Sunday, January 20, 2008

The Economists' Dirty Little Secret

By Amitai Etzioni

Posted January 14, 2008 | 04:38 PM (EST)

My colleagues in economics (and many others, including quite a few liberal ones) tend to scoff at the majority of the public that is troubled by globalization. Never mind the false medications, poisoned toys, and pirated goods, you just don't understand -- these economists say -- free trade is good for you, me, and the man behind the tree. Economists are quick to argue that free trade reduces the costs to consumers and thus ensures an ever higher standard of living. Citizens of nations like the United States that are losing jobs to India and China (and scores of other nations) are told to not fret, that these are menial jobs, that off-shoring allows more Americans to specialize in high tech, well-paying, "clean" work. Often disregarded is that neither God nor anyone else set aside these choice jobs for Americans, and that Indians, Chinese, Finns, and Israelis -- among others -- can do these jobs too, and often for a fraction of what Americans charge. (One economist, Alan Blinder, suggests that hence Americans should specialize in those jobs that are hard to ship overseas -- cutting hair, policing the streets, and flipping hamburgers. How many such service jobs there are, and how well they pay, remains to be determined).

There is a dirty secret that economists carefully keep to themselves, especially when testifying before Congress, writing op-eds, or teaching economics to hundreds of thousands of impressionable college students year after year: namely -- that free trade has never been achieved by any nation, in any market, any time, any place! It exists only in the dreamland of economists, in their mathematical models. Furthermore, all the goodies promised by free trade (trade without any barriers) are often simply not available when one moves merely from more to less managed trade, which is all that one can do. (For a short and relatively accessible early discussion of this point, see R. G. Lipsey and Kelvin Lancaster's "The General Theory of Second Best").

True free trade is as elusive as the horizon for numerous reasons. Most important are the moral and social values that we cherish. Thus, no one in his right mind (and even many who are not) would bring back trade in people (i.e. slavery), a limitation that hampers the free market. Civilized societies will not and should not tolerate child labor nor the rape of the environment, should provide basic safety for workers and consumers, and so on. Security requires that we limit the trade in nuclear reactors, uranium, missiles and several kinds of computers.

Some economists would do away with the protection of copyrights, to allow for free trade in intellectual properties. However, those who understand that large investments must be made to come up with a new drug or a new communication technology (and numerous other innovations), understand that those who make these investments must be rewarded for the risks they undertake and cannot be allowed to be robbed in the name of free trade. The same business people who vote for politicians who promote free trade are the first to object to what they call "unfair" or "cut-throat" competition-- for instance, when someone opens a shop nearby which peddles the same goods as theirs.

All these limits on free trade have one common element: they hinder the "efficient" allocation of resources that true free trade requires.

True, there are some silly, unnecessary regulations. The French slowed down (for a while) the importation of video players by insisting that they all must be examined by a single customs office, located somewhere on top of a mountain along the Spanish border. American economists love to point to a particular couple of regulations: one requires machines that overheat to sound a bell; the other, that those who work with the same machine must wear heavy duty ear mufflers to block out noise.

We need an honest debate about trade which disregards the illusion of free trade. Instead we should ask: which regulations make sense? Should trade be a bit less or a bit more managed? Such a debate would best be conducted regarding one area at a time: stronger regulation of imported drugs? You bet. More scrutiny of imported toys? For sure. Penalties for those who pirate our products? Essential. But limiting imports to protect managements who refuse to adjust to changing technologies and economic needs (our car makers)? Probably not. Nor should we block fair competition from nations that abide by the environmental and labor standards of a decent society, say European airlines. But, we should reject the calls to choose between free and managed trade, because in effect these are calls to give up the benefits some regulation of trade provides -- in the name of a promised land that does not exist and can not be brought about.

Some of the presidential candidates have raised this issue. One does not necessarily have to vote for these candidates, as they may fall short on other fronts. But they should not be dumped upon because they refuse to worship at the altar of a false god: the economists' free trade illusion.


Micro-blog: The libertarian Economist is upset because Texas is introducing a "pole" tax on the customers of strip clubs. The Economist fears that some people will not be able or willing to "pony up the five measly dollars," a possibility which the magazine finds "depressing." Some of us find this problem rather low on the totem pole of depressing developments.

Amitai Etzioni is a University Professor at George Washington University and the author of The Moral Dimension: Toward a New Economics.


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