Thursday, April 26, 2007

Trade fallacies

This one comes from Dani Rodrik’s blog (via Smart):

Trade and procedural fairness

Economists fail to appreciate sufficiently that globalization often runs into a procedural fairness roadblock.

Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change. Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information. Is Tom richer or poorer than Jerry to begin with, and by how much? What are their respective needs and capabilities? And what exactly is the nature of the shock that created this redistribution of income? It would be one thing if Tom got richer (and made Jerry poorer) through actions that we would consider unethical or immoral; it would be another if this was the result of Tom’s hard work and Jerry’s laziness. In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness. The fact that the shock created a net gain of $1 is not enough to conclude that it is a change for the better.

The thought experiment clarifies, I think, why the archetypal man on the street reacts differently to trade-induced changes in distribution than to technology-induced changes (i.e., to technological progress). Both increase the size of the economic pie, while often causing large income transfers. But a redistribution that takes place because home firms are undercut by competitors who employ deplorable labor practices, use production methods that are harmful to the environment, or enjoy government support is procedurally different than one that takes place because an innovator has come up with a better product through hard work or ingenuity. Trade and technological progress can have very different implications for procedural fairness. This is a point that most people instinctively grasp, but economists often miss. (Notice that even in the case of technology, we have significant restrictions on what is allowable—c.f. human-subject review requirements—and wide-ranging debates about the acceptability of things like stem-cell research.)”

The problem here is the concept that we can define the fairness of trade. Child labor does sound horrible, but the bigger question is: What were those children doing before they went to work in a dirty factory? How do you want to force that country to send all these children to clean and safe schools?

I’ve read once (I believe it was at Johan Norberg's) that Sweden had a serious problem with child labor. The solution was not new laws but pure and simple economic development. Once society is richer and education is more valuable to parents than sending kids to work for $1 a week in sweatshops they will stop doing so. I even believe that government can accelerate this process but only up to a point.

In any case, globalization and technological advances are important because they make the pie bigger. That in turn makes better choices and social organization possible. To think that this is the other way around is dangerous. This is not only the case of “You can't have your cake and eat it too” but the simple truth that you cannot expect to have a cake without the appropriate ingredients in place.

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