Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
The Iowa Car Crop
“Looks like the Subarus are coming in great this year.”
According to an argument popularized by Steven Landsburg in The Armchair Economist, we have just discovered an amazing new technology. Some brilliant engineers have designed a big black box with secret, patented machines inside. This machine eats corn, and — after enough corn is consumed — it spits out a brand new car, like magic. You can even choose what kind of car you want: the color, engine, everything. The value of the corn the machine consumes is always less than value of the car it produces, so every time it is used, the wealth of society increases.
Would you want such a machine? Or would you lobby to have it destroyed for fear that it will put other car manufacturers out of business? Would you admit that it also creates jobs for farmers and, with the added wealth coming into society from the machine, it would probably allow for the creation of new jobs elsewhere? My guess is that most people would be very happy to see this machine. The auto workers would hate it, but everyone benefits who gets a new car for a lower price than they otherwise would have. Now, call that machine “Japan.” Or “China.” Now do you want it? If not, why not? That’s exactly what happens with free trade. We load a barge with grain — send it over the horizon, wait for a while — and back comes a barge loaded with cars. Isn’t that fantastic?
Once you think of trade as a black box, a lot of issues become clearer. For example, what happens if Japan “dumps” cars in the US? Well, isn’t that the same as if an engineer tweaked the box and made it even more efficient so it uses less corn per car? Why in the world would we complain about that?
On the other hand, what if they slap a tariff on grain imports? Well, that’s like the box getting a little less efficient. If the efficiency is bad enough that it requires more value in grain than the value of the car, we’ll stop using it. But even if the efficiency of the box goes down, it’s still valuable to use it so long as the net value it produces is greater than zero.
This is why free trade is always a good idea. Either it produces positive value, or the trade will stop. It doesn’t matter whether one country “dumps’ goods or puts tariffs on goods, although we might want to negotiate with them to stop doing it so that the markets stay maximally efficient. But even if they refused, we’re still better off with the trade than without it.
Of course, real trade policy can be messy, and there are considerations such as national defense that need to be worked into trade policy. But at its core, the fundamental principle is that when markets are free, they become more efficient. Capital flows where it has the most impact. Jobs are created where they add the most value, and destroyed when they no longer add value at all.
Another way to look at this thought experiment is that trade is no different than automation. Building a robot call center is functionally no different than building a call center in India: both are simply ways of making a process more efficient. Reducing the labor in a factory by 20% through automation is functionally no different than losing 20% of the labor force because the Japanese have 20% of the auto market. In both cases, the reduction happened because we found a better, cheaper way of achieving the same goal.
It seems to me that the fundamental difference is that with trade there is another human on the other end or the transaction. That potentially opens up issues of “fairness,” jealousy, racial intolerance, and tribalism. But should it? Why should we care whether our corn was ground up for energy in a machine or wound up on a plate in Tokyo?
Try to separate such issues from the economic argument, and many fallacies regarding trade become easier to deal with.
Published in Economics, Foreign Policy
I don’t think we can say they “decided” against making steam engines. They simply found them to be too expensive (in opportunity cost of lost production of wine grapes) compared to the price of acquiring them from Britain. If those costs and prices change, Spain could then start making those engines. Isn’t that how the Koreans started up an auto industry and an electronics industry long after other countries had developed theirs?
That’s a great argument! Thank you for bringing it to our attention.
What a group of steam engine enthusiasts from Britain decided to immigrate to Spain?
This point can’t be made often enough.
Conservatives constantly lose on questions of “caring about someone like me.” The problem is that most conservatives do not care about people except as abstracts in economic calculations. The liberals are the same – substitute political for economic there – but they are good at hiding it.
The free market is not a magic wand. Pretending that free trade won’t ruin some people’s lives and increase our dependence on foreign powers is pure Pollyanna.
“The value of the corn the machine consumes is always less than value of the car it produces, so every time it is used, the wealth of society increases.”
Always? This is why I say free is magical thinking. In the free trade version of jack and the beanstock Jack was a genius for trading the family cow for the magic beans, because it was trade, and trade can’t go wrong. And of course free traders believe in magic islands so why not magic beanstocks?
“But even if they refused, we’re still better off with the trade than without it.”
Who’s the we in this equation?
“That potentially opens up issues of “fairness,” jealousy, racial intolerance, and tribalism.”
Oh. Plainly not the racist tribalistic American voters who might prefer to retain jobs and economic activity inside the United States.
“Try to separate such issues from the economic argument, and many fallacies regarding trade become easier to deal with.”
Try to separate the grim political issues from the glorious theory, and you’ll understand that losing elections is awesome.
I disagree. Obviously.
I think Goodfellas explained how that works.
[Warning: link is not CoC compliant – language]
That’s ridiculous. First of all, the notion that conservatives don’t care about people is a liberal talking point – not a statement of reality. I care about people a lot – which is why I think it’s tragic that people understand so little about economics that they constantly vote for things that actually hurt people, just because they sound good.
Second, the point to a thought experiment like this is not to present an issue in all its nuance and moral complexity, but to clarify thinking and simplify an issue down to its basics. It’s only when you understand the basic, fundamental nature of a thing that you can begin to understand how other factors fit into the situation.
But if you don’t understand the fundamental basics of how free trade works, your thinking will be muddled and all of the complicating factors will just contribute to the cloud of uncertainty in your mind. Then you become unable to evaluate policy or understand the arguments the other side is making against you.
The Iowa Car Crop is meant to be a fundamental base to begin thinking about the subject – not a description of everything there is no know about trade. I even conceded as much in the article.
So have you ever traded with someone where you felt you were losing on the trade? Why would you?
People trade goods and services when both sides of the trade believe they are benefiting. This is basic microeconomics.
It’s the protectionists who generally try to cloud this issue by coming up with all sorts of hypotheticals, convoluted conspiracy theories, or statements of ‘fact’ that are unsupported by the data.
Are there other issues involved? Of course. I already mentioned a big one – national defense. It might be a good idea, for example, to build your own rocket motors rather than rely on Russian rocket motors – which is what the U.S. government is doing now.
But before you can start talking intelligently about how trade should be modified for defense or any other purpose, you really should understand the core function of free trade, how it benefits our economies, etc. If all you can talk about is emotions and people and lost jobs and evil foreigners trying to put us out of business, and you don’t understand the core logic of trade, your chance of coming up with any coherent trade strategy is about zero.
This is one of those easy-to-think-of scenarios that almost never happens in real life. The main reason is because the barriers to entry in most markets are low enough that as soon as a malevolent company tries to regain the losses required to put their competitors out of business by raising prices above market value, new competitors just flood the market anyway.
Investment capital flows to where profits are high, and tends to drive profits back down close to the marginal cost of production + a return on capital + a premium for risk. The only exceptions tend to be where barriers to entry are very high, or where patents or other intellectual property gives one company a large advantage over the market.
Again, these are odd talking points to hear on Ricochet. This is usually the kind of stuff the left comes up with to justify heavy market regulation.
Of course we do! The difference is that we consider ALL of it. If a factory closes because it can’t compete with an overseas factory, that’s very sad for the people involved. On the other hand, it’s very good for all the people who benefited from the lower cost good.
It’s easy to spin a moral argument. All economic policies require tradeoffs. Some people are hurt, and some benefit.
For example, you may think it’s awful that a domestic T-shirt factory closes because one opened in China that can produce T-Shirts for $10 less. But you know what else is awful? All those poor people shopping at Wal-Mart who have to donate $10 to the wealthier factory workers because trade protection kept their jobs at the expense of the mom with four kids to clothe.
What kind of monster are you, to want to see poor single mothers have their money taken from them to give to wealthier union workers?
The problem with trade protectionists is that they make these academic arguments about keeping factories open, but don’t seem to understand the costs that protectionism forces many people to absorb.
‘Simplistic metaphors’ are a teaching tool, and nothing more. I’m trying to help people understand a commonly-misunderstood aspect of economics.
Yes, but conservatives never seem to get around to convincing voters that they care about them as people. We are always talking numbers and goods and theory. I’m not saying that we should never talk about the mechanics of the economy, but we have to also show that we understand that creative destruction has downsides and that the people who are forced out of work face real harm. Voters have to believe we are willing to help those who need it.