By Paul Krugman once said: “If there were an Economist’s Creed, it would surely contain the affirmations ‘I understand comparative advantage’ and ‘I advocate Free Trade.’”
We agree. Alas, economists have a nasty habit of overcomplicating the virtues of trade when we communicate with the public. That’s why we propose that our fellow economists adopt a new creed when we talk trade with the public: “KISS: Keep It Simple, Stupid.”
Edwin Cannan, a professor at the London School of Economics and president of the Royal Economic Society, gave a prescient 1933 address titled “The Need for a Simpler Economics.”
Delivered almost a century ago, Cannan’s words feel evergreen in an age of sword-rattling against trade. Here’s a sample of his simple points.
First, people reverse the logic of bargaining when they begin thinking of “nations,” instead of “individuals.” In our everyday exchanges, we all want to get as much as we can with the least sacrifice. Some might even call this “the art of the deal!” But in international trade, people’s rhetoric shifts, as if the objective were to “give, and not to get” — to produce and export (give) as much as we can while importing (get) as little as possible. That anti-import sentiment is the essence of mercantilism, the very doctrine Adam Smith set out to dismantle 250 years ago when he penned The Wealth of Nations.
If you slip into this first fallacy, you’ll inevitably fall into a second: treating cheap imports as bad news. In everyday life, it seems obvious that we are better off if we can sell our exports for very high prices and buy our imports at very low prices. We want to sell our output for a high price, and we hope to find “Always Low Prices” when we stroll through the sliding doors at Walmart. Protectionism teaches us to lament in foreign trade what we celebrate at our local checkout counter: low prices. American consumers rarely complain when domestic companies offer Black Friday or Cyber Monday discounts. So why should they object when foreign governments do the same?
It follows from this second point that foreign subsidies are not inherently injurious to us. For a government to subsidize, it must first tax. Suppose a foreign power taxes its own people, then subsidizes some domestic industry that, in turn, sells us cheaper goods. In effect, these foreign governments are taxing their citizens to sell cheaper goods to ours.
According to Cannan, people suffer from similar fallacies when it comes to trade’s influence on jobs. The man on the street thinks that exports giveth jobs and imports taketh away. But jobs are a means to an end. We work to earn income so that we can spend it on food, shelter, and clothing. If trade brings us more stuff for less labor, that’s cause for celebration, not concern. Trade changes the composition of jobs, true; but it does not permanently increase unemployment. If it did, our unemployment rate would be at record highs after decades of globalization, not near historic lows.
Reading Cannan inspired us to put our new “creed” into practice. If we had just one moment to convince skeptics of the virtues of free trade, we’d try our own hand at a “simpler economics” by asking protectionists why they want to stop the rest of the world from working for us.
Surely, President Trump himself grasps the value of specialization and exchange — at least in his personal life. Mar-a-Lago hardly runs itself, and we highly doubt Trump sets his own tables, maintains his own china (no pun intended), or mows the lawn.
Now zoom out and look at the planet as a whole. Imagine a Martian peering through his telescope. He’d notice billions of little humans scurrying around, doing tasks. Some people would be working to satisfy themselves directly, such as the person in Brooklyn pouring himself a cup of morning coffee. But what would be striking is the enormous number of tasks performed to satisfy other people’s desires — including strangers across an ocean. That woman sitting down at her desk to refine a German engine is perfecting a new car that will be sold to an American businessman in five years. That man directing a crane in the Port of Tokyo is placing boxes on ships that will bring joy to American buyers in a few weeks.
If you asked our Martian to draw some conclusions, he’d probably find the international division of labor a pretty sweet deal for both foreigners and Americans. We do too.
Think of it this way: Each side of the ocean works for the other while the other is asleep. While you were sleeping, countless people on the other side of the globe toiled away on products you’ll soon enjoy, letting the dollars you earn stretch much further. You’ll have a chance to do the same for them when you wake up. Isn’t that the dream? To have people working to meet your needs while you… sleep? Yet that is precisely what free trade makes available to each of us.
Protectionism, in contrast, makes that work grind to a halt when the lights go out. There’s no planet — ours or the Martian’s — where that’s a path to prosperity.
These themes are explored further in the authors’ forthcoming book from the Independent Institute. Trade Wars: Why Freedom Trumps Tariffs.