Welcome to my weekly digest for March 25, 2022. For new subscribers, this contains a roundup of my recent writings and podcasts, as well as links to the best articles from around the web this week. You can control what emails you get from me by
Great curation, as usual!
I wanted to push back a little bit on the excerpt from the Law & Liberty forum. I’m not an expert on international economics, but I have taught a couple of sections of it, so I’m familiar with a few textbooks and the general ideas spouted by economists on the subject. I don’t know what Aaron means when he says it was not until 2016 that economists began publicly admitting that trade with China had caused many American job losses. I know of no exception when it comes to models of international trade describing the changes that occur when moving from autarky to free trade that do not emphasize the change in the composition of production. Countries specialize in what they have the lowest opportunity cost of producing – that is the point! Of course this is going to involve changes in the jobs people perform, particularly those in industries in which their home country does not have a comparative advantage. I don’t think any economist ever denied this, so this attack feels like a strawman.
The “simplistic” ideas of economists when it comes to trade – that specialization will lead to increased productivity and that individuals only engage in trade when they expect to benefit from the transaction – are a priori true. They cannot be proven false by experience; in the same way the Pythagorean theorem cannot be proven false through empirical measurement of triangles. I don't see how trade experiences with China could show that they're false.
Again, this isn’t to say that every individual benefits (especially in the short run) from moving from protectionism to free trade (something economists never claimed). But it is the case that protectionism will make the nation as a whole poorer. Perhaps that is something protectionists are willing to accept and perhaps they favor protecting certain industries over the well-being of consumers. That’s fine. But let’s be precise.
With the example of the profit-maximizing firm, we aren’t provided much understanding of how firm evaluation occurs. What is the relationship between profits and firm valuation? Is there a conflict between them? It’s insufficient to demonstrate the falsity of the claim that firms are profit-maximizing by pointing to stock prices skyrocketing during a period of anemic economic growth. Unprecedented money creation by the Fed, which we’ve been experiencing over the last decade and the last couple of years especially, can also make stock prices go up. Now, I’m not saying that there is no nuance in understanding the ends of those in control of firms; there are things like principal-agent problems, taxes on “excess” profits that cause resources to be reallocated, controllers of a firm’s resources using them for personal consumption, and other things that may make it seem like firms aren’t strictly profit-maximizing. But it’s unfair to point at stock evaluations and then indict economics based on it (and trade).
I don't think we should draw unwarranted conclusions from Aaron's essay about Indiana. His report made it seem like geographically and demographically similar states struggled regardless of their policies. One cannot indict free-market policies based on this evidence, and there are clearly other factors that matter. Ideally, we would have a controlled experiment with free-market Indiana and progressive Indiana and then we could make more meaningful conclusions. And does anyone think that a free-market NYC or California wouldn’t be doing better than they currently are?