Misleading “trade partners”

Posted: 13 February 2011 in Uncategorized
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I am not enamored by the economics of Obama’s campaign of “Winning the Future” but the economic theory of Gregory Mankiw’s critique is, at best, misleading.

Obama wants us to see China and other economies as rivals to our own economic success. Therefore, we all need to become more competitive. Mankiw, for his part, disputes the idea of rivalry and wants us to see all trade as taking place between partners and therefore as mutually beneficial.

He begins with the misleading example of the surplus obtained by both participants in hiring a neighborhood boy to shovel the driveway. Technically, the ideas of consumer and producer surplus only make sense—even within neoclassical theory—in the context of a market, when different consumers and producers are willing to buy and sell a commodity at different prices. Even more, Mankiw clearly has no idea that, in the current economic climate, there’s a vast difference between those who have the ability to pay to have snow cleared and those (boys and girls, young and old) who are forced to have the freedom to get out there in the cold to earn a few dollars shoveling snow.

Then, Mankiw makes a more general point about the gains from trade.

This example is not as special as it might seem. The gains from trade would be much the same if your neighbor were manufacturing a good — knitting you a scarf, for example — rather than performing a service. And it would be much the same if, instead of living next door, he was several thousand miles away, say, in Shanghai.

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.

What Mankiw and other neoclassical economists refuse to understand is that, when international trade takes place, it has nothing to do with an individual in one country (say, the United States) buying a scarf from an individual in another country (say, China) as if they were just equal neighbors engaging in a mutually beneficial transaction. There are other economic processes involved. The consumers in the United States sell their ability to work to a corporation, and then use their wage or salary to purchase goods, some of which are produced in other countries. Some of those corporations have decided to produce goods in other countries, and thus to export jobs, while other corporations have decided to purchase the goods they sell either from their own subsidiaries in other countries or from corporations located in other countries. And in those other countries, the workers are not deciding to sell their goods to consumers in the United States; the corporations they work for are making those decisions.

Simply put, international trade doesn’t take place either between individual consumers and producers or between countries. International trade takes place between and, increasingly, within corporations located within different nations. They make the decisions about where and how goods will be produced, and where and how people will be employed.

Obama wants us to see nations as rivals while Mankiw wants us to see them as partners. What neither wants to talk about are how corporations make the decisions that drive international trade and how the workers—in the United States, China, and other countries—pay the costs.

Maybe both Obama and Mankiw should spend some time shoveling snow.

  1. […] traders like Reinhardt, Gregory Mankiw, and Jagdish Bhagwati present themselves as having the best of intentions and, in the end, as […]

  2. […] fact, as I argued back in 2011 (in criticizing Harvard economist Greg Mankiw), the whole idea of international trade […]

  3. […] such fanfare is no different from the miserable and misleading analogy invoked by Harvard’s Greg Mankiw between international trade and hiring someone to shovel snow. And it accomplishes nothing more […]

  4. […] with such fanfare is no different from the miserable and misleading analogy invoked by Harvard’s Greg Mankiw between international trade and hiring someone to shovel snow. And it accomplishes nothing more […]

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