Month: April 2004

I’ll say “no.”

The common argument for “yes” confuses absolute and comparative advantage. If you can see that conclusion right away, I commend your economic intuition. Eric Rasmusen unpacks the core insight:

The naive view is that if Canada has lower productivity in all its industries than the US, then if trade opens up, Canada will produce nothing, and will instead import everything from the US. The fallacy in this is that if Canada produces nothing, it will have nothing to export to the US, and the American sellers will not send anything to Canada. What actually would happen is that Canada would import from the US the goods it has the biggest productivity disadvantage in, and export to the US the goods for which it has the smallest productivity disadvantage. Free trade will benefit some Canadian producers, despite the fact that their productivity is lower than that of their American counterparts.

It would also be true that even if Canada has onerous regulations that hurt its productivity, Canada would benefit from opening up trade with the US. It would actually become easier for Canada to maintain its welfare state, because the country would become richer.

Here is more:

Suppose we have two countries, one and only one of which imposes costly regulations on all its industries– a family leave law, or a minimum of 6 weeks of vacation, or something like that. Let’s call them Canada and America. Initially, the countries do not trade, because of prohibitive tariffs. Then we drop the tariffs. What will happen?

In this situation, nothing will happen that is any different from the opening of free trade between any two countries. Each country has a comparative advantage in one or more goods, and will export those goods and import the others. If Canada’s onerous regulations are equally onerous for all Canadian industries, the regulations will have no effect on trade patterns. Instead, it will be the same sort of effect as if Canadian labor productivity were 10% lower than US productivity. Whether lower productivity is because of regulations, taxes, or anything else doesn’t matter.

More weight on the scale: Trade is a substitute for factor migration. The more a welfare state country trades, the less likely it is to lose factors of production. And the richer the country it becomes, the more likely it can afford higher levels of taxation. It is because of free trade, in part, that today’s world can invest so much in welfare states.

That being said, I am less convinced that very high levels of immigration make it easier to have a welfare state. In this regard trade and migration are not perfect substitutes, especially once politics enters the equation.

Somalia continues to provide a unique test of the theory of anarchy (competitive governments) promoted by David Friedman, Murrary Rothbard and others. Somalia has no government but in many respects it is booming. Somalia has what is perhaps the best phone system in Africa, for example, because entrepreneurs are unburdened by any regulation. See, Andew Cockburn’s amazing piece in National Geographic (not all here but watch the videos) for more description.

A prominent critic (you know him well) of the economics of anarchy once argued that even if anarchy was a good idea competitive governments would devolve into unitary government. Possibly so, but so far the trend has been in the opposite direction. Here is the Economist

There is still no proper central government but, where once there was only a handful of warlords, there are now at least 24, and that is only the serious ones. With smaller fiefs to pillage, few can now afford the $100,000 or more that it costs to wage a six-hour battle, so such battles are less common. This is what passes for peace in Somalia, and it is enough to tempt many homesick exiles to return. They bring money as well as skills and contacts. In the past few years, hospitals, schools, businesses and even a university have appeared.

In some ways, anarchy makes doing business easier. There are no formal taxes–given how heavily-armed the average Somali is, these would be hard to collect–and no regulation whatsoever.

On the other hand anarchy is turning out to be quite expensive. The Economist continues:

But the costs of chaos outweigh the benefits. You can roar through a warlord’s road block unmolested if you have ten gunmen in the back of your pickup, but you have to pay your gunmen. Nationlink, one of the country’s three mobile-phone operators, employs 300 guards to protect 500 staff. Everyone yearns for a restoration of stability and a proper government.

If discrimination against an historically oppressed social group is dismantled, will the group forge ahead? This paper presents experimental evidence that a history of social and legal disabilities may have persistent effects on a group’s earnings through its impact on individuals’ expectations. 321 high-caste and 321 low-caste junior high school male student volunteers in village India participated in an experiment in which their caste either was not revealed or was made salient. There were no caste differences in performance when caste was not revealed, but making caste salient created a large
and robust caste gap in performance. When a non human factor influencing rewards (a random draw) was introduced, the caste gap disappeared. The results suggest that when caste identity is public information, low-caste subjects anticipate that their effort will be poorly rewarded. The experimental design enables us to exclude as explanations socioeconomic differences and a lack of self-confidence by low-caste players.

What are they really saying? When the Experiment-Meister knows who belongs to which caste, and this is common knowledge, the low caste players don’t try very hard. It seems the low caste players don’t expect to keep anything they might win.

Use the same players, but “caste blind,” and the low caste players put in a good showing. Their supposed “self-confidence” problems disappear. In fact the high caste players try harder too.

“Mistrust undermines motivation”, write the authors. How is that for a nice three word sentence?

The bottom line: File under: “More problems with Iraq.” No the Iraqis don’t have a caste system, but they are not used to playing by fair rules either. So we can’t expect them to trust the incentives we put before them.

Here is the full paper, which includes the details on experiment design. Of course one experiment doth not a full conclusion make, but I found this work fascinating. If I had an award for “paper of the week” [hmm…], this one might win it.

Imagine that, a new blog devoted solely to news about Wal-Mart, the “best and the worst.”

Did you know that Wal-Mart will be selling DVD players that edit out the offensive content from movies?

A recent Economist article look at how Wal-Mart keeps on growing bigger:

The mathematics of big numbers suggests that Wal-Mart’s growth must slow. Amazingly, the opposite appears to be happening. In America this year, Wal-Mart intends to open some 50 new discount stores and more than 220 new supercentres, some of which will be existing stores moving to new locations. Overseas, it plans another 140 or so new stores, including relocations. This adds up to some 50m square feet of new space–even more than many of its rivals operate in total.

So why shouldn’t it get its own blog? I don’t know whether the topic will sustain a blog in the long run, but I predict we will see more specialty blogs of this kind. (Read this on babyblogs, which are also accused of violating privacy.) As blog readership continues to rise, the division of labor will increase.

Thanks to the Mises blog for the original pointer. By the way, Kevin Brancato puts out a request for co-bloggers.