Dani Rodrik’s wonderful post on free trade and prices has started an extraordinarily candid conversation among economists. Economists sometimes rudely pretend that critics of free trade simply fail to understand “Ricardo’s Difficult Idea“, and that skepticism amounts either to ignorance, a kind of literary snobbishness, or simple corruption. In doing so, despite protestations to the contrary and rich nuances hidden in journals, economists as a group have grown doctrinaire in policy arguments regarding trade. All of a sudden, thanks to Dani Rodrik, they’ve begun to fess up.

Tyler Cowen’s recent addition to the conversation is worth highlighting (emphasis mine):

More empirically, having your export prices bid up is a wonderful driver of growth more than it is a distributional or efficiency nightmare. The net externalities of that process are usually positive rather than negative, even without firm- or industry-level increasing returns in the traditional sense. The exports help build a middle class and in the long run make democracy and rule of law possible. The dynamic effects are the key to the benefits of trade, and neither the Ricardian nor the Heckscher-Ohlin model is satisfactory. The best simple (ha!) model has trade bringing more innovation, new goods with high consumer surplus, greater reason to work hard and get ahead, greater domestic inequality, a growing middle class, and new and usually more liberal political coalitions.

Empirically, the troubled cases of trade typically involve exports of oil or diamonds and subsequent corruption. The relevant problem with trade is not higher prices for home consumption, in fact home consumption of those commodities is usually quite low. How much oil does Guinea-Bisseau use? We’re left with Mexico and corn prices as a possible example, but note that Mexico would have much lower corn prices with free trade in corn. And it is U.S. government subsidy, not the market, bidding up the price of corn in the first place.

What is extraordinarily about the bit of text in bold is the admission that what’s great about trade is not the deterministic result of some well-established, you-may-not-understand-it-but-it-is-definitely-true theorem. “Dynamic effects” here means things that we’ve observed over time, but that aren’t captured by simple, standard models. Tyler is making a case based on human judgement, not rocket science. (I’m sure there is some rocket science somewhere to support his intuition, but you won’t find the wall of obeisance any mention of Ricardo provokes.)

I agree with everything Tyler writes here. But note that his analyisis offers no simple prescription. He has become a two-handed economist, thank goodness. Unfortunately, he tries to shove one hand back in his pockets at the end of the post:

I don’t disagree with Rodrik’s claims about positive economics, although they don’t quite “shade” as I might wish. I would have liked to have seen the sentence: “The early 20th century trade theorists discussed by Jacob Viner and Gottfried Haberler knew about these problems, but they also realized they did not, when viewed in a realistic context, weaken the case for free trade.”

Yet Tyler himself describes some realistic contexts (oil, diamonds) where the bad effects of trade arguably trump the good. If we were debating a specific policy proposal, it would strike me as normal to worry about the “shading” of other peoples’ true statements. But getting upset that comments on trade in general don’t “shade” sufficiently towards “free trade” is odd. There seems to be a strong norm among economists to “shade” towards a simple view on trade that is known within the profession to be inadequate, theoretically and in some real-world contexts.

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If you haven’t followed this debate and you care about this stuff, here are some things to read:

• Dani Rodrik — Does Free Trade Bring Lower Prices?
• Greg Mankiw — Does free trade lower prices?
• Dani Rodrik —Can the wrong answer in the classroom be the right answer in public debate?
• Greg Mankiw — Ricardo vs Heckscher-Ohlin
• Mark Thoma — On the Other Hand . . . . Rodrik versus Mankiw (Krugman Also Weighs In)
• PGL — Can Free Trade Raise Prices?
• PGL — The Debate Over the Effects of Free Trade Heats Up
• Tyler Cowen — Does free trade bring lower prices?
• David Altig — What Are You Going To Believe — Theory Or Your Own Lying Eyes?

Among God’s jokes is that one always sins in precisely the ways one accuses others of sinning. In accusing “economists” of strongly shading towards a caricatured view of trade, I myself have caricatured economists. There are, of course, economists who consistently engage the public with nuanced views of trade. Any list I could write would be unforgivably spotty, but I’ll send some love to Dean Baker and Brad Setser. Recently Alan Blinder and of course Dani Rodrik have deviated from what I allege to be the party line. I am sure there are many others.

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Here, by the way, is a synopsis of my own views:

1. International trade is usually a fantastically good thing, because of Ricardo-esque efficiency gains and Tyler-Cowen-esque dynamic effects, and also for cultural and aesthetic reasons.
2. Nation-states are still important units of analysis and determinants of human welfare. So long as this is true, enthusiasm for trade in general must be tempered by caveats about balance and national portfolio diversification. At this moment, I think these concerns are sufficiently pressing in the United States that a policy response is required.
3. Neither blinding people with equations nor presenting tendentious simplifications as scientific truth are adequate approaches to policy debates. Yes, models are always simplifications, but a good model captures relevant complexity, while a bad one is scientific window-dressing around a preconceived result. Having a secret good model doesn’t excuse pawning off a bad one that gives the right answer as “science”. Largely false simplifications that capture important insights are essential pedagogical tools. But they should be presented as thought experiments rather than models, and qualified with some discussion of their inadequacies.

This entry was posted on Sunday, April 29th, 2007 at 1:21 pm PDT.
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