Sunday, February 20, 2011

Mankiw's leap

In last Sunday's NY Times economics column, NGM quite reasonably points out that voluntary exchanges benefit both parties in the exchange.

However, he then makes an unsupportable leap to the following:

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.

I do agree that China is not one biggest problems the US is facing, but not for the reasoning that NGM uses which is that all voluntary exchanges are mutually profitable (read the article, it's the only principle he speaks of before giving the quote i reproduce above).

People, the United States is not a person! Only in DSGE models do we assume that all individuals are identical! There is no "our" to which general statements can be attached.

Yes, going from autarky to free trade will raise the GDPs of both nations, but that is a very far cry from saying that a large number of individuals will not be made worse off in the process. I figure that NGM is familiar with the Stolper-Samuelson theorem, so I guess he is assuming the political process always provides adequate compensation for the losers??

ROFLMAO, anyone?

Here's a case for free trade:

Individuals should be allowed to contract with whoever they wish, without government interference based solely on geography.

Now, that is not much of an economic argument, but, to tell the ugly truth, THERE ISN'T MUCH OF AN ECONOMIC ARGUMENT.

Once you factor in agent heterogeneity, imperfect competition, increasing returns, and an arbitrarily large number of traded goods, the welfare economics of free trade is murky at best.

Here's a political economy case for free trade:

Yes free trade has its losers and drawbacks, but the losses and distortions from free trade are far less than the losses and distortions from politicized, "managed", trade so free trade is therefore preferable.

Is there a bumper sticker big enough to hold that?


Anonymous said...

How dare you suggest that the lines I draw on my graphs are based on unknowable information;)

Anonymous said...

I've heard lots of criticisms of Mankiw, but this is ridiculous. You should be criticizing the much more serious abuse of language and economics that Mankiw is responding to.

Anonymous said...

The argument is not "economic"--it is one based on liberty. There will *always* be winners and losers, but should we allow them to be chosen by policical power? No! That always leads to corruption.

Look at what the unions are trying to do in Wisconsin as a good example.

Norman said...

If you find that bumper sticker, let me know where you got it.

Anonymous said...

When is welfare economics ever not murky?

k said...


choosing the lesser of two evils?

Frank said...

Stolper-Samuelson is correct. Some will be made worse off by free trade. If that worries you, we should have domestic redistribution to make up. Ah, and scale economies strengthens the case for free trade. Endogenous growth strengthens the case for free trade. I presume Mankiw was thinking of this last while considering the longest of long runs.

Free trade is best!


Vlad said...

"Free trade has its losers, fair trade breeds abusers"

Angus said...

Increasing returns most decidedly does NOT strengthen the standard case for free trade.

Anonymous said...

You seem to presume that the losers in free trade are losers in every aspect of free trade. If that were true, the poorest in the US would be poorer than the poorest in China, when in fact the poorest in the US are about as rich as the richest 5% in China.