The other side of the story: what non-economists don’t see

It is not my intent in writing these posts about economic education to bash economists and what they learn. If anything it’s the opposite – my point is that most of the valuable information that economists learn in advanced study doesn’t and/or can’t be fit into their interactions with non-specialists, whether in the real world or in the classrooms of professional schools. This is especially true of the all-important assumptions and conditions on which their models (and the policy choices based on them) rest.

Dani Rodrik’s The Globalization Paradox is one of the best books I’ve read on economics in the past year, and includes a vignette that illustrates my point. Chapter 3 of the book addresses the cases for and against trade, and includes a section called “What Economists Will Not Tell You” that should be required reading for anyone interested in the economics of trade. The section begins by describing a hypothetical professor who is called by a reporter and asked whether free trade is a good thing.

We can be fairly certain about the kind of response [the reporter] will get: “Oh yes, free trade is a great idea,” the economist will immediately say, possibly adding: “And those who are opposed to it either do not understand the principle of comparative advantage, or they represent the selfish interests of certain lobbies (such as labor unions).”

The scene then shifts to an advanced graduate seminar on international trade theory – precisely the sort of setting where neither the reporter nor someone busy with law school would ever set foot – and describes the professor’s answer to the same question in this different setting.

Let [the student] pose the same question to the instructor: Is free trade good? I doubt that the question will be answered as quickly and succinctly this time around. The professor is in fact likely to be stymied and confused by the question. “What do you mean by ‘good’?” she may ask. “Good for whom?… As we will see later in this course, in most of our models free trade makes some groups better off and others worse off… But under certain conditions, and assuming we can tax the beneficiaries and compensate the losers, freer trade has the potential to increase everyone’s well-being…”

The professor goes on to list exactly what ‘under some conditions’ means.

The import liberalization must be complete, covering all goods and trade partners, or else the reduction in import restrictions must take into account the potentially  quite complicated structure of substitutability and complementarity across restricted commodities. (So in fact a preferential trade agreement with one or a few trade partners is unlikely to satisfy the requirement). here must be no microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be too adverse. The home economy must be ‘small’ in world markets, or else the liberalization must not put the economy on the wrong side of the “optimum tariff.” The economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal. The income redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden. There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues. The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal. (emphasis added)

The section I bolded is an example of the kind of nuance that never gets into policy coverage in the news, and I would assume is rarely available to policy makers who often only have time for summary recommendations (see e.g. a “one page briefing sheet“). To take a recent example, the “crowding out” argument that government spending will crowd out private spending also has this full employment condition, but as I remember it that condition was never mentioned in mainstream coverage of that debate.

Rodrik’s example goes on to describe the professor’s clarification that all of the assumptions listed so far only address changes to “the level of aggregate income” rather than growth. Economic growth only occurs under a whole new set of assumptions:

In our standard models with exogenous technological change and diminishing returns to reproducible factors of production (e.g. the neoclassical model of growth), a trade restriction has no effect on the long-run (steady-state) rate of growth of output. This is true regardless of the existence of market imperfections. However, there may be growth effects during teh transition to the steady state. (These transitional effects could be positive or negative depending on how the long-run level of output is affected by the trade restriction.) In the models of endogenous growth generated by non-diminishing returns to reproducible factors of production or by learning-by-doing and other forms of endogenous technological change, the presumption is that lower trade restrictions boost output growth in the world economy as a whole. But a subset of countries may experience diminished growth depending on their initial factor endowments and levels of technological development. It all depends on whether the forces of comarative advantage pull resources into growth-generating sectors and activities, or away from them.*

– Rodrik, The Globalization Paradox, pp. 61-63

I regret the long block quotes here but I thought this was as good a window as I’ve seen into the disparity between what academic economists see and what the rest of us do.

* Such as, toward finance, where our “comparative advantage” does not appear to be working out so well.

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