Brown and Obama declare they love free trade. So why don't they follow the logic of their thinking?
Jamie Whyte
Governments must not respond to the financial crisis by erecting barriers to international trade. They must not adopt the "beggar thy neighbour" policies that deepened and prolonged the Great Depression of the 1930s.
So say most commentators and many politicians, including Peter Mandelson on these pages on Monday. Even President Obama, having advocated trade barriers during the Democratic primaries, now claims that he does not want to "send a protectionist signal". And Gordon Brown rarely misses an opportunity to recommend free trade in these troubled times.
They are confused. To see why, start by asking what is so good about free trade. The short answer is that it allocates resources to their most efficient uses. Any introductory economics textbook will explain how. But a simpler route to the answer is to see that international trade benefits us in the same way that technological advances do, as the economist Steven Landsburg explains with a fable (from his More Sex is Safer Sex: the Unconventional Wisdom of Economics): "Once there was a man who invented a new and cheaper way to analyse MRI data. Medical costs fell and more people got better care. The invention put some radiologists out of work, but even that had its upside - after a little retraining, the radiologists moved into other specialties where their talents were much appreciated.
"But one day, an investigative journalist tracked down the inventor's disgruntled former assistant and learnt that the great 'invention' was nothing more than a $600 laptop computer connected to the internet. The so-called inventor e-mailed data to Asia, where it was analysed by low-paid Asian radiologists. They e-mailed back their reports, which he advertised as the output from his machine."
Be it new technology or simply trade, the economic benefit of the new process is the same: cheaper medical care and, hence, resources liberated for other uses. And, be it technology or trade, these benefits could be eliminated by a subsidy to domestic radiologists. Suppose the analysis of an MRI scan costs $50 using the Asian radiologists and $100 using domestic radiologists. If government decided to subsidise domestic radiologists by $60 per MRI scan, then they could offer their services for $40 and patients would no longer prefer the Asian alternative.
The subsidy would not reduce the cost of domestic radiologists; their MRI analyses would still cost $100 to produce. The subsidy would thus divert resources away from their more efficient use. In other words, it would create waste. Since the wasted resources would no longer be available for alternative uses, the subsidy would make us poorer.
That is the reasoning of those of us who love free trade - or, at least, of most of us. It cannot be the reasoning of Mr Obama and Mr Brown. For, besides declaring their love of free trade, they declare their love of subsidies. They claim they can make us richer by maintaining the subsidies they already have in place - of agriculture and healthcare, to name but two of countless examples - and by adding subsidies for other industries as well, such as construction and car manufacturing.
Those who think subsidies will enrich us doubt the merits of the market mechanism. They doubt that market prices result in an efficient allocation of resources and they doubt the value of what the sociologist Joseph Schumpeter dubbed "creative destruction". They believe that the cost to those who lose their jobs or businesses as a result of competition exceeds the benefits to society provided by more efficient production. Economic planners - using subsidies, taxes, quotas, regulations and so on - can, they think, achieve better results than free markets.
Never mind which view is right. The question is which view Mr Obama and Mr Brown endorse. The contradiction in their pro-subsidy, pro-free trade position lies not merely in the inconsistent theoretical foundations of these two positions. It is more direct. As the MRI fable illustrated, domestic subsidies are themselves barriers to free trade. Mr Brown's subsidy of British carmakers (if only for "green" cars), creates a barrier to the import of more efficiently produced foreign cars.
It is fascinating, if futile, to speculate on the source of our leaders' incoherence. I suspect it comes from a superficial, pick-and-mix dedication to doing "what works". They have heard that trade barriers aggravated the Great Depression and also heard that Roosevelt's public works programme helped to return America to growth. So they plump for both subsidies and free trade, failing to think hard enough about how these policies are supposed to work to notice that their combination is impossible, not just intellectually but practically.
Mr Brown has long advocated impossible combinations, such as increasing both labour market flexibility and employee protection (just one of the miracles that he and Tony Blair promised their Third Way would deliver). But it is disappointing to discover that, after emerging from the fog of grandiose rhetoric, Mr Obama has the same tendency.
Jamie Whyte is the author of Bad Thoughts: A Guide to Clear Thinking
So say most commentators and many politicians, including Peter Mandelson on these pages on Monday. Even President Obama, having advocated trade barriers during the Democratic primaries, now claims that he does not want to "send a protectionist signal". And Gordon Brown rarely misses an opportunity to recommend free trade in these troubled times.
They are confused. To see why, start by asking what is so good about free trade. The short answer is that it allocates resources to their most efficient uses. Any introductory economics textbook will explain how. But a simpler route to the answer is to see that international trade benefits us in the same way that technological advances do, as the economist Steven Landsburg explains with a fable (from his More Sex is Safer Sex: the Unconventional Wisdom of Economics): "Once there was a man who invented a new and cheaper way to analyse MRI data. Medical costs fell and more people got better care. The invention put some radiologists out of work, but even that had its upside - after a little retraining, the radiologists moved into other specialties where their talents were much appreciated.
"But one day, an investigative journalist tracked down the inventor's disgruntled former assistant and learnt that the great 'invention' was nothing more than a $600 laptop computer connected to the internet. The so-called inventor e-mailed data to Asia, where it was analysed by low-paid Asian radiologists. They e-mailed back their reports, which he advertised as the output from his machine."
Be it new technology or simply trade, the economic benefit of the new process is the same: cheaper medical care and, hence, resources liberated for other uses. And, be it technology or trade, these benefits could be eliminated by a subsidy to domestic radiologists. Suppose the analysis of an MRI scan costs $50 using the Asian radiologists and $100 using domestic radiologists. If government decided to subsidise domestic radiologists by $60 per MRI scan, then they could offer their services for $40 and patients would no longer prefer the Asian alternative.
The subsidy would not reduce the cost of domestic radiologists; their MRI analyses would still cost $100 to produce. The subsidy would thus divert resources away from their more efficient use. In other words, it would create waste. Since the wasted resources would no longer be available for alternative uses, the subsidy would make us poorer.
That is the reasoning of those of us who love free trade - or, at least, of most of us. It cannot be the reasoning of Mr Obama and Mr Brown. For, besides declaring their love of free trade, they declare their love of subsidies. They claim they can make us richer by maintaining the subsidies they already have in place - of agriculture and healthcare, to name but two of countless examples - and by adding subsidies for other industries as well, such as construction and car manufacturing.
Those who think subsidies will enrich us doubt the merits of the market mechanism. They doubt that market prices result in an efficient allocation of resources and they doubt the value of what the sociologist Joseph Schumpeter dubbed "creative destruction". They believe that the cost to those who lose their jobs or businesses as a result of competition exceeds the benefits to society provided by more efficient production. Economic planners - using subsidies, taxes, quotas, regulations and so on - can, they think, achieve better results than free markets.
Never mind which view is right. The question is which view Mr Obama and Mr Brown endorse. The contradiction in their pro-subsidy, pro-free trade position lies not merely in the inconsistent theoretical foundations of these two positions. It is more direct. As the MRI fable illustrated, domestic subsidies are themselves barriers to free trade. Mr Brown's subsidy of British carmakers (if only for "green" cars), creates a barrier to the import of more efficiently produced foreign cars.
It is fascinating, if futile, to speculate on the source of our leaders' incoherence. I suspect it comes from a superficial, pick-and-mix dedication to doing "what works". They have heard that trade barriers aggravated the Great Depression and also heard that Roosevelt's public works programme helped to return America to growth. So they plump for both subsidies and free trade, failing to think hard enough about how these policies are supposed to work to notice that their combination is impossible, not just intellectually but practically.
Mr Brown has long advocated impossible combinations, such as increasing both labour market flexibility and employee protection (just one of the miracles that he and Tony Blair promised their Third Way would deliver). But it is disappointing to discover that, after emerging from the fog of grandiose rhetoric, Mr Obama has the same tendency.
Jamie Whyte is the author of Bad Thoughts: A Guide to Clear Thinking
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Glen is completely wrong. The standard of living would rise marginally in the UK and dramatically in Asia. And wages do not tend to a global average, they rise overall because money and resources including labour are not being wasted but are being allocated efficiently.
As has been happening.
Alan Wilkinson, Russell, New Zealand
That's fine as long as you accept that wages and standards of living will initially at least tend to some sort of global average. The standard of living in the UK would drop dramatically and that in Asia would rise marginally. I for one am not so altruistic.
Glen, Melbourne,
I suspect the main idea of loudly promoting free trade is to try to persuade other markets to stay open and non-protectionist rather than a serious declaration of personal intent. The reasoning would thus appear to be political rather than economic.