Tuesday, March 01, 2011

If Free Trade = Technological Progress, Then Restrictions on Trade = Restrictions on Technology

From Greg Mankiw's textbook:

"Trade is, in some ways, a form of technology. When a country exports wheat and imports textiles, it is as if it had invented a form of technology for turning wheat into textiles. A country that eliminates trade restrictions will, therefore, experience the same kind of economic growth that would occur after a major technological advance."

With that understanding that free trade = technological progress, here's some editing of Ian Fletcher's latest anti-trade tirade, which Don Boudreaux responds to here:

"It is sometimes argued that although free trade technological progress has some victims, its benefits exceed its costs, so it is possible for its winners to compensate its losers out of their gains, everyone thereby coming out ahead in the end.

This is, in fact, the usual fallback position of mainstream economists once they admit that free trade technological progress has drawbacks.

It is sometimes even mischievously argued that if such compensation doesn't happen, any problems are due to society's failure to arrange it, and are therefore not the fault of free trade technological progress per se.

Hmm... Sounds like a perfect excuse.

Now in theory, they might be right, but it also means that a bureaucratic deus ex machina is required to make free trade technological progress work as even its supporters admit that it should.  So free trade technological progress turns out to be laissez faire on life support from big government.

In any case, such compensation rarely occurs, because free trade's technological progress winners don't have to pay off its losers.

It is often impossible to identify who has lost a job due to free trade technological progress as changing technology and consumer tastes also cost jobs (and legitimately so).

The time is past for free-trade technology band-aids. We need to stop treating the defects of free trade technological progress as mere imperfections to a fundamentally sound policy and realize that free trade technological progress itself is the problem, and should be ended with public policy that freezes technology at its current level."

34 Comments:

At 3/01/2011 11:39 PM, Blogger Hydra said...

This sounds like a general indictment of kaldor-hicks efficiency, but I don't think that is intended.

Many regulations are imposed with the contention that they increase net social benefit. Frequently, that I'd not actually true. A valid test is aether those proposing the regulation are willing to pay off the losers such that the winners still come out ahead.

It is particularly easy to propose a negative incentive, with the claim that only the "bad guys" pay, and therefore a net social benefit is guaranteed. What this usually means is that someone is not willing to pay for what they want. This is a sure sign of an attack on property rights.

Free trade falls into neither of those categories, but restrictions on free trade might.

Unfortunately, there is a difference between free trade and fair trade.

We like to think they are the same: if it is not fair, you can walk.

In practice, you may not have that choice.

 
At 3/02/2011 12:40 AM, OpenID Sprewell said...

Mark, you had me till the end, with that crack about the patent office. It is likely that getting rid of the patent office would lead to a boom in innovation, so you have it the wrong way in this case. Michele Boldrin did a good EconTalk on the case against patents, which also links to his free book. While I don't like all his arguments and think that the medical situation deserves more though, I am convinced that getting rid of the patent system would greatly benefit us.

 
At 3/02/2011 6:23 AM, Blogger sykes.1 said...

Too funny for words.

 
At 3/02/2011 7:20 AM, Blogger geoih said...

"When a country exports ..."

The flawed collectivist thinking can be identified in the intial sentences. A "country" doesn't export anything, because a "country" doesn't produce anything. People produce, and they export when it's to their advantage to export.

Countries block exports as a means of parasitizing off of producers. Allowing exports is simply removing the parasite.

 
At 3/02/2011 7:23 AM, Blogger geoih said...

Quote from Hydra: "Unfortunately, there is a difference between free trade and fair trade."

What exactly is "fair trade"? I think you might be implying a subjective value judgment.

 
At 3/02/2011 8:50 AM, Blogger PeakTrader said...

Geoih, fair trade is when someone pays more to consume less, while another produces less to consume more.

The net result is less.

 
At 3/02/2011 11:00 AM, Blogger Buddy R Pacifico said...

In Greg Mankiw's text cited, the preceding paragraphs, to Free Trade, include this sentence:

"An important prerequisite for the price system to work is an economy-wide respect for property rights."

So, let us turn-around the equation that is offered to:

If Free Trade = Respect for Property Rights, Then Lack of Intellectual Property Right Enforcement = Breakdown of the Price System.

Greg Mankiw has a great text, but I think he needs to address the fact that technology can be stolen, because of the lack of property right enforcement. No wheat need be sold for the technology, if technology is freely acquired, because the price system is crushed by official malfeasance in enforcing intellectual property rights.

 
At 3/02/2011 1:23 PM, Blogger Benjamin said...

If global free trade is good, then let's go to one world--one currency, open immigration, open borders for everything.

 
At 3/02/2011 1:32 PM, Blogger Hydra said...

It is clearly not fair trade if the trade damages a disinterested third party, not just a competitor.

 
At 3/02/2011 1:41 PM, Blogger James said...

In his book The British Industrial Revolution in Global Perspective Oxford professor of economic history addresses why the Industrial Revolution took place in Britain instead of elsewhere. He concludes that a large part of the reason was that wages were higher in Britain than in the rest of the world and as a result technology that could replace labor was profitable there where it was not profitable elsewhere. There is a reason why innovation tends to happen in rich countries, in spite of poorer countries' lower labor costs and in many areas similar skill levels. High labor costs force innovation.

In his 1857 book The Impending Crisis of the South Hinton Rowan Helper came to the same conclusion when he asked why the Antebellum South lagged behind the North in technology. Cheap foreign labor, slaves, meant that there was little or no profit in the deployment of labor saving devices.

By allowing the deployment of cheap labor, free trade will limit future technological advancement. There is very little return on an investment that will save one hour of a Chinese laborer’s wage.

 
At 3/02/2011 2:54 PM, Blogger Ron H. said...

"Unfortunately, there is a difference between free trade and fair trade."

Free trade is two parties engaging in a voluntarily exchange that benefits them both. What could possibly be fairer than that.

"We like to think they are the same: if it is not fair, you can walk.

In practice, you may not have that choice.
"

What choices are denied you, except through the application of government force?

 
At 3/02/2011 4:57 PM, Blogger Ron H. said...

"In his 1857 book The Impending Crisis of the South Hinton Rowan Helper came to the same conclusion when he asked why the Antebellum South lagged behind the North in technology. Cheap foreign labor, slaves, meant that there was little or no profit in the deployment of labor saving devices."

While this is likely true, it's my belief that improvements in technology and labor saving devices resulted in the elimination of slavery from the entire Western Hemisphere within the next 30 years, with Brazil ending slavery in 1888. Only in the US was there an armed conflict that involved this issue.

 
At 3/02/2011 8:23 PM, Blogger geoih said...

Quote from James: "There is a reason why innovation tends to happen in rich countries, in spite of poorer countries' lower labor costs and in many areas similar skill levels."

Innovation will happen when the cost of labor is high enough to make the cost of innovation profitable (e.g., low supply and high demand, or from artificial factors like government mandated higher wages).

 
At 3/02/2011 8:24 PM, Blogger geoih said...

Quote from James: "There is a reason why innovation tends to happen in rich countries, in spite of poorer countries' lower labor costs and in many areas similar skill levels."

Innovation will happen when the cost of labor is high enough to make the cost of innovation profitable (e.g., low supply and high demand, or from artificial factors like government mandated higher wages).

 
At 3/02/2011 8:26 PM, Blogger geoih said...

Quote from Hydra: "It is clearly not fair trade if the trade damages a disinterested third party, not just a competitor."

If trading occurs between willing participants with owned property, how could it damage a third party?

 
At 3/02/2011 9:37 PM, OpenID Sprewell said...

James, while that may have been true in the low-tech past, it's probably not true today. First, technologists are constantly trying to squeeze out gains in this rabidly competitive global market, replacing even Chinese workers with automation where the price allows. If there is such a labor glut that they're not able to in many sectors, that just means that tech isn't competitive enough and we're better off with humans doing it cheaper. Nevertheless, robotics is the next tech revolution that will undoubtedly replace most manual labor in the coming years, such as cars that drive themselves (Of course, telecommuting will get rid of much more of today's driving).

Second, the tech focus right now isn't on those low-wage jobs, it's on freeing up the money wasted on high-paid information jobs, such as replacing one Katie Couric making $15 million/year with thousands of online journalists or online learning decimating the overpaid teaching profession soon. So tech is doing its thing, just as your analysis would predict. Finally, your argument is perverse as you seem to be calling for more protection for US jobs, only so they can be decimated by technology when it finally arrives. But many of us'd rather they be outsourced, so that we don't have to wait for that technological breakthrough, but can pay much less for Asian labor now. The kind of protection you seem to imply is necessary will only lead to a sudden rupture when tech comes along, such as will happen when most teachers are thrown on the streets when online learning takes off. Frankly I look forward to that, but I think it would have been a lot easier on everyone if the transition had started long ago.

 
At 3/02/2011 10:56 PM, Blogger mhsp said...

[Unfortunately, there is a difference between free trade and fair trade.]

Engaging in a voluntary exchange (free trade) is fair and free. The government interfering is neither.

[If global free trade is good, then let's go to one world--one currency, open immigration, open borders for everything.]

I do want open immigration and open borders. I do not want one mandated currency, I want open currency: legalized private currency competition.

["An important prerequisite for the price system to work is an economy-wide respect for property rights."

So, let us turn-around the equation that is offered to:

If Free Trade = Respect for Property Rights, Then Lack of Intellectual Property Right Enforcement = Breakdown of the Price System.]

I'm going to have to disagree that intellectual monopoly is a property right.

 
At 3/03/2011 8:48 AM, Blogger Hydra said...

Engaging in a voluntary exchange (free trade) is fair and free. The government interfering is neither.

==================================

But it is not a voluntary exchange for a third party that incurs costs without compensation.

 
At 3/03/2011 8:51 AM, Blogger Hydra said...

The issue isn't whether government intervention is required to resolve legitimate third party disputes.

The issue is whether the case is legitimate in the first place: the costs are real and not imagined. And whether the government response is results in a fair and equitable playing field.

And finally, that response needs to be re-evaluated over time, as the appropriate government intervention may change.

 
At 3/03/2011 9:07 AM, Blogger Hydra said...

If trading occurs between willing participants with owned property, how could it damage a third party?

==============================

Oh come on. That isn't a real question.

There is however a big caveat in that statement that offers a clue. It has to do with who owns what property.

If I decide to raise pigs, I have some neighbors who will complain bitterly. They will claim that the scent interferes with the enjoyment of their property, and scares their horses. (horses dislike pigs, apparently) In a sense I would be using property that isn't mine.

But if I owned enough property to use as a scent barrier, then your argument would be correct.

So the theroy is OK as far as it goes, but in the real world, it is insufficient.

In the real world, I can raise some pigs, and my neighbors have no recourse because of the freedom to farm rules. What I cannot do is raise thousands of pigs in a confined feeding operation.

This amounts to a trade, brokered by the government (which after all is my neighbors and I). The trade is that they cannot demand that I be zoned agricultural, and then deny me the right to do agricultural things, and in exchange, I can't claim that a pig factory is agriculture.

 
At 3/03/2011 9:09 AM, Blogger Hydra said...

Innovation will happen when the cost of labor is high enough to make the cost of innovation profitable (e.g., low supply and high demand, or from artificial factors like government mandated higher wages).

================================

Unions cause innovation?

 
At 3/03/2011 9:16 AM, Blogger Hydra said...

What exactly is "fair trade"? I think you might be implying a subjective value judgment.


"An important prerequisite for the price system [fair trade] to work is an economy-wide respect for property rights."


A fair trade may involve more than just two parties.

The proper goal is to try to achieve lowest toal cost where
Total Cost = Production Cost + External Cost + Government Cost, in which benefits count as negative costs.

Either too much or too little government intervention means total cost goes up. Instead of arguing about (agianst) government intervention we should focus on how to build a system that modulates itself correctly.

 
At 3/03/2011 4:32 PM, Blogger Sean said...

FDA = regulation on technological progress. So are patents and any idea of intellectual property.

You'll find that pro-regulation/anti-regulation perspectives really can be applied to anything.

 
At 3/03/2011 4:37 PM, Blogger Hydra said...

If there is no intellectual property, the information age is going to be bankrupt.

 
At 3/03/2011 8:11 PM, OpenID Sprewell said...

If you mean a govt-enforced monopoly of patents or copyright, it's actually the converse that's true. Boldrin and Levine have pointed out that much of the innovation on the steam engine happened only after Watt's patent expired (page 7). The current mobile patent war is probably doing nothing other than slowing the pace of innovation- "Patent costs are 15-20% of [a typical smartphone's] selling price, or about half of what the hardware components cost"- insomuch as resources that could be spent on innovation are wasted on lawyers' fees and silly patent licenses. Among the many reasons I will never buy an Apple product again- my last one was in 2004- is their ridiculously aggressive patent stance. If you think patents and copyright will represent anything meaningful in the information age, you're way out to lunch.

 
At 3/04/2011 2:55 PM, Blogger geoih said...

Quote from Hydra: "If I decide to raise pigs, I have some neighbors who will complain bitterly."

This is still a property issue, but in today's statist controlled judicial system, the state has co-opted the property rights of your neighbors by restricting what they can sue you for.

If your pig smell and noise are trespassing on your neighbor's property, then they should have the right to sue you for it. It is the state's intervention into the process that is creating the real problem, by refusing to recognise your neighbor's property rights against your pigish trespassing.

 
At 3/04/2011 3:06 PM, Blogger geoih said...

Quote from Hydra: "Unions cause innovation?"

Sure, but only to the detriment of their membership.

Government's can do the same. For example, prior to the last revisions to the minimum wage law, certain geographic locations were exempted from the minimum wage. Specifically, American Samoa. When Congress removed this exemption, the fish canning industry dried up in Samoa, with the canners either replacing workers with machines, or moving their operations off the island (or both).

Unions can have the same effect. If you artifically raise the demand for wages above the level where workers are productive (i.e., the employer is profitable), then employers will "innovate", too the detriment of workers with lower productivity.

 
At 3/04/2011 9:33 PM, Blogger TheHongaQueen said...

At 3/02/2011 8:26 PM, Blogger geoih said...

Quote from Hydra: "It is clearly not fair trade if the trade damages a disinterested third party, not just a competitor."

If trading occurs between willing participants with owned property, how could it damage a third party?
------
Free Trade: Companies A & B (for example, Oil companies) incur basically the same Total Costs in manufacturing their product. Just by chance, they both sell their product for the same price (for example, $2.99/gal). Disinterested third party (consumer) "not damaged"; thus, Free Trade = Fair Trade.
------
Semi-fair trade:Same scenario as above except every Friday Company A jacks prices up (say $0.20/gal)and every Monday reduces prices back to original; thus Company A:3rd party 'damaged'; thus Free trade = Unfair trade while Company B: 3rd party 'not damaged' and Free Trade = Fair Trade.
------
Unfair Trade: Same scenario as Free Trade except every weekend (or Holiday) both companies jack up prices followed by price reduction after weekend thus 3rd party is 'damaged' thus Free Trade dose not equal fair trade.

 
At 3/04/2011 9:48 PM, Blogger TheHongaQueen said...

At 3/02/2011 8:26 PM, Blogger geoih said...

Quote from Hydra: "It is clearly not fair trade if the trade damages a disinterested third party, not just a competitor."

If trading occurs between willing participants with owned property, how could it damage a third party?
--------------
Scenario 1: Two companies (A & B) manufacture same product (for example, 2 oil companies producing 93 octane gas) incur the same Total Costs. Coincidentally, they both sell their product for the same price (say, $2.99/gal). Free Trade = Fair Trade as 3rd party (consumer) is 'not damaged'
----------------
Scenario 2: Same situation as scenario 1 except company A jacks prices up on weekends and then reduces prices to original after w/e. Company A consumers (3rd party) 'damaged' on w/e thus Free Trade = Unfair trade while Company B consumers are 'not damaged' and thus Free trade = Fair trade for them.
--------------
Scenario 3: Same situation as scenario 1 except both companies jack prices up on w/e and return (maybe?) to original prices after w/e thus both companies consumers are 'damaged' and Free trade = Unfair trade.

 
At 3/05/2011 5:10 AM, Blogger Ron H. said...

TheHongaQueen

Scenario 1

Scenario 2

Scenario 3

"...thus both companies consumers are 'damaged' and Free trade = Unfair trade."

This is utter nonsense. The trade is between oil companies and consumers, all transactions are voluntary. You haven't mentioned any third parties.


No one is damaged by raising prices. Consumers can choose to buy less, or not buy at all, at the higher weekend price. I would expect smart consumers to fill up before the price is raised, thus avoiding the price increase.

In scenario 2, I would expect the company that raised prices to lose business to the company that hadn't. Wouldn't you?

You are ignoring human nature, and the effects of competition.

 
At 3/05/2011 5:15 AM, Blogger Ron H. said...

"If there is no intellectual property, the information age is going to be bankrupt."

No, those who are innovative and first to market would win. Everyone else will be in catch up mode. The next first innovator to market would win next time, etc.

 
At 3/05/2011 10:36 AM, Blogger TheHongaQueen said...

@Ron H: My friend, sadly you've missed the point I was trying to make...or, perhaps my explanation was not worded correctly. The question was the difference between Free Trade vis-a-vis Fair Trade. (Or, to put it another way, the difference between fair trade and unfair trade.)

While all 3 scenarios were examples of free trade, each scenario showed a case of fair trade vis-a-vis unfair trade (that is, from full fair trade to full unfair trade).

Unfortunately, not everyone lives in an area where they can run to the corner gas station to full-up when the tank reads 3/4 full....some live in areas where there is only one gas station, for example, thus arguing for a non-free trade example.

 
At 3/05/2011 6:23 PM, Blogger Ron H. said...

TheHongaQueen

"Unfortunately, not everyone lives in an area where they can run to the corner gas station to full-up when the tank reads 3/4 full....some live in areas where there is only one gas station, for example, thus arguing for a non-free trade example."

You're right: it's not clear from your comments, what point you're trying to make. Your example above imposes quite different conditions from your original 3 scenarios, but makes no better sense. I can only guess that you think it's unfair if someone charges a high price.

You imply in the example above that there are cases in which people are forced to buy gas from the one and only station, and have no other choices. I wonder how many real examples you can cite?

It's not necessary that you like the price, mind you, but if you buy the gas, you prefer the gas to the amount of money you exchanged for it, and consider yourself better off with the gas. And, this choice is better than all others available to you.

To see what's wrong with your single station example, ask yourself the following questions:

- Would people would still buy the same amount of gas if the price were $100/gal?

- How many areas have so few stations as to be beyond the round trip range of most cars? And if there is such an area, are there enough people living there to support a gas station at all?

- If choice is really so limited that people feel they must pay any price for gas, wouldn't others see a golden opportunity to open a competitive station?

Your answers should convince you that this single station example isn't very realistic.

 
At 3/05/2011 6:24 PM, Blogger Ron H. said...

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