Thinking carefully about free trade

We are told by serious people that boosting international trade is good for everyone.  We should, they say, all want to support trade agreements, like the currently touted Trans-Pacific Partnership.  The freer that international trade becomes, the better off we all are.

Then we find out that one of the “everyones” that are benefitting is the tobacco industry, whose shill, the U.S. Chamber of Commerce, uses trade agreements to bully other countries into backing off of tobacco control policies, lest that country find trade with U.S. commerce to be endangered.  (They really are doing that!  New York Times, June 30th.)

Is free trade good for us, as a country?  Or is it a threat to American jobs for working class folks?  Can the answer to both of these questions be “Yes?”  It depends on your definition of “what is Good for us.” 

Bear with me as we do a little math.

How economists think

Economists believe that we can capture this notion, of “what is good for us,” by adding up all of the happiness before and after an event.  If the total happiness increases, then the event must have been a good thing.  What they are talking about can be captured by this expression:

            △∑IUj > 0

Something is good to do if the change in the sum of all individual utility, from the first person through the last person (the “j’th” person) is positive.

To understand this expression, we first need to understand what economists think of as “us.”  The basis of a good market, they say, is voluntary exchange.  When two parties trade with each other, freely, then both are happier after the trade.  That makes sense.  When you buy a new Le Creuset pot, you are happier than before you bought the item.  And the company is happier than before they sold it to you. 

And the rest of us, who are not involved in your purchase, feel pretty much the same as we did before.  Our individual happiness (economists refers to this as “utility”) stays constant, before and after the trade.  So, we are all as happy as before, and you and the company are both happier.  There has been an increase in the amount of individual happiness or individual utility as a result of the trade.

After every voluntary trade, we have an increase in the total happiness of all of the individuals in the society.  Let’s see if we can boil this down to the formula. 

Deriving the formula

Before the Le Creuset purchase, everyone had some level of individual utility.  Some people were very happy with their current situation, some people were very sad, and everything in between.  You could ask everyone to rate their current status of individual utility (IU), and then add that up:

            ∑IUj

This is the sum (represented by the Greek “sigma”) of all individual utility (IU), starting with the first person and then going all the way to the last person (presented by that little “j”).  This is where we started before the purchase.

After the purchase, you and Le Creuset are happier, and everyone else feels the same as they did before.  So, the sum of all of the individual utility in our society went up after the trade.  Hence, the expression:

            △∑IUj > 0

This is how economists think about “us.”  We are a bunch of individuals, who can be happy or not happy or something in between.  To gauge whether doing something was a Good thing or a Bad thing, you merely have to measure the state of individual utility before and after the action, and if the change in the sum of all individual utility goes up (is greater than 0), we did a Good thing.

So, free trade “makes us richer.”  It is Good for the society “as a whole.”  In other words, when we maximize the amount of voluntary exchange that takes place across borders, the change in the sum of all of the traders’ utility increases.  Consequently, free trade is better than restricted trade.

Too simplistic a yardstick

But notice that the yardstick we are using is somewhat limited.  For instance, △∑IUj > 0, because it is merely additive, does not need to keep track of whose utility went up and whose utility went down, as long as the total movement in utility was positive. 

So, might you lose your job as a result of more free trade?  Might lots of people?  That might happen, in fact probably will happen, and it would be a significant decrement in your individual utility.  But if some other people make lots and lots of money as a result of this trading, their high level increase in individual utility gets added to your lower decrement, and the net is positive.  Therefore, the action that lost you your job was a Good thing.  The sum of individual utility across the society went up, even if yours went down. 

What we are fighting for, in the current debate over trade policy, is whether and how these distributional impacts should be captured.  You, and those like you, have suffered enormously.  Your livelihood is gone, transferred oversees.  You don’t want free trade because you fear this happening.

To an economist, your loss of individual utility is overshadowed by the greater good that the U.S. Chamber of Commerce realizes, as it promotes American tobacco companies oversees.  If the rich get rich enough off of free trade, your loss is a necessary sacrifice.  Some employment dislocation is just a price we have to pay for a larger Good.

Notice that the loss and the benefits are not experienced by the same people.  But △∑IUj > 0 doesn’t have any term inside of it for “distributional effects.”  “Who gets what” is not the point, as long as somebody gets enough.

Obama, the Democrats and unions

When Obama is arguing for free trade, he is saying that open markets increase the total wealth of the American people.  And when the Congressional Democrats and union leaders are against free trade as currently practiced, it is because they know that that total growth, even if it does come, will be at the expenses of working people, and to the benefit of the already well-off.

So, maybe we need to consider international trade from a more wholistic viewpoint.  Not just that it increases the simplistic “sum of individual utility,” but that it might carry with it distributional impacts that ought to be considered and ameliorated.  But that would take some complex law-making, not consistent with the President’s desire for “up and down votes” under “fast track authority.” 

More trade is a Good thing.  But it looks like it is something that we have to do thoughtfully and carefully.  That doesn’t sound like a “fast track” kind of approach.

By the way, notice that △∑IUj > 0 only considers value that occurs at the level of the individual.  Public policy that produces benefits at the level of community have no place in that formula.  There is an “I” in the formula, but no “us.”

And anything that might be difficult or impossible to measure is not going to be considered either, since you can’t add up what doesn’t have a number attached to it.

Also, mightn’t you have strong feelings about the trading behavior of others, like my view that selling cigarettes is morally egregious?  The assumption that we are all morally neutral about trading in which we are not involved is invalid.

These problems, with the limits of economics as currently practiced, will be addressed in subsequent blogs.

For now, let's have more trade, but on terms that benefit working people, not just the rich.