Comment by FabHK | Hacker News Reader

Comment by FabHK | Hacker News Reader

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Here's one thing I find funny though about this argument (Econ 101, yet correct, yet complicated):

The argument for free trade is an efficiency argument (comparative advantage, Ricardo, Hecksher-Ohlin yada yada) that it's unambiguously better, but it's predicated on redistribution: The reason that free trade is unambiguously better is that you can compensate all the "losers" of free trade so that they're as well off as before, and you still have extra income left (to distribute, in theory, as desired politically).

Economics mostly shies away from inter-personal utility comparisons (they're hard to grapple with) and prefers the notion of "pareto improvements" (where at least someone is better off without anyone being worse of). Trade theory uses this device of redistribution to show that a free trade is a pareto improvement.

But then, in the real world, many advocates of free trade suddenly forget about this part of the argument, and when some sectors of society profit handsomely and many (often workers) end up on the street, they suddenly remember their free-market credentials and argue that no, one cannot redistribute, the free market is optimal and fair and pays everyone their marginal product and yada yada yada.

Funny, that amnesia in the middle.

This is because the strongest advocates of free trade don't treat economics as a useful model, they treat it as doctrine.

I don't know where you got this idea, but the argument for comparative advantage has nothing to do with the redistribution of income, nor is there a claim of "fairness" towards each and every individual or interest group.

To understand why comparative advantage is an advantage, you must consider the alternative: Economic protectionism. It results in inefficient allocation of labor, because everyone's job is protected. Everyone pays more for everyone else's labor, everyone is less productive. This affects the poor the most, because they spent the biggest share of their income on basic goods and services.

Of course there are economic winners and losers, but by attempting to fully protect everyone, everyone becomes a loser, as evidenced by the countless failed attempts at socialism.

Perhaps the parent missed something in the yada yada.

I'm not sure why people fail to see the benefits of free trade and specialization in their own lives. Just imagine working all day long, out in field, just to put food on your own table! Why would it be a good idea for certain size groups and not others?

Sorry, nobody is denying the benefits of free trade and specialisation, come on. However, there are people that suffer from the changes, and contrary to the ideal world of econ 101, they're not immediately redeployed in a more productive sector etc.

Now the remarkable thing about free trade/specialisation is that we can help those people and still be better off overall. And I'm arguing that in some case we should actually do that.

I'm really not sure what's so complicated about the argument: Economic analysis shows that with free trade a country as a whole can afford more than without (which is insufficient to state that everyone is better off, thus insufficient to state that the country is better off), and using the device of redistribution/compensation you can show that everyone in that country can be made better off.

> Sorry, nobody is denying the benefits of free trade and specialisation, come on.

Then explain the current resurgence of protectionism right now. This redistribution argument has very little to do with trade, and actually undermines it. You don't have to go very far to see the impact automation has had and will have on certain segments of the population, so why are we muddying the waters with the downside of free trade here?

Now I agree with you that those affected by trade (and technological advances), or who are vulnerable should be helped. Since there's always some other threat out there to our collective prosperity, there's really no reason why we can't talk about tax policy, UBI, education at the same time. But we can't kill these geese laying the golden eggs.

> explain the current resurgence of protectionism

Sorry, I meant nobody is denying the benefits of free trade in this discussion here.

> This redistribution argument has very little to do with trade

But it does. Trade only makes everything better if you do redistribute. That's the whole point. Without redistribution, it's expected and even legitimate that some sectors object to, and reject free trade.

> the argument for comparative advantage has nothing to do with the redistribution of income

But it has.

Comparative advantage shows you that the country as a whole can afford more with free trade than before.

But one of the theoretical consequences of the Heckscher-Ohlin trade model [1] is factor price equalisation, ie in once country wages might fall while returns to capital increase. Inevitably, there are winners and losers.

Now, since economics rightfully shies away from inter-personal utility comparison, that does not tell you whether the country as a whole is better off; unless you invoke redistribution, such that everyone has at least as much as before (now you can say that everyone is (weakly) better off, and some strongly, and thus the country).

This is well understood (see eg [2] for some more on this issue, quoting James Kwak, & I'm pretty sure Krugman has articulated the same). (This, btw, is not an argument from authority, but an answer to "I don't know where you got the idea")

> Of course there are economic winners and losers, but by attempting to fully protect everyone, everyone becomes a loser

How about comparing to northern Europe, and not some dystopia nobody is arguing for anymore?

My point was that the case for free trade is good and valid, and it rests on (and should go along with) redistribution/compensation.

[1] https://en.wikipedia.org/wiki/Heckscher–Ohlin_model

[2] http://www.samefacts.com/2015/05/everything-else/free-trade-...

Comparative advantage shows that production in either countries is improved, increasing supply and therefore putting pressure on prices, increasing the purchasing power. This simply isn't redistribution of income.

An individual worker, whose livelihood is destroyed and who is unable to perform any other form of work (unlikely, but conceivable) will of course have less than before. I don't see anybody making the argument that every single individual will be better off (that's obviously wrong), but the purchasing power of every individual income will increase.

You can make an argument that such inequalities should be mitigated by some income-redistributing measure or another, but that's orthogonal to comparative advantage itself.

Redistribution is required for Pareto efficiency (improvement without making any individual worse off). https://en.m.wikipedia.org/wiki/Pareto_efficiency

Free trade allows exchanges that make both involved parties better off, but possibly harms others (higher cost producers). This can be done without redistribution.

It is interesting that you suggest that existing producers deserve compensation. Why? Do they have some innate right to their previous business model or profession?

Sugar producers in the US have been protected for decades by trade policy that increases the costs for all sugar consumers in the US. I don't know that they deserve that protection but it would be cheaper to just compensate them at a decreasing rate to get them out of the business, rather than perpetually enforcing higher sugar prices.

Oops, make that centuries - the US sugar industry developed in part because of tariffs https://scholarworks.montana.edu/xmlui/bitstream/handle/1/25... page 18 "Ballinger (1975) asserts that when the United States acquired the Louisiana Territory in 1803, the fledgling sugar industry there immediately benefited from tariff protection, hence spurring its development." Do they still deserve compensation if harmed by free trade? They've already been compensated by unfree trade...

Taxing and social services aren't the only way that redistribution occurs. When people are rich enough, they become lazy tourists. Then they travel to poor countries and spend money in restaurants, hotels etc.

Similarly, hard working immigrants travel from poor countries to rich countries to do menial work that rich people can't be bothered with. They often send some money back home.

If the US can sell their excess maize in poor countries, it lowers the cost of food for the poor people in those countries. (Especially true when the local harvest is poor)

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