Why Do Economists Make Such Dismal Arguments About Trade?

Bill Pugliano/Getty Images Hard case: Economists arguments for free trade are often little more convincing than this sign on a closed GM plant in Lansing, Michigan.

Trade is proving to be an unexpectedly potent political issue these days. A number of free trade deals have stalled on Capitol Hill, with little hope of quick passage. On the campaign trail, the U.S. Democratic presidential candidates Barack Obama and Hillary Clinton have sought to outdo one another to express their concern about everything from NAFTA to outsourcing. My fellow economists have watched this show with growing unease, and many have made it their mission to defend free trade from what they see as ill-informed, scurrilous attacks.

As one prominent economist framed it:

No issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the markets invisible hand, Joe Sixpack sees a threat to his livelihood.

This was written in a New York Times column by one of those high priests, Harvard Universitys Gregory Mankiw, and it accurately reflects the views of most economists.

A non-economist might ask: What are these opportunities, and how do these economists judge them as more important than the threats?

At bottom, trade is responsible for creating opportunities in some sectors of the economy and reducing opportunities in others. By the same token, restriction of trade reduces opportunities in some sectors and expands them in others. Without a doubt, this means that trade helps some people and hurts others.

In such a situation, why do economists claim that trade is good for the country? After all, the Joe Sixpacks are citizens of the country, and their losses are often large, painful, and traumatic, requiring dramatic life changes. Why should people think economists can be, in effect, high priests who tally up benefits and losses to different individuals and pronounce the outcome good or bad for the group as a whole?

In fact, people shouldnt. Any time a change in economic circumstances creates both winners and losers, the judgment of whether such change was good or bad for the group as a whole is problematic. It becomes a matter of moral philosophy, not number crunching. Economists, as a result of their training, have no more claim to know what is good for the country than Joe Sixpack. Its really that simple.

Do economists know something, though, that Joe Sixpack doesnt, and does this knowledge inform their thinking about free trade? What they know that Joe Sixpack doesnt is a basic but not obvious result from economic analysis: The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesnt say that these compensations actually take place. In fact, everyday experience shows us they dont, and economists know that there are practical problems that make it virtually impossible to carry out such redistribution schemes. Why, then, do economists support free trade?

To answer this requires speculation, of course, because the arguments economists frequently present in favor of free trade are poor and simply cannot be a basis of support. In particular, they almost all in some form or another are a variation of the above-mentioned compensation criterion. For example, in an op-ed in the New York Times, the University of Rochesters Steven Landsburg writes:

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers.

A quick thought experiment shows why this argument is problematic. What if free trade is making a small percentage of the country much better off, but is hurting a much greater percentage (the Joe Sixpacks), as some argue is the case? Even if the total gains to the few winners are sufficiently large that they could hypothetically compensate the losers, why would it be obvious that Americans as a group are net winners?

Some arguments are even worse. They take the form: We have a model that shows that everyone is made better off by free trade. Joe Sixpack doesnt need a Ph.D. to understand the uselessness of a model that doesnt apply to the world of actual experience, or to understand the problematic nature of a judgment that relies on hypothetical redistributions.

So, one explanation for why economists are free traders is that their argument for free trade has become an institution: 200 years of tradition that has short-circuited their critical thinking. That would explain why economists seem to cherry-pick the implications of trade that support their case. For example, economists frequently point out that import competition leads to lower prices for things like baby clothes, athletic shoes, and toys. They never point out that these imports are fundamentally paid for by exports, such as food and pharmaceuticals, the price of which must rise to generate the increased sales. These higher prices are certainly bad for those domestic consumers who spend a greater proportion of their income on drugs and food than on baby clothes and toys.

It would also explain why economists employ such rhetorical sleights of hand as pointing out the unambiguously good things that come to an individual from trade with the wider world, and then arguing that, by analogy, trade must always be good for a country of distinct, heterogeneous individuals. They love to quote Adam Smith:

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage .

But this famous analogy doesnt quite hold water. Families are composed of relatively small numbers of intimately connected individuals. A move from autarky to trade for a family might create some losers, but these could be easily identified and compensated. That is just not the case for a nation with many millions of people.

Perhaps the deeper reason economists favor free trade so strongly is that they do use the compensation argument to inform their thinking about free trade, technological progress, and other economic changes. Their craft tells them that, if societies embrace economic changes that satisfy this criterion, such societies will have a bigger pie over time. Observation of economies over long periods of time suggests that the benefits of the bigger pie are widespread. The rising tide eventually raises most boats.

Is this, then, the priestly knowledge that allows economists to be certain that free trade is good for the nation? Not at all. Who are economists to judge whether benefits to future generations justify current hardships? Thats a question for philosophers. But it is the kind of useful knowledge that economists can present to the world to help people make up their own minds. It clarifies the trade-offs that societies face when they follow different policies. That is what economists are trained to do: see the pros and cons of different policy choices, trade-offs that are not obvious to non-economists. But they dont have to practice philosophy without a license to do that.