If Truth is What Your Freshmen Students Let You Get Away With, Then…

Michael Giberson

What do we owe the status quo?

Uwe Reinhardt, Economix, asks “How convincing is the case for free trade?” In his column, Reinhardt takes note of a few discussions of free trade without taking a stand himself. But he ends with a provocative quote from Alan Blinder: “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.”

Mark Thoma responds, “If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.”

Thoma’s response triggers Tim Worstall: “this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.” He continues, “This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you. Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?”

Blinder’s message is one that William J. Polley  has learned from “16 years of defending free trade to Midwestern college students.” In “Should losers from free trade be compensated?” Polley says you can’t just teach free trade leads to potential Pareto improvements. It isn’t good enough for “classes of principles students who have seen jobs in their hometowns disappear because of free trade.” You have to add that there are winners and losers, and standard economics can’t recommend the policy unless the winners compensate the losers. What economists know about free trade is that winners will gain more than the losers will lose (problems of implementing the necessary transfers aside). Polley says he doesn’t advocate free trade unless compensation is there.

Polley notes Worstall’s critique of compensation arguments, but isn’t persuaded. Ultimately, said Polley, “it boils down to the notion of a social contract.  People make decisions, many of which are irrevocable or nearly so, on the basis of the best information and their expectations of the future.  Sometimes the biggest influences on our expectations are the existing law and the political environment.  If I then make a decision in good faith based on existing law, only to have the law change to my disadvantage, I will feel wronged.”

Polley’s “social contract” is, essentially, the same principle as involved in the broadest notion of regulatory takings. If a new law or regulation deprives a person of some portion of their property, advocates of regulatory takings will demand compensation. You want to prevent millionaires from building their vacation homes too close to the beach? You’ll have to tax the public to pay the millionaires for taking beachfront property, since they acquired the property in good faith based on existing laws. Want to impose a carbon tax to control global warming? All those owners of coal deposits are going to need a side payment. Want to implement new workplace safety rules? Like free trade, the policy will have winners and losers; like free trade, Polley’s social contract would have the workers pay the factory owners for the owner’s losses.

And the principle is still broader: when Wal-Mart comes to town, it should pay off the less efficient competition for taking their customers. Boeing moves its headquarters from Seattle to Chicago? They’d have to pay Seattle for the good faith decisions the citizens left behind made on the basis of the best information and their expectations for the future. This “social contract” is a quite conservative tool, a very big defender of the status quo.

Of course ideas like this “social contract” are usually not as ambitious as all of this, usually because they are not as consistent. Instead, in most such “social contract” arguments, the advocates want to pick and choose which winners should pay and which losers should be compensated. The “social contract” argument is, in effect, the tool by which a “value free” economist can get his values back into the mix.

Anyway, I prefer to argue in favor of free trade because I think the right to choose who I wish to deal with belongs to me and your right to choose who you deal with belongs to you. I think, ultimately, government policies respecting these rights will promote economic growth and development, but that is mostly just a happy coincidence.

ADDED: Two related views from Kids Prefer Cheese: first Angus, then Mungowitz.

MORE: This post is quoted at Free Exchange: “Putting the Free in Free Trade.”

8 thoughts on “If Truth is What Your Freshmen Students Let You Get Away With, Then…

  1. I find the trade compensation arguments have the matter of onus backwards.

    Free trade is the natural state of affairs – it is what you get when government does nothing. Individuals, not countries, trade and they, unless prevented by force, will trade with whoever they choose and under whatever terms they choose. It is the movement from free trade to trade restrictions that requires a positive policy choice. Have there ever been measures put in place to compensate those who are the losers when trade restrictions are put in place (i.e., those prevented from freely trading) by the winners? Have they ever been discussed? Of course not, because the whole point is typically to use the restrictions to arrange a transfer to the winners.

  2. One more thing – I expect that no one is seriously arguing that a movement from free trade to trade restrictions would be pareto improving, nor would it seem even logically possible to do so.

  3. I don’t understand the focus on Pareto improvements since whether something is a Pareto improvement is very sensitive to initial conditions. Basically, as you said, it supports the status quo no matter how good or bad the status quo is.

  4. @Michael Giberson and David.

    “prefer to argue in favor of free trade because I think the right to choose who I wish to deal with belongs to me and your right to choose who you deal with belongs to you.”

    Good. You are honest. The problem is that most economist aren’t. They say (at least implicitly) that free trade is Pareto efficient – which it isn’t.

  5. @Urstoff

    yes – but you essentially only has two reference points to chose from (i.e. two that is not completely arbitrary). Anarchy or the present. And only one is operational unless everyone agree what anarchy would imply.

  6. So how much should Olympic medalists pay the athletes that they bested? I would agree that remediation is appropriate when a winner is determined in an unfair contest, but the mere act of losing should not be grounds for compensation. And students need to learn that one cannot judge the fairness of a contest by its outcome. The question is whether what we call free trade is fair.

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