I am a proud member of the Sierra Club. No, not that Sierra Club; what I mean to say is that I am a regular reader of the parenting blog ChildWild, and a fan of its wise and charming proprietor Sierra Black. I am therefore delighted that Sierra seems to have become a regular reader and frequent commenter here on The Big Questions, and glad to see she’s sticking around despite frequent disagreements—much as I do on ChildWild.
Over on another thread, amidst a discussion of the case for free trade, Sierra threw me for a brief loop with an issue I’d never seen raised before, though I’ve since learned that it’s commonplace in certain corners of the Internet. I thought, then, that it might be worth responding in a separate post.
(I’ll admit too that another motive for the separate post was my conviction that I’d be able to slip in a perfect pun around the phrase “Sierra, Madre”—Madre, of course. meaning mother, and what with her running a parenting blog and all and—well, it’s bad enough to have to explain your jokes, but here I am trying to explain a joke I couldn’t even figure out how to make. But by the time I’d realized the pun was stillborn, I was already committed to this post.)
Here’s the relevant part of Sierra’s comment:
One of the arguments I’ve often seen made in opposition to free trade is that while international trade often increases the amount of money in a less-developed nation, it can damage the quality of life for the people living there.
Here’s an example: you might have a small community that has subsisted for many years on small farming and handcrafts that are traded locally. The people are poor, but getting along OK.
Then a foreign-owned mine opens up, and offers higher wages than anyone is making farming in their backyard. A generation of workers goes to the mine, and in the process loses much of the farming and crafting skill their parents and grandparents used.
When the local resource is exhausted and the mine closes, the people are left impoverished and unskilled; a worse situation than if they had never traded outside their local region.
Overall, the wealth of the country has gone up, and the mine probably made a few people in that country rich. But the workers are worse off than before, and don’t have a clear path to accessing the overall improved wealth of their nation.
Some responses:
1) You are absolutely right that in theory, this could happen.
2) Of course, if people realize that the mine is going to disappear eventually, they won’t go to work there unless the wages are high enough to compensate them for putting their farming skills aside. A problem arises if they don’t realize that the mine is going to disappear eventually. It would seem that the obvious solution to that problem is to alert them to this truth, rather than taking away their options.
3) It’s interesting that you chose farming as your example. The fraction of the population engaged in farming decreases over time pretty much always and everywhere, as advancing technology leads to better agricultural yields, and as economic growth leads people to spend smaller fractions of their incomes on food. So a lot of the people you’re worried about are going to be out of the farming game in a generation or two, with or without trade.
4) We should not lose sight of the fact that putting farmers to work in a mine raises not only their wages, but the wages of every other farmer (and ultimately of every other worker in that country). Losing sight of this would cause you to way underestimate the benefits of trade.
5) In case the reasons for point 4) are not obvious: Except for short-run fluctuations, wages are determined by productivity—not in individual industries, but nationwide. The reason wages today in America are ten times what they were several decades ago is that workers are ten times more productive than they were several decades ago. For this, we have ample (uncontroversial) theory and ample empirical evidence. Notice that all workers share in these wage increases. Barbers are not substantially more productive now than they were a hundred years ago, but they earn ten times as much because factory workers are ten times more productive. If you can turn farmers into (more productive) miners, then wages have to rise across the board.
6) The newspapers are forever touting some new “study” or other that concludes wages—for the first time in history—have stopped tracking productivity. These results are almost always derived from one of the following fallacies: Failing to include benefits as part of worker compensation, failing to correct appropriately for inflation, or making apples-to-oranges comparisons between, say, the mean of one variable and the median of the other. Greg Mankiw says it at least as well as I can.
7) Since trade increases productivity, and productivity is pretty much the sole determinant of wages (again, not just for the workers who are directly affected, but nationwide), the benefits of trade are immense. Could there be a downside if some workers are fooled into making bad choices? Sure. Should we ban trade to prevent that downside? That’s a lot like banning cars to prevent auto accidents, or banning abortions to prevent post-abortion regret. Surely a parenting blogger can see the folly of throwing the baby out with the bathwater.
Hat tip to the Two Marks, who helped me think about how to organize this post.
Nice wrap up Steven.
Her comment that “[W]hen the local resource is exhausted and the mine closes, the people are left impoverished and unskilled…” also misses some fairly critical points thatI always find frustrating.
Even if the profit seeking company just ditched the mine because they saw no residual value, wouldn’t they have left behind a whole infrastructure (roads, electricity, water systems) that can be converted for other uses? Presumably some of the workers would have developed essential non farming skills that play quite well in a global economy. Wouldn’t the foreign entity have some faith in the ability of the people in the local area to organise and produce value?
More infrastructure, a more diverse skillset and a relationship to an organisation with plenty of capital somehow makes them poorer?
Presumably she thinks that them having exhausted the local resources makes them poor but it sounds like she is advocating never mining the resources in the first place (and hence never drawing any of the benefits of their availability as if they were never there).
So how do they lose?
Hypothetically, once the mine is exhausted and the big evil corporation leaves town, wouldn’t the wages for farmers drop back down to their previous levels? Or even lower now that we have a population of less skilled farmers, who might be less productive farmers than they had been pre-mine?
On #2, that seems an unlikely scenario. That a new industry coming into an area that knows nothing about said industry (e.g. mining coming into an agricultural community that knows nothing about mining) actually would do full disclosure about the benefits, risks, and future potential of their enterprise? That seems like suggesting that we wouldn’t need police if everyone would just be nice to each other.
That’s not to say that I object to mining, or to diversifying and/or offering more choices of ways to make a living in agricultural communities, or anything like that. But the idea that corporations can be trusted to do ethical disclosure to the communities the affect seems pretty thoroughly not to be so.
Which would lead to another question: how does one make that system *work* in a way that is not deceptive to the workers involved?
Also, yet another question: the trend that you note in #3, which I agree has proved to be pretty inexorable over time, do you think it’s a good thing? I tend to think no, as the same “advancing technology [that] leads to better agricultural yields” tends to lead to unsafe food practices, decreasing biodiversity, and environmental malfeasance. A modern Iowa monoculture may produce *more* food in real terms than the string of nineteenth century farms that preceded it on the same land, but the use of advanced technology like chemically fixed nitrogen, and the concept of the monoculture as a thing to do have both seriously damaged the farmland there, as well as downstream, and have sacrificed “good” in the name of “more” in a variety of ways.
Also, oh hai, I finally got around to reading your blog. Must go back to dissertating now. ::furrows brow and runs away::
It seems to me that there is a much more interesting argument that could be made against certain effects of free trade, like the one described in the post above. The thesis that in the long run(the very, very long run) the population as a whole, and the majority of individuals, will be economically worse off, I find hard to swallow.
What concerns me more is the effect on the population of the breaking up of traditional cultural institutions. It has often been pointed, most recently in this article (http://www.esquire.com/features/best-and-brightest-2009/world-poverty-map-1209), that for a country to develop economically, it must have stable institutions that make people feel safe to invest. This is why many countries rich in resources fail to develop with comparative advantage. The money gained in trade flows right out of the country, instead of being invested into future growth. The obvious examples are diamonds in Africa, or oil in the Middle East. Now that being said, eventually, after some growing pains(civil war/famine/radical fundamentalist movements) new cultural institutions will replace the older ones, and things will get better for everyone. But at what price? It is very hard for me to measure peoples lives right now against the future prosperity of their countries. Also, the costs to the developed world, of poverty and radicalism in developing countries, are becoming harder and harder to ignore.
I’m not totally sure about this, or what it means for how international trade should function, but I think its worth thinking about. I feel a lot of these things are ignored because they are hard to quantify.
Desiring Subject…
in regards to your objection to #2 – I don’t think Steven’s saying the company is likely to do this. But maybe you should if you think it’s a problem. ie fly over there yourself and tell the villagers that hte mine won’t be around forever and then let them make up their own minds rather than putting the efforts in to stop free trade because the mines may not exist in the future.
In the scenario envisaged by Sierra Black, the problem arises not from free trade by itself, but by the combination of free trade and a substantial natural resource. I note that only item #2 in Steve’s answer addresses this specific combination.
When I think of the benefits of trade, I think first of all of the medieval European city-states, especially Venice and Florence; of Portugal and the Netherlands in the Age of Exploration; and of Hong Kong and Singapore today. (Also ancient Athens, Victorian Britain, and the USA, but they also had/have natural resources.) If the community postulated by Sierra did not have natural resources, they could still benefit by marketing their handicrafts. They would not grow rich as fast as Hong Kong and Singapore unless they have sea access (and some defense guarantee by the USA or some other power), but they would grow rich, and develop a stronger work ethic into the bargain.
The combination of free trade and natural resources otoh puts a country in a situation similar to that of Southern Italy, Wallonia, the American inner cities, etc, where vast welfare transfers from richer parts of the country have created a culture of dependency (with apologies to those who strive to get ahead in those parts of the World). Another comparison might be to somebody who suddenly comes into a vast inheritance: if he lets it go to his head, he might fritter it away and be worse off than before.
“That’s a lot like banning cars to prevent auto accidents”
We do ban some cars to prevent auto accidents. Specifically, we ban really obviously dangerous cars, with bits hanging loose off the back and no lights or brakes.
Is there any room in your analogy for obviously dangerous trade? If all road-users had to sign a waiver saying they accept whatever safety standard the owner of the road chose to enforce, maybe we could be done with driver and vehicle licensing. But we don’t do that, because we still have some state-owned or commonly-owned resources.
Should I be banned from selling lit bottle-rockets in Times Square, presuming that I inform the purchaser that they are dangerous? Are all opportunities for trade mathematically provable to be a strict improvement on the situation were that opportunity not available?
Part of the confusion could be that in plausible example of mining in a “third-world” country I (a western mining concern) pay an unelected or only marginally-accountable despot some consideration in cash, weapons, and limousines. This entitles me to start forcing farmers off “their” land, either directly with force or by commencing the process of dumping toxic waste into the water supply. Once I’ve done that, their best option is to work for me.
It’s unclear to me that this necessarily makes the farmers “better off” in any sense other than “GDP is up, and they live in the country, so they participate in the average”. The farmers are worse off not because they made an economic mistake in discarding their farming skills, but because they were in the first place relying on a benefit external to the market (clean land and water), which the coltan trade gave me incentive to destroy.
Obviously in market-topia this cannot happen, since there are no despots, and either (a) there would be some mechanism to force me to compensate farmers if I damaged their property with my toxic waste, or more likely (b) they would be buying their clean water from whoever owns the aquifer, which I could attempt to purchase and thereby obtain the right to poison.
We might also choose to ignore the possibility of this happening in the real world, because we like trade and want to focus on its successes. In any plausible universe, however, it seems natural for Sierra to be able to identify specific cases where “adding a bit more trade” is harmful, irrespective of whether “adding even more trade, to a quite infeasible degree given who currently runs the country” would be beneficial.
I have two problems with this. First is your assertion that “if people realize that the mine is going to disappear eventually, they won’t go to work there unless the wages are high enough to compensate them for putting their farming skills aside.”
I think this is a gross over-estimation of people’s ability to behave logically, or to apply foresight to their decisions. While it might stand from an economic perspective, I would be surprised to find that it held any water from a psychological standpoint. I believe there is significant research indicating that humans’ ability to accurately judge risk, and make rational decisions based on the amount of risk they expose us to, sucks. I could imagine how someone with no relevant experience would have a hard time accurately assessing the risk posed by an eventual mine-closing, which would make it even harder for them to make a logical decision on giving up farming for mining.
The other problem I have is with the issue that Desiringsubject raised, the diminishing number of farmers around the world. (I’m having a hard time writing coherently about this, so I’ve put it second. I hope I’ve at least said *something* coherent.)
My area of expertise is not economics but food, and as an advocate of sustainable food (which I think must, at least in part, come from local sources, which means that food production can’t be uber-centralized), I have a hard time subscribing to a system that would exacerbate this trend.
What I mean to say is this: You assume that because the number of farmers has historically decreased, it will continue to, whether or not a mining company deprives a farming community of its farmers. But I, and I suspect others like me, would work to see that that doesn’t happen if we determine that it will have more negative than positive consequences. Which could translate into not supporting free trade. So if the question is, “Is free trade a good thing?” my answer may be different from yours based on the fact that you see a trend as inevitable, while I see it as impactable.
Leah:
1) If your argument is that we should not allow people to make choices that might turn out badly, then of course we should ban abortion, home ownership, jobhunting and marriage. When you ban trade to prevent occasional bad outcomes, you are cutting off pretty much the only escape route from Third World poverty. That strikes me as overkill.
2) If you value “sustainability” enough that you’re willing to condemn people to poverty to attain it, then of course that’s a value judgment that I can’t prove is wrong. But it is good to be aware that that’s the choice you’re making.
If I were to list the things that the poorest people in the world need most, trading opportunities and cheap food would be near the top of my list. To actively stand in their way, especially from the comfort of a middle class American living room, strikes me as callous in the extreme.
>> 1) If your argument is that we should not allow people to make choices that might turn out badly, then of course we should ban abortion, home ownership, jobhunting and marriage. When you ban trade to prevent occasional bad outcomes, you are cutting off pretty much the only escape route from Third World poverty. That strikes me as overkill. <<
That's too absolutist to make sense. What many people say is that *some* kinds of trade very consistently lead people to make choices that are bad in the long term, and that putting barriers in the way of those kinds of trade mitigates that problem, or that there are ways to mitigate the bad choice problem that act as barriers to that kind of trade as a side effect.
For example, properly informing people of the things they need to know in order to avoid a bad choice we can predict most people would otherwise make if they're not well informed, may require time and money, and require that time and money to be spent as a condition of engaging in a particular kind of trade may rightly be seen as a barrier to that kind of trade. Say we can determine that opening a minerals mine on farmland in an area with high illiteracy leads to a 40% chance of civil war within 25 years, but has only a 5% chance of leading to civil within 25 years if it is always preceded by certain steps such as opening enough schools and waiting 10 years until you have a certain level of literacy. Then, if country A decides to require that such mines not be opened until that is done, while country B decides to do it anyway, A has a long term advantage over B, but many proponents of "free trade" will decry A's restrictive trade barriers – even if A offers a deal to the mining companies that if *they* want to pay to educate the population, they can start their mines earlier. Those companies will just go to country B anyway.
This isn't a choice between "always allow everything" and "never allow trade at all", nor is it something universally applicable to all kinds of trade in all places and times.
You're trying to make a leap from:
* "When we find that something that should be beneficial usually causes a predictable harm, and we have some good ideas for mitigation steps, so let's take them even in some cases when they reduce or delay the expected benefit."
To:
* "When we find that something may sometimes be harmful we should always ban it completely."
The second does not logically follow from the first. But pretending that it does is a large part of what gives "free trade" such a bad name, and such a hit to its popularity.
Steven, I think you dismiss Leah too quickly. What s/he is pointing out is that your metric for benefit assumes rational choice. That’s an assumption that can be made with a “better” degree of certainty in a developed country because the institutions exist there to facilitate rational choice.
Education is free and even mandatory to at least an intermediate level. Communication and information is available at little or no cost and is instantaneous. And an open and free media often serves.
All of these institutions support rational choice. When these institutions are absent one can no longer assume that individuals will make choices in their own best interest, and the market advantage cannot be counted on.
Could you formulate an answer that does not rely on an assumption of rational choice? Otherwise you are suggesting that my offering my 5 yr old daughter FOUR shiny metal quarters for the one flimsy Paper 5 dollar bill she got for Christmas from Nanny must be a fair transaction.
Benkyou: You wrote:
Could you formulate an answer that does not rely on an assumption of rational choice?
Nothing here relies on the assumption of universal rational choice. The argument is not that all choices are rational; it is that we should not shut down a staggeringly effective force for good in order to prevent occasional bad choices.
Otherwise you are suggesting that my offering my 5 yr old daughter FOUR shiny metal quarters for the one flimsy Paper 5 dollar bill she got for Christmas from Nanny must be a fair transaction.
Nobody said anything about fair transactions; the question is what’s good for your 5 year old. And what you are suggesting is that because she occasionally chooses candy over broccoli, we should stop feeding her.
I disagree. I’m saying that judging free trade a success based on people getting what they wanted out of the deal is not the correct measurement unless the participants in the deal are capable of acting out of self interest.
So it’s not about whether to feed my daughter it’s about am I doing my daughter a favor by giving her choosing? Compared to starving her, the answer is yes, only when she is able to make decisions less likely to kill her than not eating. So sometimes it’s better to starve my daughter than to let her choose to eat drain-o
Should we engage in open trade with a nation if the end result is a retreat from industries that allow for self sufficiency? The answer is yes, only when there are institutions in place that will realize that self sufficiency out of the gains from the trade.
Should we spend money on providing condoms in sub-Saharan Africa? Not until the people there stop seeing AIDS as an inevitability unrelated to sexual activity.
Ja,
Benky
Benkyou:
I disagree. I’m saying that judging free trade a success based on people getting what they wanted out of the deal is not the correct measurement unless the participants in the deal are capable of acting out of self interest.
You continue to miss the point. It’s not just a matter of “people getting what they wanted out of the deal”. It’s a matter of the difference between prosperity and poverty for many tens of millions of people. You’ve got to weigh the downside you’re pointing to against that upside, and the *magnitude* of that upside is highly relevant here, but nothing in your argument acknowledges it.
Fair enough. But doesn’t that allow for instances where the benefits from trade go to a tiny power-dominant minority even to the degree of harming the greater population?
I’m thinking in particular of the hyperinflation experienced in china under nationalist rule. Autarky under communist rule didn’t help but there are more than two choices in a complex world.
I’m sensing an “all things being equall” quandry. If there are 5 starving people and you give one of them a meal you have still helped since you haven’t made anyone life worse.
What’s being argued here is that there are times when free trade is not a net benefit to a country that allows it. Such is the case when those gains are funneled out of the country by a puppet gov. Or go entirely to a ruling elite
Benky