Wednesday, January 18, 2012

An assist on a DeLong smackdown over mercantilism

OK - I am wording this very carefully, so make sure you read it very carefully. Because I'm doing two dangerous things: offering a mild defense of mercantilism, and assisting Noah Smith in a "DeLong smackdown".

Noah Smith pushes back on a claim by DeLong and Don Boudreaux from a couple years ago that mercantilism could be a sound economic policy. In a casual conversation, I would be on DeLong and Boudreaux's side. Free trade is so crucial that you don't want to muddy the waters on a question like that.

But we're all people interested in the nitty-gritty here, and we're talking about scientific explanations of reality not dogmatism, so I think you can all handle my limited defense of mercantilism.

- First, one crucially has to ask exactly what the object of economic policy is. Cutting yourself off from specialization and exchange bears a very real cost, but if for any reason you think it's legitimate to maximize your relative position there may be some justification for a mercantilist position. This is essentially [somewhat sorta tangentially related to] the point that Noah Smith makes in answering Boudreaux's question about why we constitutionally disallow mercantilism between states. The reason seems obvious to me: we are negatively disposed towards a policy of relative deprivation between states (much less an escalating tariff war) in a way that we may not be negatively disposed towards relative deprivation between other countries. This is particularly true when it's a developing country defending a nascent industry (it seems less justified of developed countries). Maybe Don and Brad think that's insufficiently cosmopolitan, and I'd tend to agree with them. But that's a value judgement "bad policy" depends on how you make those value judgements about what is "bad".

- Second, as Noah points out, new trade theory (which is fundamentally Smithian, I'll remind everyone right now) provides a limited defense of limited protectionism. But Paul Krugman has always attached important cautions to these findings. Predicting the advantages of this sort of industrial policy gaming can be very hard. But it seems intellectually dishonest to say that it's always a bad policy. When you look at the really disastrous economic policies its really limited to socialism and actual planning. You have lots of anecdotal evidence for well-played mercantilism that speeds up the industrialization process and entrepreneurial activity. Anecdotal evidence is limited and what new trade theory tells us is that success is always going to be highly circumstantial. This makes it harder to demonstrate the case for mercantilism with standard empirical methods; randomly or quasi-randomly assigning a trade barrier isn't going to get you the right answer to your question because new trade theory's version of mercantilism also predicts that randomly assigned trade barriers are going to be bad policy. What we're interested in is strategic trade policy, and I have no clue how to think about randomly assigning strategic trade policy.

- Third, is that I think we need to clarify when in history we are talking about this. One important reason why mercantilism could be considered a "right" answer in the context of seventeenth and sixteenth century England but a "wrong" answer in twentieth century America is that mercantilism played an important role in maintaining the money supply (or NGDP for those of you that swing that way). Obviously that concern doesn't apply after the late seventeenth century. Again, we find these arguments have to be circumstantial.

I am not a "mercantilist" and if you gave me one of those surveys of what economists think I would check the free trade box. But we're grown-ups here and we can handle Alfred Marshall's wise words: "Nature's action is complex, and nothing is gained in the long run by pretending that it is simple, and trying to describe it in a series of elementary propositions".


  1. DK wrote: but if for any reason you think it's legitimate to maximize your relative position. This is essentially the point that Noah Smith makes in answering Boudreaux's question about why we constitutionally disallow mercantilism between states.

    Nah, his point had nothing to do with caring about relative position. It has to do with a prisoner's dilemma. In the standard PD, the reason for the weird outcome--where both people could be made better off if you took options away from them--wasn't that either cared about relative status.

    The difference between state-level protectionism and national protectionism is that there is no world government to prohibit it at the national level.

    1. That's true - I was already thinking of my answer and sort of superimposed that on his.

      I don't think it's completely unrelated, if you think about some sort of prisoner's dilemma-ish repeated game. In the world of nation-states and trade you don't want to be the dummy that didn't defect for two reasons - first, it hurts you (the classic prisoner's dilemma point), and second, it leaves you worse of relative to the other guy (my point - but admittedly not the usual prisoner's dilemma point).

  2. "Free trade is so crucial."

    To what, destroying the country?

    Daniel, there really is no hope for you. You have no idea how to think or judge, anything.

    Do yourself a favor. Quit while your ahead. Your mind can neither observe facts nor judge 2nd and 3rd order effects.

    "Free Trade" is short term sugar high. Show me a model that considers its long run second and third order effects.

    For example, show me a trade model that considers the second order effect of simple location theory---that talent (people) and firms will move to where the action is taking place. Hence as trade increases the size of China's economy, talent and firms will leave the U.S. and move there. If you don't believe me, go look at the number of posts on economics job boards about jobs in China!!!!!!!!!!!!!

    And, if you don't think this is the case, the evidence is overwhelming that the Euro crisis is entirely the result of location theory. Talent and firms have been moving from the South to Germany, since the Union. The capacity for productivity has fallen every year in the South, since the Euro (free trade on steriods) was adopted. Everyone knew this would happen. Read Martin Jacomb at the FT site. It is why Britain stayed out. It is why Britain fights so hard to keep London as a financial center

  3. "Nature's action is complex, and nothing is gained in the long run by pretending that it is simple, and trying to describe it in a series of elementary propositions".

    I like that comment, sounds like something I would say.

    IB ;)

  4. As the "Anonymous" two posts above points out, capital export will always be an argument against free trade for developed countries. It's an old argument, Mises made it in 1919 quite cleraly and it was old then. The problem with it is that it's about relative wealth. That is, by export of capital from the US then Chinese become richer. Why is that a problem? From there we get into issues about nationalism.

    Something I'm interested in is the effect of tariffs on the distribution of the tax burden of things like corporation taxes and income taxes on capital. I think that could be as important and how it affects incentives could be important.

    1. Why is captial export the problem?

      It means, in the future, no jobs here, when China is better a mfg than are we. Today's NYT about why Apple builds iphones in China

      Then a bid for the work arrived from a Chinese factory.

      When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

      The Chinese plant got the job.

      “The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”


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