Chronic Murmuring

Don't feel bad. The attrition you are dealing with now may give you a better crop of students who are more suited to the demands of your class.

Scott,

What do you think of this article?

Bobber, I printed it out and will read it soon. I saw the words "trade defecit" and gulped. At the least, in reading it, maybe I can take the time to learn more about this.

Our continual back and forth on this has prompted me to take international trade as a field course next fall, incidentally. Maybe as time goes on, I'll become better able to actually talk about things like NAFTA, globalization, trade defecits, and all that stuff. Right now, though, I'm still just one of those guys the author in the article notes as relying heavily on "simplistic" principles of economics ideas.

His stuff on economies of scale, though, sounds false to me. He has aggregated an entire nation of suppliers and consumers into one acting, trading unit, as though the United States was a single economic unit which benefits from trade. And while some principles textbooks do indeed crudely talk about trade like this (for instance, you'll set up "the US" trading with "Japan" in various examples), this is really misleading. The United States doesn't trade with anyone, nor does Japan. Rather, millions of individual firms and individual consumers do. It's actual economic units that benefit from trade, not aggregations like "the United States." I don't know if that necessarily is an important point, but the fact that he confuses it has me a bit concerned from the start.

Scott,

I received the book today. It's a very good read. It is definitly bringing some of the concepts down to earth for me to grasp a little better. Also written by a guy at Wash U. here in St. Louis, very cool.

Ok, here's a question: There does seem to be kind of a faith dogma expressed in the book so far. That is the idea that there will always be an expansion of jobs and, even though we lose some jobs because of better efficiency in other countries, we gain more. But how do we know this will always be the case? If we don't, when do we get concerned? What if we give up more jobs than we create and it starts becoming an ever increasing downward spiral? How do you know this will never happen?

Bobber, good question. I don't know a whole lot about trade and job creation or job loss. The point I think to remember, though, is that trade results in each party producing the things at which they have a comparative advantage. More of those respective goods/services are produced. So, theoretically, there's an increase in productivity. Productivity eventually requires more jobs to meet demand. So I think that this is one of the mechanisms by which trade leads to job creation, but I may need to get back to you on this.

I think the other thing to remember is that it's not so much religious dogma as it is theory. In economics, there are a few things upon which virutally all economists agree. One of them is the efficiency of markets given perfect competition. In perfect competition, markets will maximize total surplus - there does not exist any other allocation of resources that can make us better off other than the allocation that results from markets in that kind of setting. Another point of widespread agreement is comparative advantage. There seems to be soemthing like 90-95% agreement among economists around this idea. It's been rigorously tested empirically, for a long time, and seems to be left standing. But, it's never religious dogma. It's always a theory that can be rejected if evidence is produced sufficient to reject it. My sense is that it's a fairly solid proposition, though, since it's been around for so long and more or less all economists still agree on it. Heck, even Krugman agrees with it essentially, and he's as liberal as they come in my field.

The thing that can cause job loss, though, is if the industry that loses in trade has employees who cannot easily move into the other growing industry (the one at which the country has a comparative advantage). For instance, consider a country that makes two goods - coffee and computers. Let's say that the global price for coffee is lower than the domestic price. The result will be the country reducing the coffee it will supply by domestic coffeeproducers, and an increase in the coffee demanded domestically. The difference will be imported from abroad. But what of these coffegrowers - the ones who are leaving the market because of the drop in prices? Well, if the country is worse at coffee, then it will be better at computers, and there the country will be able to export to meet the world's demands, since the world will have a higher price than their own domestic price. In other words, there you'll see increased supplies.

Well, theoretically, those lost jobs in coffee could go into computers. Those workers who lost their jobs in coffee could go and take jobs in the growing computer industry. But what's wrong with that picture? More than likely, they won't be able to. The human capital needed to work in computers is of a different sort than that needed to grow coffee. And so there'll be a certain amount of chronic unemployment among those who lost their jobs in coffee. They won't be able to transition into computers. They lack mobility.

But, even here, the gains from trade outweigh these costs, and there are things the government can do to help those hurt by trade without invoking protection. For instance, they could offer programs designed to educate workers. Or they could tax the winners from trade a certain amount and transfer that money to the losers. Theoretically, they could do that and still be better off. OF course, taxes come with their own problems, but the point is, there are better ways of helping those hurt by trade than protectionism.

If you get a chance, while you're out, pick up the latest Economist magazine. It has an op-ed piece on outsourcing, and on jobs in America. I read some of it today; it's very good. Lots of relevance to the things you and I have been discussing.

I'm glad you like the book. Even if you disagree with it, I figured that Roberts was much better at answering your excellent questions than I really could be. He's such a great communicator. He's got another book called The Invisible Heart which is, of all things, a love story between an economist and an english teacher. She loves Dickens and hates capitalism. He loves capitalism and loves her. It makes for wonderful reading, and it explains things in a way anyone could understand. Russell Roberts along with Steven Landsburg is one of the few economists out there who is great at communicating economic theory into everyday language.