Sunday, March 16, 2008

Initial conditions and the virtues of Free Trade

In Beyond the Noise on Free Trade, Greg Mankiw asserts the virtues of free trade using the conclusions of Smith and Ricardo- Trade between two countries creates winners and losers, but it leaves both nations with greater overall prosperity. Disagreement with this assertion leaves one, according to Mankiw, in the apparently unenviable position of a distinct minority- only 12.5% of Ph.D. members of the American Economic Association thought the US should not eliminate remaining tariffs and other barriers to trade. Adding insult to injury, Mr. Mankiw labels dissenters mere muggles.

Well call me a muggle (but not within arm's reach)!

While the high priests of the dismal science may see opportunity in free trade, this muggle thinks they are misunderstanding the views of Smith and Ricardo on one of the necessary preconditions of virtuous free trade, a mechanism to keep that trade balanced between nations over time.

To wit, from Ricardo's Principles of Political Economy: Thus, cloth cannot be imported into Portugal, unless it sell there for more gold than it cost in the country from which it was imported; and wine cannot be imported into England, unless it will sell for more there than it cost in Portugal. If the trade were purely a trade of barter, it could only continue whilst England could make cloth so cheap as to obtain a greater quantity of wine with a given quantity of labour, by manufacturing cloth than by growing vines; and also whilst the industry of Portugal were attended by the reverse effects.

He concludes the chapter on Foreign Trade with: The nations of the world must have been early convinced, that there was no standard of value in nature, to which they might unerringly refer, and therefore chose a medium [Gold], which on the whole appeared to them less variable than any other commodity.

To this standard we must conform till the law is changed, and till some other commodity is discovered, by the use of which we shall obtain a more perfect standard, than that which we have established.

The idea that the US could import goods and services whose value was far in excess of US exports for a considerable length of time, in this case, decades, would, I assume, lead Ricardo and Smith to use the proper word for such exchange; tribute, not trade. The difference, it seems to me, between trade and tribute is balance- trade assumes some equivalent (albeit in the eye of each party) value on both sides while tribute is one-sided.

I do not, however, wish to imply that the Joe Six-Packs of the US have not benefited from reduced barriers to exchange, just the opposite. The average man has benefited greatly from the US system of exchange as have many nations who have extracted tribute.

So, you might be wondering, if you think the average man has benefited from the current system of exchange, aren't you agreeing with Mr. Mankiw?


Mr. Mankiw is not referring to the past but to the future- and a future of more Ricardian free trade. The closer the world moves to a Ricardian system of free trade, the worse off will be the average man because a system of balanced trade, as opposed to the current system of de facto tribute, will mean the US needs to produce and export more to maintain our level of imports.

Ricardo's thought experiments on foreign trade, through which the phrase comparative advantage entered the Economist's lexicon, assumed a shift from a system of autarky to a system of increased exchange. China, then, given its recent shift from a fairly autarkic model to a system of increased foreign trade seems a more apt nation to fit in Ricardo's model, albeit with the proviso that they are still sitting on hundreds of billions of $s whose value sinks by the day.

The US, by contrast, is not autarkic. The virtues of comparitive advantage have been enjoyed for some time. Indeed, more virtues have been enjoyed than imagined by Ricardo, for we haven't repaid the exchange. In a system of free and balanced international trade, the US, in my view, would be worse off.

I'll conclude with an old adage for the Wizards of Economics; be careful what you ask for, you might get it. In a system of free and fair trade, the US will need, as noted above, to produce and export more, or import less. In other words, jobs of relative leisure, such as is enjoyed by these wizards, might become quite scarce.