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Dani Rodrik replies on free trade
Here is his long post, his introduction reads as follows:
The question, if I understand is correctly, is whether I think trade policy—and in particular trade policy which departs from free trade—can ever do some good in a world where purely political motives and rent-seeking are rampant. My answer is yes, but let me build my case point by point.
Here is one of his closing paragraphs:
...let me note the irony in how a discussion on free trade among economists quickly ends up being a debate on its politics—that is, a debate on whether this or that trade policy which on economic grounds is actually desirable can also be politically feasible. We are way beyond our area of expertise. Your hand-waving is as good as mine.
Here is my original query. Read his whole response, comments are open, do let us all know what you think...
Posted by Tyler Cowen on May 4, 2007 at 06:24 AM in Economics | Permalink
Comments
i think the appropriate summary is : Tyler says that trade restrictions are, no matter what, a result of political rent-seeking, so we should just any provision for trade resticitons. rodrik says rent-seeking is inevitable, no matter what, but proper institutions should be designed to check it and that trade restrictions aren't always an obvious result of rent seeking but sometimes voter preferences.
although i am a die-hard loyal MR fan(from 2004) I think tyler's views are somewhat more simplistic here. rodrik's makes an important point about designing the right instituions and the right incentives. human beings will be human beings and we will look at ourselves in terms of tribal affiliations. trade restrictions will never go away(is all intra-US trade free?) so the right way forward is the alignment of the political incentives so as to make it co-incide with social welfare.
Posted by: sa at May 4, 2007 8:26:54 AM
Every economists should read or re-read Friedrich Hayek's "The Road to Serfdom".
Posted by: SMIP at May 4, 2007 8:49:00 AM
Tyler, your original query was in regard to the efficiency of protectionist trade policies, and Rodrik's essential answer, as an economist, was that efficiency is a political question, though he gave broad hints as to his own stance, or as he would say, he did a lot of handwaving.
The interesting question is, what exactly is meant by efficiency? It seems the original question, and cost-benefit analysis in general *is* probably ultimately a political question. His point is taken. However, in full view of the controversy of social-welfare analysis, it is a cop out to say this is a *purely* political question, if I understood the intent behind your original question. We can, for instance, ask the same question in the light of Pareto-efficiency, and we arrive at the answer 1.0 (with some complications if you take existing trade laws as given).
My own opinion is that interpersonal social welfare calculus has no solid basis in pure economics and becomes an arbitrary political tool, which may be the unintentional point to come out of this exchange. If you had phrased the question in light of Pareto optimality, would the political question have come up in the same way, or would Rodrik be pointing out that your framing of the question implies something about the nature of your political beliefs?
Posted by: John Goes at May 4, 2007 10:40:28 AM
"Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath."
I for one know precisely what my underlying assumption is: peaceful exchange based on free consent benefits both parties and is therefore always good. Throw whatever scary adjectives out front of it that you like... "raw", "unrestrained", "unconditional"... but true FREE TRADE is the only correct policy. Anything else not only harms us economically but is inexcusably immoral.
Posted by: Noah Yetter at May 4, 2007 12:14:40 PM
What I think is that Rodrik is a great addition to the top tier of econ-blogging. The two of you have a good dynamic going. Try and develop some friendly antagonism, and I'll get some popcorn.
Posted by: Lee B at May 4, 2007 2:23:52 PM
Rodrik's comments can be summed up in phrase that I often use, "trade is a policy lever" Saying we should have free trade always, is like saying we should have no excise taxes, always.
Both generate losses but
1) We have priorities. Efficiency is but one of the goals we want to reach. If we can get equity or some other goal more cheaply through trade restrictions than some other means we should use it.
2) We live in a second best world. For non-economists that just means, the market doesn't work perfectly. Sometimes something that could do damage to a perfect market could actually help a non-perfect one.
Posted by: Karl Smith at May 4, 2007 2:29:28 PM
Rodrik's comments can be summed up in phrase that I often use, "trade is a policy lever" Saying we should have free trade always, is like saying we should have no excise taxes, always.
Both generate losses but
1) We have priorities. Efficiency is but one of the goals we want to reach. If we can get equity or some other goal more cheaply through trade restrictions than some other means we should use it.
2) We live in a second best world. For non-economists that just means, the market doesn't work perfectly. Sometimes something that could do damage to a perfect market could actually help a non-perfect one.
Posted by: Karl Smith at May 4, 2007 2:29:48 PM
"We live in a second best world" is true to the extent rigidities that cause second-bestness (like the resources required to retrain marginalized workers) are assumed to be fixed and permanent.
In order to replicate the data, which are generated by the second best reality, our models require such rigidities. Often we deduce 2nd best policies from those models. Instead, shouldn't the normative implication be to remove or reduce those rigidities?
In particular, suppose low skilled laborers see reduced wages because of freer trade. Its too expensive for a bargain to be struck between low-skilled laborers and the rest of us consumers, so potentially efficiency gaining trade policies aren't put into place. We can talk the politics but, as Rodrik points out, that's not our competence. Instead, let's consider the fact that skill level isn't static... people can be retrained. To the extent that retraining becomes cheaper and cheaper, there's fewer and fewer losers from trade. The policy is to remove/reduce the rigidity (i.e. elasticity of substitution between skill levels).
Posted by: Will Ambrosini at May 4, 2007 3:34:41 PM
Will: "shouldn't the normative implication be to remove or reduce those rigidities?"
Depends whether that gets you more bang for your buck. In your specific example, I think you're right, but that depends on an argument about the increasing ease of relaxing rigidities, which may not always be the case.
Karl: I though Rodrik's point was "that we do not have to throw up our hands and say “politics will screw everything up at the end.” The nature of the political equilibrium depends on the rules we select and the institutions we design."
Posted by: conchis at May 4, 2007 5:17:32 PM
Rodrik said:
"We are way beyond our area of expertise. Your hand-waving is as good as mine."
My reply to that assertion is that economists are not outside their area of expertise to speculate as to what politics will chose. If we define economics as the science of choice and understanding how incentives affect the choices we make. I would argue that economists should feel extremely comfortable analyzing political institutions and then making their speculations about what government policies will ultimately come about. Economists had to invent public choice precisely because the political science department was much much too faithful about democratic government's abilities to chose the most socially optimal policies. If anything, I would argue that the ONLY worth while political analysts are those experts in the field of Public Choice.
Posted by: John Pertz at May 4, 2007 11:41:45 PM
Of course trade policy is rife with politics, but our role is to explain that all trade policy is harmful. The world's history can be explained as a battle between politics and economics. If once we accept that political control is inevitable, we have accepted defeat.
Karl: we don't live in a second-best world simply because markets are not perfect. We live in a second-best world because people think political control over markets makes them better. THAT is the mistake we must correct.
Posted by: Russell Nelson at May 5, 2007 2:07:45 AM
we don't live in a second-best world simply because markets are not perfect. We live in a second-best world because people think political control over markets makes them better.
Well, thats not really a best at all.
Yes, I agree that there are people who believe that controling markets is generally a good thing and those people are wrong.
However, is our job to: Say whatever it takes to beat back the socialist? Or, is it to give the our best most objective analysis?
There are some things that make interfering in the market is a good thing.
1) Money matters. In a perfect market it should not. Not only does this mean a there is a role for a FED, it also means we have to think about how we handle relations between economies that use different money.
2) Perfect competition is the exception not the rule.
3) There are externalities, pollution being cheif among them.
4) And no one talks about this one but - the consumption of others enters into our utility function. That is, we care about what happens to other people.
A dirty little secret in economics is that this one screws the pooch royaly. Not just because we care about something other than effeciency but because all of our effeciency models grind to a halt.
It is no accident that compasion is the objection to economics in pracice, it breaks down economic models in theory!
Posted by: Karl Smith at May 5, 2007 9:59:04 AM
What? No libertarian sound bite BS rebuttal from the usual commentators. Hmmm, I wonder why…
Posted by: aaron_m at May 6, 2007 8:31:38 AM
Posted by: 鑽石 at Apr 2, 2008 8:32:04 PM
