1/24/2012

01-24-12 - Protectionism Part 3

One of the stranger things that's happened in the past 20 years or so is that the religion of free-marketing has become widely accepted dogma. I say "the religion" because these people believe in it beyond rationality. For examply the widely known ways in which the mathematical abstraction of ideal free markets does not apply to the real world (such as rational actors, perfect information, shared goods, etc.) are waved off as insignificant.

Part of this weird mass delusion is the belief that "protectionism failed" or "the welfare state failed" ; you will frequently see these assertions in supposedly factual news articles. Papers like the NYT which will parrot ridiculous government press releases without question will also say things "free markets have clearly proven themselves" or "nobody wants a return to a welfare state, that model has clearly failed".

Huh, really? I find that interpretation highly dubious; certainly not something that can be dropped as an aside as if it's incontrovertible. During the golden age of America (roughly 1950-70) we were highly protectionistic and we had our most generous welfare state. So, where was the failure? I'm sure the popular memory is somewhat fixated on the bad times of the 70's-80's that were blamed on corrupt unions and inefficient protected businesses and supposedly saved by Reagan/Thatcher free marketism. But there are numerous complicating factors that make that interpretation questionable at best.

The only indisputable success of the free market era was the dot com boom, but that would probably have happened anyway in a more controlled market system (and we may have avoided some major crashes due to excessive speculation and capital liquidity, such as the southeast asian crash and the south american crash).

In the mean time, highly protectionist / socialist states have been doing very well (eg. most of the scandanavian and german speaking states). I don't mean to imply that they are a good model for us to copy, but if you're just looking at world evidence for certain economic/political schemes, it seems there's more pro-socialist examples than there are good "free market" examples.


I believe that part of the problem is the mathematical appeal of free markets in theory. You can set up these toy problems with idealized conditions, and talk about what creates the "global optimum" for all.

There's nothing wrong with playing with toy models, except that people then think that it applies to the real world. A serious economist would be able to list the various ways that the idealized models don't match reality, but then you start drawing yield curves and run simulations and cook up formulas and it all looks so nice that by the time you get to the end you forget that it doesn't actually connect to reality.

6 comments:

Pinky's Brain said...

In my opinion the problem is not foreign vs. local trade ... the theory of comparative advantage is a sound one.

The problem is that unbalanced trade makes the theory of comparative advantage almost null and void, it shifts the restructuring of less efficient economies by decades ... allowing creditors (both foreign and domestic) to slowly buy the country out from under the population, who are blind to the fact that credit won't always remain as easy to get.

In a trade balance situation we would never have been able to get the economy in the state it's in now, we would have had to start restructuring far sooner.

Free trade in goods is good ... free trade in debt, land and equity is bad.

cbloom said...

"the theory of comparative advantage is a sound one."

No. This is the exact kind of thinking that I'm trying to talk about, where a small theoretical model can be very clear and seems elegant and obvious, but in reality there are so many confounding factors that it hardly applies at all.

Even within traditional (conservative) economics, simple comparative advantage trade has many doubters and qualifications.

It also applies less and less to the modern world, due to capital mobility (which invalidates comparative advantage) and also because the entire theory is based on the assumption that the country with absolute advantage does not have the capacity to produce all that's needed of all goods.

Comparative advantage based trade can in the real world in fact be bad for *both sides* of the exchange.

It's bad for the developed country because you wind up exporting only "top tier" goods (capital, IP). This may be good for GDP but is bad for 90% of the population (and median income).

It's bad for the developing country because it traps you in a ghetto of producing only the things that are based on cheap labor, and you never move in to the better white collar industries that the developed country does better.

Most developing countries were pretty protectionist before the IMF started forcing them not to be. China has done so well because they are very protectionist.

Pinky's Brain said...

Relying on protectionism to keep bottom tire low educated labour at home is a losing strategy ... it buys you maybe a decade before the machines take over.

The market can not solve the employment problem, only redistribution can. If you're going to solve it through redistribution you might as well optimize GDP.

As for the less developed countries ... the best way for them to move up the value chain is education and infrastructure, which are again a function of government. So they too are best off optimizing GDP.

China is protectionist in as far as it's own currency, land and equity is concerned ... but as far as I can see they have no qualms importing means of production. Subsidies in those areas only seem to start once they get pretty close to being competitive to begin with. Education + copying made Japan and China great, not trying to build their technological base up from the ground up.

cbloom said...

"Relying on protectionism to keep bottom tire low educated labour at home is a losing strategy"

Nobody is suggesting that. But what exactly do you expect the bottom 75% of Americans to do for work?

"The market can not solve the employment problem, only redistribution can."

This sentence seems to me to be exactly false. In fact redistribution does nothing for employment at all, but the market is what creates jobs.

Quite often the question for a company of whether to hire someone or not is a very close call, and small government incentives towards employment could push that decision one way or the other.

In fact right now American policy has very strong incentives *against* employment and for off-shoring of profits.

"If you're going to solve it through redistribution you might as well optimize GDP."

This also makes no sense to me. If your goal is employment then your economic policy should be to optimize employment, not to optimize GDP.

The fallacy of the past 20 years has been that if you optimize GDP everything else follows. In fact it does not.

"As for the less developed countries ... the best way for them to move up the value chain is education and infrastructure, which are again a function of government."

The economic policy of a country is a function of government. If, as you suggested, a poor country focuses on the exports that it has an advantage in, it would not invest in eduction or infrastructure.

In fact, investing in education and infrastructure is exactly the type of job-encouraging protectionism that I am talking about.

"So they too are best off optimizing GDP."

This sentence has absolutely no relation to the previous one, I'm not sure why you put it here.

"China is protectionist in as far as it's own currency, land and equity is concerned ... but as far as I can see they have no qualms importing means of production."

As I have noted several times in these posts "protectionism" does not just refer to tarrifs or import limitations. China spends vast amounts of money developing internal businesses and infrastructure. The government develops entire industries that they previously weren't profitable in. They also have lots of limits on what foreign companies can do, and some limits on removal of capital from the country.

Thatcher Ulrich said...

The thing I don't get is, why don't we apply a tariff to imports based on the goals of domestic regulation? I.e. if we impose a carbon tax at home, apply a carbon tax to Chinese imports to compensate for China's coal-burning. Same thing with other environmental regulations, labor laws and OSHA regulations. Instead we are just exporting all our environmental problems and employment.

The objection might be the bookkeeping and monitoring required, but that seems thin compared to the obvious advantages. Even a rough approximation of true parity would go a long way.

cbloom said...

I'm sure it's intentional. American companies want to be able to pollute at will, employ at low wage, have unsafe working conditions, etc. They can't get away with it in the US any more, so we need "free trade" so that they can wreck other countries and sell the stuff here.

More on this topic in part 4 perhaps.

old rants