Sunday, October 09, 2005

Not So Fast...

Isaac writes:
But activist types aren't arguing that this world can be better (a world with all existing economic constraints and normative orientations intact), they are arguing that there is another possible world which would be better (a world with different economic constraints and/or different normative orientations).

Activists don't dispute that given existing constraints sweatshops are fine; they are saying that there is no reason that companies should be allowed to fire union organizers (a constraint) or no reason that companies shouldn't realize that improved working conditions might actually be good for productivity (a normative orientation). In that other possible world, sweatshops would certainly be less bad than they are in this world -- and in the narrow static sense they would still be the best option for workers, and free-trade types would continue to celebrate sweatshops, not realizing that something fundamental had changed. Thus, activist types and free trade types don't really disagree about sweatshops, they are just arguing about whether we should focus attention on this world, or other possible worlds.
In a nutshell, firms/people/other entities have preferences (normative orientations) as to what they would like to achieve and constraints on their behavior. Isaac argues that free traders promote the policy that works best given status quo preferences and constraints while activists promote a policy that works best given some other preferences and constraints. Presumably, they also seek to change those preferences and constraints.

I'd like to suggest an alternative explanation. Every policy changes constraints. That's exactly what policy is for. Too much pollution? Establish a tax. This shifts the budget constraint for polluting firms, producing the desired effect. Abstracting from preferences for the moment, what makes up a "world," in Isaac's sense, is the set of constraints placed on its economic actors. Picking a policy, as in the debate between free traders and activists, also means picking the world you'd like to live in (or you'd like for others to live in.) I don't think it's a question of on which world each group would like to "focus," but rather in which world each group would prefer to live.

Perhaps that's not substantively different from what Isaac wrote. I do disagree with him on a couple points. The first is the implication that free traders are somehow defenders of the status quo, while activists want to change it. Most free traders don't like this world's constraints very much at all. Exactly because there is surprisingly little free trade. If we look at the major free trade debates over the last few years they've come about when trade policy, like NAFTA/CAFTA/FTAA, is about to be put into effect. In these situations it has been the free traders who want a different (less constrained) world and the activists who want to preserve the status quo. (Obviously, activists aren't really that interested in preserving the status quo. I mean to show that it's not the other way around either.)

The second point on which I disagree with Isaac has to do with what "levels" of constraints we are talking about. As an example, Isaac mentions that companies are often allowed to fire union organizers. This is a (lack of a) constraint that could be changed. These kinds of constraints can be changed with policy. But there are constraints that can't be changed, those that actually constrain policy itself. For example, there is no policy that can make the capital account and current account deficits (or surpluses) sum to a non-zero number. A bit more relevant (and less robust) example: ceteris paribus, one cannot pay a higher than market wage without inducing unemployment. Ignoring these inherent constraints is just all too much "and-a-pony!"-ism.

I think there is a bigger point, though. Given a set of constraints and normative orientations (a "world") can there be more than one outcome? Are there multiple equilibria? If so, how can you use policy to choose between them? I don't think that "...activists don't dispute that given existing constraints sweatshops are fine..." is really meaningful. Given existing constraints, this is the outcome. Whether someone thinks it is okay or not doesn't really matter. That's just how it is, in a sort of Hayekian sense.


Blogger Isaac said...

Yeah, hmmm...I think what I was trying to get at was that you tend to have this debate where activists say "if only we dream big, we can change the world." And dour types say, "but no, the world is as it is and unchanging." In some cases, with accounting identities for example, the world is unchanging. But I think that activists would claim that the range of things which are changable is much larger than the dour types would accept.

And yes, perhaps this is a rather banal point insofar as all policy tries to change constraints. But I think you can dress it up by slicing and dicing constraints into different classes, some of which activists aim at, and some which free trade types aim at. Like: perhaps activists have managed to make mainstream the idea that corporations ought to treat workers in the third world decently. Even if this is not done categorically, if everyone has that expectation, then it will subtly change behavior. This is most distinct from what free trade types are arguing, I think. Though I've lost the thread.

9:49 PM  

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