, and for which he can, quite rightly, take the credit, at least when he puts his policies into place. Even in Australia, now there are limited opportunities to invest. I am a small investor In Australia, which remains “free trade heaven.” My residual investments are in the mining industry. I am hoping for a recovery there. However, much of my new investment $s are in the medical industry, in companies like CSL and Resmed, who happen to be the best in the world in their fields.

Twenty years ago there was a thriving manufacturing sector, now there are only niche players. This is a product of the drive to reduce tariffs combined with a very high $A resulting from supercharged returns from mining. So now the search for industrial players on the Australian Stock Exchange returns only two significant operators. One is a toll-road operator, the other is Sydney Airport. Is that really the best we can do in Australia in the industrial space? Well, yes it is, if free trade ideology is given open charter, as it is in Australia. Yet not every company can be “best in the world,” not in Australia, and not even in the USA. However, the current dominant economic ideology expects only the “best in the world” to survive. This is a recipe for disaster. It is what the events of 2008 exposed. It led to many voters in the UK and the USA abandoning those who support the dominant economic ideology.

My case is that “protectionism,” by which I mean a trade realignment, will not hurt growth, but is more likely to encourage it. Perhaps that possibility could also be mentioned in passing in future articles.

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