Wednesday, May 12, 2010

"Economic enlightenment" and the supposed consequences of free trade

I recently had a look at the new edition of Econ Journal Watch, an e-journal devoted in large part to comment on what's in the economics journals. The May 2010 issue contains a laughable article entitled "Economic Enlightenment in Relation to College-going, Ideology and Other Variables: a Zogby Survey of Americans", by Zelijka Buturovic, a psychologist, and the journal's editor, Daniel B. Klein, a professor of economics and George Mason University in Fairfax, Virginia.
  The survey attempts to get at the interesting question of whether the college-educated have better knowledge of economics ("economic enlightenment") than those with lesser levels of education, and whether 'economic enlightenment' is related to other things, like political ideology.
  "Economic enlightenment" is judged by the answers to 8 questions, but (to keep this short) I'll focus on just one: "Free trade leads to unemployment". Anyone who answers "strongly agree" or "somewhat agree" is branded by the authors as "economically unenlightened". (Not surprisingly, those further left on the political spectrum are deemed the most ignorant.)
  Remarkably, and perhaps instructively, the authors don't regard it as necessary to explain why free trade does not lead to unemployment. Apparently the answer is supposed to be so blindingly obvious to the professional readership of the journal and so beyond doubt that not a single phrase is needed to defend the 'right' answer.
  Chapter 10 in The Economics Anti-Textbook deals with trade issues, so I won't repeat what's there. Suffice it to say, as one of my international trade teachers, Jim Melvin (then at the University of Western Ontario) memorably put it in a lecture: unemployment is the whole point of free trade. As he then explained, the point of free trade is to improve the allocation of resources in the economy and that resource reallocation can't take place unless some the resources themselves (the labour and capital of the textbooks) move to other uses. That movement necessarily involves some period of unemployment. No pain, no gain. If you make the judgement as a policymaker that the gain is worth the pain, then free trade is your policy.
  So how, then, can the authors of this article claim that free trade does not lead to unemployment? I can only guess, because they give no clue. My guess is that they are saying that free trade does not permanently increase unemployment. The unemployment is temporary: some get re-employed, some leave the labour force and are no longer counted as unemployed. The economy returns to full employment. If unemployment is being dismissed as of no importance, that return to full employment is presumably quick. In the perfectly competitive, perfect- information perfect-mobility labour markets of the introductory micro textbooks, unemployment is always zero.
  In short, free trade does not lead to unemployment because nothing leads to unemployment; the economy is simply assumed always to return to full employment in a negligible period of time. Students have to wait until they get to macroeconomics to read about the issue of 'structural unemployment' -- the longer-term unemployment experienced by workers displaced by things like shifts in demand for skills and products that can result from things like ... changes in trade patterns. (In the United States, special 'adjustment assistance' programs have been experimented with in an attempt to deal specifically with the unemployment caused by trade liberalization.)
  What's most scary about Buturovic and Klein's article is not the manifest silliness of some of their claims, but the fact that it's clearly been read by many intelligent and well-educated colleagues and reviewers who apparently see nothing wrong with it.


Postscript (added 28 August): On looking at the Econ J. Watch article again, I realized that my comment was a bit off-base. In fact, the authors do have one sentence about how they interpret the statement 'free trade leads to unemployment' -- they want to interpret it as 'free trade leads, overall, to greater unemployment'. In other words, it's a claim that overall there is a net inflow into the pool of unemployed people in some unspecified period of time after the change in trade policy. Workers lose their jobs in import-competing industries, while jobs are gained in exporting sectors. I don't find that (or the rest of their article) convincing either, as I explain in a brief comment published in Econ Journal Watch in September.