The observation that trade is a form of technology isn't original to me. I got it from Steven Landsburg, who got it from David Friedman. Here's Landsburg's version of the argument, from The Armchair Economist:
A thing of beauty is a joy forever, and nothing is more beautiful than a succinct and flawless argument. A few lines of reasoning can change the way we see the world.
I found one of the most beautiful arguments I know while I was browsing through a textbook written by my friend David Friedman. While the argument may not be original, David's version is so clear, so consice, and so incontrovertible, and so delightfully surprising that I have been unable to resist sharing it with students, relatives, and cocktail party acquaintances at every opportunity. The argument concerns international trade, but its appeal is less in its subject matter than in its irresistable force.
David's observation is that there are two technolgoies for producing automobiles in America. One is to manufacture them in Detroit and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw materials from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.
International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans' well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.
Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on "imported" automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmets because Iowa farmers are the competition.
The task of producing a given fleet of cars can be allocated between Detroit and Iwa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.
That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.
There is much talk about improving the efficiency of American car manufacturing. When you hve two ways to make a car, the road to efficiency is to use both in optimal proportions. The last thing you should wnat to do is artificially hobble one of your production technologies. It is sheer superstition to think that an Iowa-grown Camry is any less "American" than a Detroit-built Taurus. Policies rooted in superstition do not frequently bear efficient fruit.
Together with Ingram's parable about Mister X, this is the clearest explanation of why Free Trade is good that I know of.
Posted by ekr at October 18, 2004 06:24 PM | TrackBackFriedman produces a collection of political economy essays each year as a tutorial for someone interested in understanding free trade issues. The idea is to present, in one place, the dominant theory/analysis lines used in examining "globalization" and "free trade".
Posted by: Steve @ PM-style.com at October 18, 2004 09:44 PMThis is just a minor nit, since you're not the original author of the argument, and this doesn't really affect the validity of the argument, but Iowa does not produce a significant amount of wheat. According to the USDA (http://www.nass.usda.gov/census/census02/volume1/ia/CenV1IA1.txt), Iowa had 18 thousand acres of wheat planted in 2002. Compare that to the 11 million acres of corn and 10 million acres of soybeans that were planted the same year.
Posted by: Jeffrey C. Ollie at October 19, 2004 06:37 AMThe flaw in the "Mister X" story is that someone who invented a machine that could take in raw materials and produce all kinds of goods cheaply would not be hailed as a hero. He would be seen as just as much of a threat to jobs as outsourcing and overseas competition is seen today. His goods would be taxed to pay for job training for those displaced from their work.
For a sobering analysis of this issue, see economist Robin Hanson's article at http://hanson.gmu.edu/aigrow.pdf , "Economic Growth Given Machine Intelligence". Hanson shows how the historical trend of rising wages with increasing automation can be expected to reverse once the process reaches its culmination and machines can do everything better than humans. "Our models show that wages can rise a great deal for a long time before eventually falling dramatically."
What flaw? Everyone who buys Mr X's products would consider him a hero. Much like certain people don't like Wal-Mart (the people they put out of business). But all the people that want to buy cheap stuff really like it. If you think we should have protectionism, do you think we should pass a national law taxing Wal-Mart?
As for Hanson's article, it's important to note that it has not been peer reviewed by economists, despite being published 6 years ago. This isn't a good sign. I didn't have time to work through the math (like his peers would if they reviewed it), but it appears to me he's making some assumptions about returns to scale for computers and renturn on investments in future computer enhancements that might not hold in the long term.
Posted by: Kevin Dick at October 19, 2004 12:47 PMThe specific flaw in the Mister X story is where he wrote, "Of course, his competitors dislike him, but their attempts to get laws restricting his operations get nowhere. The Houses of Congress ring with speeches saying that some economic adjustment is an inevitable by-product of technological progress." I don't think that is what would (and will) really happen.
According to http://hanson.gmu.edu/vita.html Hanson's paper is presently being revised for submission to the Journal of Artificial Intelligence Reseearch. Robin Hanson is a noted polymath who is as comfortable publishing in Foundations of Physics as in the Journal of Public Economics. After doing research in AI and early hypertext (at the famous Xanadu) he went back to school and picked up an ecnomics PhD from Caltech. He's a smart guy but it may be that speculations about super-intelligent computers are a little outre for mainstream economics journals.
Posted by: at October 19, 2004 01:23 PMUh, I think I took care of your objection with the Wal-Mart analogy. I guarantee you that if someone tried to pass a special tax on Wal-Mart, you would get those speeches defending it.
I know who Hanson is and agree that he's smart. But that doesn't mean that he's right. Being revised for JAIR is a long way from being peer reviewed by economists.
As for it being outre, I don't think that's a factor here. His framing of the problem did not rely at all on directly ascribing conscious intellect to machines. Just their releative effectiveness to humans at jobs.
He's got plenty of other peer reviewed publications in economics related journals. Many of them on controversial topics. So he's demonstrated a general ability to navigate the academic economics world.
I therefore assume that there's some weakness in this particular work that's the problem. Like I said before, I suspect it has something to do with assumptions about the returns to scale of the production function for computers and the marginal returns for the production function for computer technology advancement. As you noted, he's really good at math--he didn't see fit to call out the implications of his formulation in these two areas so we mere mortals could understand it.
In fact, down in Los Angeles there has been a huge fight over Wal-Mart, and guess what? Wal-Mart is losing. See http://www.laane.org/ad/superstores.html for details on the new ordinance being pushed specifically to keep Wal-Mart from adding superstores in Los Angeles. Check out the news stories linked from that page like "City Panels Back Plan to Hinder Wal-Mart Stores".
I suggest that it is demonstrably incorrect to think that technology which tremendously increases productivity will lead to the situation described in the story where "attempts to get laws restricting his operations get nowhere". When stores first put in grocery scanners, we got laws requiring items to still be individually labeled and such. The first instinct of the political process is protectionism. That's what's happening in Los Angeles with Wal-Mart, it's what's happening with outsourcing and overseas competition, and it is what will happen with new technologies.
The point of the Mr. X story was that there would be no such reflex with productivity increases, hence we should not oppose overseas competition to any greater extent. But the premise is historically incorrect, so the story doesn't work, its point doesn't have any force. Remember the saboteurs!
Posted by: Hal at October 19, 2004 07:05 PMI think you're very confused about the point here. Yes, in any economic displacement, you can find a small minority that doesn't like it.
The point of the Mr. X story is that trade, as opposed to some other technological shift, seems to enjoy the rather unique property of being able to inspire dislike from a majority of the population. Even those that actually benefit from the shift.
You've essentially made my point for me with your Wal-Mart reference. At a local level, you may occasionally convince a local majority to strongly resist a technological shift. However, it happens infrequently--as evidenced by the success Wal-Mart typically enjoys in getting stores established. It also doesn't happen at a national level--as evidenced by the general lack of regulations that prevent domestic technological shifts from displacing workers.
Posted by: Kevin Dick at October 19, 2004 07:58 PMI would add that temporarily successful resistance to domestic technological shifts almost never use worker displacement as a justification.
The ability to conjure resistance against people's best interest by invoking displaced workers is the point Mr. X is making about trade.
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