David R. Henderson  

Krugman on Gains from Trade

PRINT
Your Big Break, If Any... An Amazing Consensus among Eco...

Paul Krugman has posted his slides for a lecture on gains from trade. They're excellent.

One fun highlight on the last slide is a quote from my fellow Canuck, the late Harry Johnson:

Second-best policies are usually recommended by third-best economists working for fourth-best politicians.

There is one slide, though, that displays Krugman's nationalism. On the third-last slide, he lays out the argument that there can be an optimal tariff if the country imposing it has the power to affect world prices. Krugman then gives the standard economist's criticism of naively imposing this tariff. He writes, "This is optimal only if the foreigners don't react. Unilateral optimal tariffs can lead to "optimal tariff warfare", which makes both countries worse off."

Notice what criticism Krugman didn't make: he didn't say that the optimal tariff is not optimal at all when you consider world welfare. It's optimal only from the viewpoint of residents, considered as a whole, of the country whose government imposes it. Thus my statement that Krugman displays his nationalism.

I remember my first trade course, which I took at the University of Western Ontario in 1971-72 from a first-rate trade economist, J. Clark Leith. The course was so eye-opening that I highlighted it in Chapter 2, "Hooked on Economics," of my book, The Joy of Freedom: An Economist's Odyssey. Leith was laying out the various arguments for tariffs and showing the flaws in each. The one exception was the optimal tariff. But then he made the same point that Krugman makes above. I raised my hand: "But why is it proper only to include the well-being of Canadians?" I asked. Leith paused and then said, jokingly, "What? We should consider the well-being of"--and here he named residents of another actual country but I cannot, for the life of me, remember which one. But he asked it rhetorically, as if he thought that of course we shouldn't consider their well-being. He also seemed ticked off and so I didn't pursue. But I wanted to say, "Of course we should consider their well-being. You told us earlier in the course that you were in Ghana trying to help them with their economy. You're saying now that you didn't care about them?"


Comments and Sharing


CATEGORIES: International Trade



COMMENTS (26 to date)
Daniel Kuehn writes:

Hmmm... only a nationalist in the sense that people pursuing their self-interests are misanthropes.

This is would be like me taking someone who didn't spend on public goods and calling them misanthropes for not taking other peoples' welfare into consideration.

I can say "it would be good to invest in a public good" just like I can say "it would be good not to impose an optimal tariff", but I'm not sure it would make sense to call everyone a misanthrope for not pursuing that course of action.

Ken B writes:

Imagine a voluntary collective who mutually agree to have a tariff in their dealings with the rest of the world. They would want the "optimal tariff" wouldn't they? Seems like the same thing to me, as far as the treatment of outsiders. So would we criticize them for it?

My first answer was no, Daniel Kuehn has it right. But then I thought of examples: the UAW, OPEC, the mafia, racist organizations all fit to some extent. David is right: this is a question of virtue not prudence. It's wrong to not care about Ghanaians or Poles. (It is less clear it wrong to not about the French; I'll have to think about that one.)

Daniel Kuehn writes:

I agree Ken B. Like I said, we can certainly say that it would be good not to have a tariff.

But I'm not sure it's fair to call it nationalism. There's a big difference between looking out for the interests of a community you are apart of with the limited means at your disposal considering your community better or more deserving than other communities or having some kind of resentment to other communities.

It's the difference between me acting on self-interest and a sociopath acting on self-interest.

It's a big difference, in other words.

We can still talk about why we might not want to pursue this policy in pursuit of some greater virtue (we do that with public goods too - as I described above), but I don't think we should really call people names over it.

Daniel Kuehn writes:

* "There's a big difference between... with the limited means at your disposal AND considering your community better..."

Ken B writes:

@Daniel Kuehn: Your distinction with the psycopath is well taken. The question is why? Psycopaths use forces and coercion; so do nations when setting tariffs. Even in my examples I thought of groups that use coercion to some extent. I think DRH is pointing out that excusing this kind of coercion on the basis of "the good of the nation" is to some sextent at least, nationalistic.

And of course David didn't call Krugman a nationalist; he said he shows nationalism. People do show traits or vestiges of things at times. I might not be a snob overall, but might in some comments show snobbery.

Daniel Kuehn writes:

This rests on the assumption that taxes are theft, which is awfully weak.

And if taxes aren't theft this is like calling self-interest misanthropy. Lots of people have flung that at economists since Adam Smith. I don't find them very convincing and I don't find this very convincing.

If taxation is theft then this argument might be more justified, but then we've got much bigger problems with social virtue to fess up to than an optimal tariff.

Tom E. Snyder writes:

I don't have to consider non-Americans. If the US Government imposes tariffs on imports it is Americans who are hurt through higher prices. And no, I don't believe higher taxes are an improvement in my welfare.

Ken B writes:

Tom, the economists here can correct me, but I think the contention is that there is an optimal tariff rate, and that if no-one reacts to it it causes sufficient gains within the nation to allow a pure Pareto improvement (possibly with redistibution). That is, we gain enough no-one inside our borders need suffer a jot.

ThomasH writes:

Considering that the need for the "gains from trade" argument is normally made in the context of a naive "trade is harmful to national interest" argument, it is not unusual that the optimal tariff argument adopt a national interest perspective. Indeed it is highly unusual for any policy to be debated in terms of world welefare. [Should the Fed try to stabilize growth of the NGDP of the world?]

David R. Henderson writes:

@Tom E. Snyder and Ken B,
Ken B is right. The optimal tariff argument is that the country as a whole, considered either as consumers or as producers, has enough market power to drive down the world price of an import or drive up the world price of an export. So the gains to the U.S. from doing so outweigh the losses. It would be a Pareto improvement for the citizens of the U.S. if side payments could be made to compensate the U.S. losers. The argument is airtight and not at issue here. Check pretty much any international trade book or check the Krugman slides I reference above.
@ThomasH,
Considering that the need for the "gains from trade" argument is normally made in the context of a naive "trade is harmful to national interest" argument, it is not unusual that the optimal tariff argument adopt a national interest perspective. Indeed it is highly unusual for any policy to be debated in terms of world welfare.
You're absolutely right. So Krugman's is the argument I would make in testimony to Congress. But were I teaching a class, I would want to open them up to caring about people in other countries.

Mike Thicke writes:

Great post. It's amazing how entrenched economic nationalism is. In a wide range of circumstances it's just taken for granted that good economic policy is that which benefits the citizens of the nation forming the policy. Truly taking every human, regardless of where they were born or where they live, as equally valuable is a radical notion, and one that I which was taken more seriously.

Andre Mouton writes:
It would be a Pareto improvement for the citizens of the U.S. if side payments could be made to compensate the U.S. losers. The argument is airtight and not at issue here.

Then surely it's not fair to criticize economists for failing to make a political or moral distinction? If the science is agnostic, shouldn't the scientists be as well? Or is it this separation that bothers you in the first place? If so, I agree with you. It seems to me that any field that exists to make policy recommendations is inherently moralistic. If economics hadn't been built upon the foundation of classical liberalism, it may never have been built at all.

David Youngberg writes:

On slide six Krugman refers to "B"--the triangle below the domestic supply curve, above the world price, and before domestic consumers start buying from the world market--as deadweight loss. I never understood why some call this deadweight loss; we are producing there. Those gains are going to someone--namely domestic inputs. How is that not a transfer payment from consumer surplus to inputs?

David Youngberg writes:

Never mind; I just realized what I was missing.

Ken P writes:

Ken B writes: Psycopaths use forces and coercion; so do nations when setting tariffs.

Daniel Kuehn writes: This rests on the assumption that taxes are theft, which is awfully weak.

@ Daniel, if tariffs aren't force or coercion, then why did Krugman warn of a potential "optimal tariff war"?

Daniel Kuehn writes:

Ken B -
Because that's what we call escalating tariffs.

Shayne Cook writes:

@ David R. Henderson:

In your response to ThomasH, above, you state:
"So Krugman's is the argument I would make in testimony to Congress. But were I teaching a class, I would want to open them up to caring about people in other countries."

I'm curious why would you tell current CongressCritters something decidedly different, and at odds with, what you would tell (potential) future CongressCritters?

It just seems to me that both classes of recipients of your knowledge - in the broadest possible context - would benefit from it. I'd even argue that current CongressCritters might benefit from the broader context most, simply because they are the one's currently empowered to put that information to greatest use.

Shane L writes:

Yes good point by David Henderson. I see this strangeness sometimes in the simultaneous support for:

- aid or intervention to help foreigners
- distorted markets to help us at the expense of foreigners.

By the way, when my left-wing friends complain that the economic right are selfish and nationalist and seek policies that impoverish foreigners in developing countries, I'm inclined to say: "Well there's a blog you might find interesting..." and point them this way.

David R. Henderson writes:

@Shayne Cook,
Good point. It's possible you're right. My judgment call is that the current CongressCritters have self-selected so much that they're just not open to that, whereas the students that Krugman or I would teach are more open to thinking this way.

Ken B writes:

@Daniel Kuehn: Ken P makes the right point. I needn't call taxes theft to notice they are coercive. Imprisonment for rape isn't kidnapping, but it's coercive. The whole question at issue here is whether the coercion is in a good cause or a bad one. DRH argues that since Krugman's stance seem to favor those who have the power for no reason other than that they have the power, it's a bad one.

Shayne Cook writes:

@ David R. Henderson:

Not disputing your stated judgement call, let me re-phrase this somewhat.

Arguing solely from the perspective of my own self-interests, the current crop of CongressCritters are my current employees, whether I particularly like that fact or not in all cases.

And I would merely prefer, all things considered, that you would present my current employees with information in as broad a context as that which you present to your current students.

I'm in general agreement with you that CongressCritters tend to "self-select" information that is out of context. I just don't find it overly compelling to further encourage and contribute to that behavior.

johnleemk writes:

Shane L, if your left-leaning friends feel that way, ask them whether they support open borders (or since that term might seem politically loaded, phrase it as something like immigrant visas as of right for whoever applies, other than felons/the contagiously ill). If they respond with anything other than an unhesitant yes, they're not that much better than the right-wingers they mock.

Ghost of Christmas Past writes:

Since the present value of any thing (for local delivery) approaches zero as that thing gets more distant, it should be obvious that the value of the country-A optimal tariff to people in country A may be positive even if discounted by the (negative) value of that tariff affecting people in distant country B. As country B becomes more distant (by any metric, such as miles, travel hours, cultural disaffinity...) from country A, the value of stuff in country B approaches zero on country A's books.

You should not sneer at rational economic calculation by calling it "nationalism." In the real world the interests of distant people are never going to be worth as much locally, unless those distant people can cause a local effect, as by raising their own tariffs. That is why the optimal tariff calculation depends on relative economic influence, not naive appeals to (economically irrational) "fairness."

(Some of you are sputtering now about the moral equality of all humans. Well, if you aren't just a hypocrite then at least you haven't thought things through. You all know the old moral puzzle of whether a man sitting on a park bench who sees a toddler wander into the duck pond and start to struggle while her nanny is distracted has any duty to save her even at the cost of a non-zero, though modest, risk to his own life (and near certainty of ruining his clothes). Well, what's your duty to save some child from drowning in the Phillipines? Statistically there's a child struggling somewhere in the world right now. Are you morally obliged to get off your park bench and scour the world for a drowning child to save? No? Then you admit the value (to you and your neighbors) of a distant drowning child is less than the value of a nearby one (of course this is entirely symmetrical-- no one expects people from far away to come by plane, train, and automobile to guard the toddlers in local parks).)

Ken B writes:

Ghost of Christmas Past:

Since the present value of any thing (for local delivery) approaches zero as that thing gets more distant

I am not a geographer by trade, but I was under the impression there was an bound here on how far off valuable things can actually get. Certainly there seems to be a limit on the cheap things; my local dollar store is filled with tin boxes from China, and my local pub with fluids from Britain. Distant, but not the limit as d goes to infinity.

Mark Crankshaw writes:

@Daniel Kuehn

There's a big difference between looking out for the interests of a community you are apart of with the limited means at your disposal considering your community better or more deserving than other communities or having some kind of resentment to other communities

It is obvious to me that Krugman's argument is nationalist. Exceptionally easy for me to see since I am not a nationalist.

The arbitrary borders of the United States (or any other country) simply do not create "a community [I am] part of". There is no shared interest of any kind unqiue to Americans between me and this arbitrary set of mongrel people known as "Americans". I feel a kindred spirit towards libertarians who reside in Canada, the UK, or wherever in the world they live. Nothing but animosity and alienation towards Paul Krugman, Marxists, socialists or liberals who happen to live in New York, DC or California (or wherever) in the US.

I also admit I feel no moral obligation towards or active economic concern for the people of Ghana, Kyrgyzstan or the Philippines. And neither do I toward Americans simply because they reside close to me or within this arbitary national border.

The whole arugment for the welfare state and the various forms of mercantalist folly rest on a nationalist foundation. I reject nationalism and therefore the moral basis for the welfare state and mercantalist trade policy.

Simon C writes:
Hmmm... only a nationalist in the sense that people pursuing their self-interests are misanthropes.

I disagree. At least, if it's the usual sense of self-interest I disagree. Typically acting in one's own self-interest within a voluntary community is also to act to the benefit of that community. "It is not from the benevolence..."
On the other hand, if you use some undeserved power to extract to yourself some benefit at the expense of the rest of the community then I would yes, consider that misanthropic. Likewise to act to benefit one nation at the expense of others in nationalistic.. I find it hard to understand how someone could deny it. It almost sounds like a definition to me.

Comments for this entry have been closed
Return to top