Thursday, November 10, 2005

A problem

Isaac discovers that Kevin Drum has discovered the Stolper-Samuelson theorem. Here's what Drum writes:
Obviously it matters a lot whether the effect is large or small or very small, but I didn't know there was unanimity among economists that, regardless of the size of the effect, [trade with lower-skilled countries is] always negative "in absolute (not just relative) terms, and permanently (not just through tough 'transitions') [for less-skilled workers]."

That certainly puts a different spin on the standard thesis that free trade agreements are good for growth, doesn't it? If "growth" mean GDP growth, it's probably true. But if "growth" means growth in median wages, as I think it should, then it might not be. You learn something new every day.
Drum quotes Josh Bivens at MaxSpeak. Yes, under the model of international trade that Stolper and Samuelson developed, you can show that expanded trade leads to a lower rate of return for the "scarce" factor. In the United States this happens to be low-skilled workers. This is where we get into a lot of trouble. Drum does not know the details of the paper; he hasn't read it. But the discovery of this "theorem" is changing the way he thinks about trade.

There are countless such "theorems" in economics and in international trade. You can think about trade under the assumptions of any number of models. Drum's change of heart is akin to that of people who decided protectionism was good after Paul Krugman showed a small tariff on a specific kind of industry could be welfare-increasing. Or that of people who take a preliminary, unconfirmed empirical result in any kind of science too seriously. There are always caveats and these things always must be taken in context, a context that Drum (and I) are not sufficiently familiar with. Is Drum's (perhaps waning) support for free trade based on similar "theorems"? There are problems when economic models are taken too seriously and problems when they are not taken seriously enough. This is the former.

I don't know that much about Stolper-Samuelson, though the result does make sense. But one theorem based on one model should not be enough to change someone's mind about something as complex and multifaceted as trade. And I suspect that there are certain misconceptions about Stolper-Samuelson flying around this discussion.


Blogger Isaac said...

Given that there is extensive literature on the subject, it is annoying that no one has actually looked at the data.

9:36 AM  
Blogger Isaac said...

And you're right: one economic model only "proves" something in so far as it suggests a plausible and coherent story for describing a process. It doesn't say that this is in fact the process that happens in the world. This is a broader problem with how people read economic theory.

9:38 AM  
Blogger henry said...

Right. I only meant to use this as an example of that broader problem.

9:44 AM  
Blogger Isaac said...

Oh, you'll be interested to know that if you are a large country (that is, a country that can affect the world price for a good by changing consumption), you can ALWAYS raise national welfare by imposing a tariff on the good you import. Tariff implies less demand implies lower price, and, it turns out, an absolute increase in welfare.

1:59 AM  

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