Campus personalities present and past Rebecca C. Brown and Tommaso Sciortino tackle the issues. This week on a very special CalJunket: Rebecca learns not to chew with her mouth open and Tommaso finds out his best friend is addicted to no-doze.
Monday, April 19, 2004
(As much as I hope a bombastic writing style may entice people to read what would otherwise be boring free-trade arguments, I will respect Orlando’s right not to have discussions about free-trade stray onto the subject of his own posterior. Let us never speak of it again.)
You and your friend want to go to Paris. After consulting the blue-prints to your ‘79 Camaro you posit that driving to Paris will only take two days and that it would be to your advantage to do so. Your friend inspects your actual Camaro and finds that it does not exactly measure up to the blue-prints. It’s gets two miles per gallon less than predicted. Content that he has shown the inapplicability of your theory of “Camaro-Paris Advantage” he suggests that you give each other piggie-back rides to Paris and that he gets to be on top first. You spend the next two days happily driving to Paris with another friend.
Almost no theory perfectly applies to real life. This is as true in the field of auto-mechanics as it is in economics. But just because a theory doesn’t apply perfectly doesn’t mean it doesn’t apply at all. Recently, our protectionist friend Orlando gracefully dropped a lot of his crazy-talk concerning free-trade to enlighten us with some insights into the theory of comparative advantage. Having finally taken the time to learn about it, Orlando proclaimed that though it is a sound theory, it does not apply to real life because it makes the following unfulfilled assumptions:
“Goods are assumed homogeneous (identical) across firms and countries. Labor is homogeneous within a country but heterogeneous (non-identical) across countries. Goods can be transported costlessly between countries. Labor can be reallocated costlessly between industries within a country but cannot move between countries. Labor is always fully employed. Production technology differences across industries and across countries and are reflected in labor productivity parameters. The labor and goods markets are assumed to be perfectly competitive in both countries. Firms are assumed to maximize profit while consumers (workers) are assumed to maximize utility.”
While Orlando could probably pick anyone of these to nit-pick (since when has Labor ever been fully employed?) he decides to go with these two;
Orlando is right to observe that these assumptions are not completely fulfilled in real life. He is wrong however, to assume that this proves free-trade isn’t beneficial. Let us look at them one at a time:
The second half of this statement is generally true. The first part however, is a fair observation. Labor cannot be relocated costlessly. In fact, every time an industry moves in from overseas or gets created or reinforced, actual real-life people have to leave their old jobs, retrain, send out resumes, and start all over again. What this means to the theory of CA is that the price or relocating labor must be factored into the amount generated by allowing increased trade.
Orlando is suggesting that the one time costs of moving labor to new industries outweigh the reoccurring benefits of being able to specialize in you’re your country does best. Let us be clear here: labor movements due to free-trade are one time only because they occur only while a nation is opening up its markets. Yes, labor will never stop moving to new industries. But this is not due to free trade. This is due to new technologies opening up new fields and closing down old ones. I strongly believe that if the government is going to pursue free-trade policies, it should provide retraining and unemployment insurance to the people who will be relocated. Unlike Orlando, I don’t think that a one time cost can possibly outweigh the reoccurring benefits of relative specialization. Also, unlike Orlando, my political philosophy doesn’t make me averse to using government to help out those who through no fault of their own find themselves temporarily out of work.
The second randomly chosen assumption Orlando takes umbrage with is this one:
Let’s pay close attention to what this does to the theory of CA. If the above is false the theory states that means of production and technology will flow across borders instead of goods and services. Basically, Orlando imagines that any given product can be produced in any given country for the exact same cost. This is the exact same kind of foolishness that lead Pat Buchanan to complain about having to buy South American roses in New Hampshire on Valentines day. Apparently, Orlando believes that North America can grow roses in winter just as well as South America.
Well then, what does the theory of CA predict will happen if Orlando is right? Well, since shipping things always cost money, and since nothing can be produced more efficiently abroad than right here, than no international trade happens at all. Again, here we see the lunacy of a person who has accepted a conclusion without thought and seeks to support it by any means necessary.
By now Orlando is back to not accepting the theory of CA. “Of course, International trade will occur.” He thinks to himself, “Even if Mexicans make everything as efficiently as we can their labor is so cheap they can undersell us.” But then, why would their labor be so cheap? Why not import technology and up productions to American levels? “Because their government is corrupt so their economy isn’t as well managed and they can’t make things as efficiently as we can.”
And the circle goes round and round.