Question of the day

Tim Worstall asks:

If, as and when, we decide that we wish to punish a country, to degrade its economy, we argue that we should impose sanctions: that is, restrict its access to trade opportunities. How can exactly the same action, the restriction of trade opportunities, also be the desired method of building such an economy?

Comments

[dearieme]

The difference is that different people will profit from the corruption.

[Jim]

I really find it hard to believe that intelligent people can't see the difference between the two.

[AJE]

So how would you explain the difference, without making the assumption that experts are benevolent and/or omniscient?

[Quinn]

I'm certainly no expert, but I would say that there is a big difference between on the one hand imposing sanctions that forcibly prevent a country from exporting its goods, and on the other allowing developing countries the right to selectively set their own level of unilateral tariffs on imports from developed countries in order to assist growing infant industries.

But to muddy the waters further, it is fair to say that a) of course tariffs and protectionism may do harm, that personally I would favour free trade in an ideal world, and b) there is an ongoing debate about just how effective sanctions are anyway.

[Jim]

Like Quinn said, you don't have to believe in omniscience to think that a government selecting a tax to levy on certain imported goods has less chance of doing harm then an embargo on all exports imposed from outside with the express intention of doing harm. The idea that any kind of government policy needs 'omniscience' is a straw man and appears to be based on the belief that planners can't observe the same kind of economic signals that market actors use to make decisions in the absence of superpowers.

[AJE]

Quinn, it seems that your distinction relies on two things: a mercatile view of economics (i.e. exports make a nation better off, imports harm them) and the infant-industry argument (governments can generate economic gains by supporting new firms in industries with high economies of scale).

Whether that's a fair depiction of your own beliefs, and whether or not those beliefs are true, would you agree with me that to make a distinction between "sanctions are bad" and "protection is good" relies upon mercantilism and/or infant-industry?

"The idea that any kind of government policy needs 'omniscience' is a straw man and appears to be based on the belief that planners can't observe the same kind of economic signals that market actors use to make decisions in the absence of superpowers"

It's based on what strikes me as a very obvious point - if the government intends to do undertake a profitable venture which the private sector is unwilling to undertake, you're inevitable implying that they have superior knowledge.

[Quinn]

Firstly, "sanctions are bad/protection is good" is not my position; I have already stated that "protectionism may do harm" and that "there is an ongoing debate about just how effective sanctions are".

I don't subscribe to the mercantilist view, but I think the infant industry argument has some merit. Does a "sanctions bad/protection good" argument depend on such a belief? Perhaps.

But my main point was that I think there is clearly a difference between preventing a country from selling its goods abroad, and from allowing a country to impose a tariff on imports, for whatever reason. They can both be considered restrictions of trade opportunities, but they are as different as chalk and cheese.

[AJE]

""sanctions are bad/protection is good" is not my position"

Sorry, I was using that to briefly encapsulate the original point that Tim was making, rather than an expression of your own opinion

But both you and Jim are looking at the point more deeply than I think is intended. It's a very simplistic point: in some cases we're told a restriction of trade is the best way to punish a country, in other cases we're told that a restriction of trade is the best way to help a country.

My response is simply that if we actually go into the detail of the circumstances under which these two arguments are being made, it inevitably implies that the Fatal Conceit is being made.

"there is clearly a difference between preventing a country from selling its goods abroad, and from allowing a country to impose a tariff on imports"

Yes they're very different, but to make the claim that one of them is favourable and the other is unfavouralbe rests either on mercantilism or infant-industry. That statement clearly implies that exports are good and imports are bad.

So I'd say that both harm a country. Therefore it is incompatible to claim that sanctions harm an economy but protection can help it.

[Quinn]

It's a very simplistic point.

That is exactly my problem with Tim's question.

[Jim]

"if the government intends to do undertake a profitable venture which the private sector is unwilling to undertake, you're inevitable implying that they have superior knowledge."

By setting a tariff on an import the government is not undertaking a venture the private sector is unwilling to, so your point doesn't apply. In setting that tariff the government will presumably take into account some estimate of the impacts on the various parties, such as different consumers and producers. That's not information the private sector tries to collect, so it's not so much superior knowledge as different information. And like anyone else, they don't need to know exactly what will happen - like with most human activity, you make an estimate, try it out, observe the effects, and adjust accordingly.

"Quinn, it seems that your distinction relies on two things: a mercatile view of economics (i.e. exports make a nation better off, imports harm them) and the infant-industry argument (governments can generate economic gains by supporting new firms in industries with high economies of scale)."

I can't speak for Quinn, but for me it's based on the awareness that tariffs can make some people better off, as well as making some people worse off, while sanctions are designed to inflict maximum hurt. Presumably you accept that trade protection can make some people better off? Taking distributional issues into account - tariffs are often levied on luxury goods, or on imports competing with domestic goods produced by low-income workers, and tariff revenues are a major source of revenue that poor countries find it very hard to replace, imperilling public services - it's clear that even without the infant industry argument tariffs can be pro-poor. As for infant industries, tariffs clearly have benefitted them in many cases. Sanctions are intended to destroy industries in the target country, and frequently do. If tariffs were equally harmful, trade protection would also be an unmitigated disaster and liberalisation result in mean much higher growth. That, as I hope you are aware, is certainly not the case. So the comparison doesn't stand up in theory or in practice.

"It's a very simplistic point"

Like Quinn said, that's the problem.

"it inevitably implies that the Fatal Conceit is being made."

Gosh. It must take some nerve to take such a wilfully simplistic approach to the issue and then turn around and patronise people like that. Bravo.

[AJE]

It's a very simplistic point.

Sometimes i think it's valid to step back and make a simplistic point. Certainly the people who i've mentioned this to over the weekend have thought it's a curious point. Typically an economist would step forward and demonstrate why lifes more complicated that you think, and therefore the layman should just trust "an economist". I'm with the layman on this though. I think it's a point worth making.

And on top of that, i'm willing to engage in a debate about the detail behind this point. So unless anyone can convince me that i'm wrong (and all i'm saying is that mercantilism is economically illiterate) I don't see the need to obfuscate the issue in economic jargon - lets just make the simplistic point.

In setting that tariff the government will presumably take into account some estimate of the impacts on the various parties, such as different consumers and producers

I'm saying that mercantile economic policy (i.e. subsidising exports, tariffs on imports, infant-industry arguments) are economically inefficient. Therefore private firms wouldn't do it, but governments (catering to concentrated interests) do. By all means promote these policies on the grounds that you believe governments should confiscate resources from some groups to redistribute it to others, but don't use economic theory as justification.

Presumably you accept that trade protection can make some people better off?

What time scale are you talking about? Short term, definately. But if those people aren't myopic and selfish, I think the number of people who gain from economically stupid policies are very few - and probably politicians and intellectuals more than the working class.

It must take some nerve to take such a wilfully simplistic approach to the issue and then turn around and patronise people like that

I'm an economist, and i'm saying that
a. People overestimate their own talents (empirically this is highly supprted)
b. This applies to economists also (why wouldn't it?)

I don't see why that's patronising. I think it's humility.

If you want to overcomplicate things, Occam's Razor forces you to justify that. If you want to get into empirics, by all means. But again the layman would say "the greater the openess to trade, the richer the country" - seems pretty clear to me! But feel free to complicate things and talk about how that growth is intiated: but if you're baring in mind causation; the innacuracy of macro statistics; the "real" picture, then consensus starts slipping away and the layman remains confused. So what's the bottom line?

Openess to trade = High standard of living

It's not rocket science, and sometimes it's worth remembering that it's as simple as that.

[Jim]

This appears to be another one of your "I don't care what the real-world evidence says, I've got my philosophy" arguments, so I don't really know why I'm bothering, but still

Openess to trade = High standard of living

It is not just 'complicating things' with nasty 'empirics' to point out that it simply hasn't and doesn't work that way, and you would be better off spending your time finding out why it doesn't work that way than handing down cliches as if they were insights. When you start challenging your own assumptions you might actually get somewhere. Then maybe we can have a discussion again.

[AJE]

Economic theory isn't philosophy, it's economic theory.

Openess to trade = High standard of living

It is not just 'complicating things' with nasty 'empirics' to point out that it simply hasn't and doesn't work that way

To point out that it "hasn't" and "doesn't" work that way isn't empirics at all - it's assertion. By all means point out the empirical evidence that refutes this simple point. But try to do so in a way that keeps the debate straightforward, consensual and uncomplicated.

challenging your own assumptions

I assume that people are purposeful and scarcity exists. Which of those are you challenging?

[Jim]

"But try to do so in a way that keeps the debate straightforward, consensual and uncomplicated."

No. The issue is not straightforward, get used to it. You were right, it's not rocket science - it's more complicated than that.

Okay, let's see what's wrong with the statement

"Openess to trade = High standard of living"

Some trade is better than no trade, that's true. And in an ideal world I think I'd quite like free trade. But we don't live in an ideal world, which is why greater 'openess to trade' has not meant higher standards of living for all.

Firstly, this is more of an omission than an assumption, but what's the direction of causation? If you're saying that high standards of living cause more openess to trade, I agree completely - in fact, I think it's one of the key insights in trade and development. But I doubt you are saying that.

My main problem with the claim is that it appears to assume away basic facets of society, economy and indeed time and space. In terms of society, it appears to assume a homogenous effect and therefore a homogenous population, when in reality the impact of trade reform varies markedly according to current socioeconomic position, resources and capabilities, social and geographic mobility, and exposure to subsequent competition. One of the most basic points about trade liberalisation is that it creates winners and losers, not instant 'high standard of living' for all.

In terms of time, it's a static explanation, but the world is dynamic, and the timing and pace of change matters. The unmodified 'Openess' suggests 'instant, 100% liberalisation', which would obviously be catastrophic for large numbers of people currently dependent, whether due to 'economic stupidity' or not, on protected jobs, and would have unknowable effects on social stability. A gradual approach has historically been preferred by countries not subject to the beneficent care of the IMF or World Bank, most notably most of those in East Asia.

A static model also ignores possible path-dependency from 'short'-term impacts, such as the knock-on effects of within-country inequality that may be caused by liberalisation, or threshold effects such as low-income households falling into poverty traps as a result of losing a protected job. This is not a problem in rich countries - it is very much a problem in the poorest ones, but one unfortunately quite frequently ignored.

Then there's the fiscal effect. Many poor countries depend heavily on trade taxes for revenue, and liberalisation has tended to erode government revenues, impacting on services and employment.

So, those are some of the problems with your statement. Now, it's possible you agree with all this, and you meant to say something like

"Openess to trade, achieved through a prudent sequencing of liberalisation and with a less distortionary tax replacing the revenue lost to government = a high standard of living, in the aggregate and in the long run, assuming no serious social disruption or poverty trap effects for the losers, and with appropriate safety nets and complementary policies to boost human capital"

In which case I might be inclined to agree. But "openess to trade = high standard of living"? That's just silly.

[AJE]

I've replied in a new post here