Left Flank

What Eric Schoenberg and Gary Marcus are arguing, that psychology is a useful guide for economic policy, but that ultimately skepticism about ideal economic presuppositions are beneficial, dovetails nicely with Nassim Taleb's black swans and Arnold Kling's caution. It's also just another way of understanding how the stock market jitters and the congressional bailout drama relate to what laypeople are experiencing.

As an explanation of the first vote US House rejecting the Paulson bailout plan, it's reassuring to hear Schoenberg to discuss the experimental economics game, concept of the ultimatum game. And then, from that point, move forward armed with more than ideological talking points to solutions.

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Paul Krugman starts what passes, to a non-economist, for fun when reading about economics. Admittedly, I fall asleep when people talk about math - unless it concerns my money - but I will put in the effort for comparative advantage (and, so should you). If for no other reason, it's fun when intelligent people get stuck in cat fights like this.

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It's often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That's still true of things like the import quota on sugar. But when it comes to manufactured goods, it's at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I'm not a protectionist. For the sake of the world as a whole, I hope that we Americans respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Don Boudreaux responds with Krugman's own 1996 essay attacking Krugman's 2007 argument. Greg Mankiw gives Krugman an "out" (since Krugman claims he's not a protectionist, but Dani Rodrik praises Krugman.

Perhaps we can make more progress here if we stopped using blanket terms to characterize where people stand, and used real words to describe what their views are.

I think Rodrik is on to something here, even if I think Krugman's essay encourages arguments in favor of protectionism. Firstly, let me emphasize what Suranovic argues (assuming you read the passage about comparative advantage before this):

Many people who learn about the theory of comparative advantage quickly convince themselves that its ability to describe the real world is extremely limited, if not non-existent. Although the results follow logically from the assumptions, the assumptions are easily assailed as unrealistic. For example, the model assumes only two countries producing two goods using just one factor of production. There is no capital or land or other resources needed for production. The real world, on the other hand, consists of many countries producing many goods using many factors of production. In the model, each market is assumed to be perfectly competitive, when in reality there are many industries in which firms have market power. Labor productivity is assumed fixed, when in actuality it changes over time, perhaps based on past production levels. Full employment is assumed, when clearly workers cannot immediately and costlessly move to other industries. Also, all workers are assumed identical. This means that when a worker is moved from one industry to another, he or she is immediately as productive as every other worker who was previously employed there. Finally, the model assumes that technology differences are the only differences that exist between the countries.

With so many unrealistic assumptions it is difficult for some people to accept the conclusions of the model with any confidence, especially when so many of the results are counterintuitive. Indeed one of the most difficult aspects of economic analysis is how to interpret the conclusions of models. Models are, by their nature, simplifications of the real world and thus all economic models contain unrealistic assumptions. Therefore, to dismiss the results of economic analysis on the basis of unrealistic assumptions means that one must dismiss all insights contained within the entire economics discipline. Surely, this is not practical or realistic. Economic models in general and the Ricardian model in particular do contain insights that most likely carry over to the more complex real world. The following story is meant to explain some of the insights within the theory of comparative advantage by placing the model into a more familiar setting.

I would argue that most laypersons, like me, would doze during a economics lecture (but I fight the urge). And, since most people do understand their interests, based on their particular experience at whatever company or agency, better than what they learned in college, haranguing them about learning comparative advantage is probably an impossible task. But, lest I become completely cynic, many people do think in political terms for elections, if only right before entering the booth. So, the task is to translate economic theory into political language people can scrawl on their hand, as it were.

Starting with models and lectures about wine in Portugal, X's and Y's, and two countries is like labelling oneself a "free trader", unless one then proceeds to lampoon that argument. "Free trader" becomes a caricature which translates to a political epithet, "Republican" or "Clintonian". Resisting this impulse requires a political platform cut from whole cloth that emphasizes the "free trade" program and an emphasis on national interest fit enough to tangle with the mercantilist impulse.

How that would work is another question...