Theory is vital to understand the world. It helps us to understand the world around us and make predictions. Theory is like glasses: a good pair helps you to see better. A bad pair makes it worse. And no couple is just useless.
One of the biggest problems nowadays is that Trump administration’s trade policy is led by horribly bad theory (when led by theory). Even worse, they don’t even seem to understand an easy -to -process facts and figures (for example, the claim of Trump that the The American trade shortage with China is $ 1 trillion. Are Less than $ 300 BIllion. Personally, I would have relatively more confidence in central planners if they could even get the basis).
This message is intended to be a corrective lens for some of the nonsense. Of course, for the true believers, this will not be important; This message is not for them. This message is for those who want to understand trade theory.
International trade does not differ from domestic trade. Whether someone acts with Bret in Boston, Brad in Baton Rouge or Bobby in Berlin, the same principles hold. In particular, people think of the margin when making and selling decisions. They will buy a good when the marginal costs to make the good, the marginal advantage of making good. In other words, they will buy when it is cheaper to buy and make when it is cheaper to make. Both they will sell when the marginal costs to make it up is lower than the marginal benefit of making good. Or they will sell when they can get more to sell the good than it costs to make it.
RicardoThe simple model, in which comparative benefits determine the trading patterns, has been demonstrated time and time again to retain, both at an individual level and at an international level. Technical elaborations have been created (for example, the standard trading model of Hecksher-Ohlin, ‘Stolper-Samuelson and Factor Price-Eggalization, the specific factor model, the product living cyclus theory, etc.), but we will remain with the simple model because these elaborations do not change the underlying logic.
Because people think and act on the margin, we must expect international trading patterns to reflect these margins. In other words, a nation must generally import what it is relatively bad When making (ie low productivity goods/services) and export what it is relatively Good When making (ie high productivity goods/services). Moreover, since wages are linked to productivity, we expect wages in import-competitive industries to be relatively low and that wages in export-competing industries will be relatively high. Indeed, that’s what we see.
Writing for the Peterson Institute for International Economics, J. Bradford Jensen and Lori G. Keltzer Show that The vast majority of jobs that run the risk of acting is in sectors with low productivity and low wages. Conversely, the sectors with the highest productivity and wages are exporters (see Figures 4 and 7). This data is a bit old (the report is from 2008), but I have worked on updating the figures. The pattern does not change; Only the numbers.
Since trading patterns follow a certain logic and are not random, we should not expect that job losses of trade are random. Protectionists gladly implicitly claim that trade course losses are random (and so they quote average wages) or that commercial jobs are non-voluntary, but for some reason companies want their most productive, least expensive things offshore (so only aimed at high productivity industries and wages). But job losses would be in low wages, and job profits would be in areas with a high wage.
Consequently, all jobs that are saved by rates will also be at the expense of jobs with high productivity. Take textile for example. Textile production in the US is confronted with loyal competition from abroad. According to the BLSTextile manufacturing workers earn an average of $ 17.78/hour. That is only 54.4% of the national average ($ 32.66). Conversely, oil and petroleum – extraction – employees – one of our most important exports – an average of $ 28.39/hour. (Note: This data excludes managers and other supervisory employees. These are simply non-supervision.) Rates can “save” some jobs with low productivity, but at the expense of jobs with higher productivity. (To deduce any objections, it is true that the two chosen industries are the polar contradictions of the scale, but the point remains.)
Of course, as the trade expands, some textile workers can be fired. What are their alternatives? Are they doomed to live the rest of their lives of the public? After all, their skills are no longer needed in the US economy (which economists call “structural unemployment”). The answer is: probably not. Even relatively low productivity services pay approximately the same as this low-end production paths. Employees in the field of food preparation earn an average of $ 17.32/hour. Shopping manners: $ 17.05/hour. Are this decrease in wages for the textile production employee? Certainly. But they are fairly comparable wages. If the employee had no well -being with textiles, he would probably not work as a store or food preparation worker. And all this assumes that the employee does not take steps to train again. If they acquire skills for which there is more demand, they can increase their wages.
Life happens on the margins. Therefore, adjustments to the margins will also take place. Good theory helps us to see the potential effects of rates along different margins (and to reject which effects will probably not happen).
Let me end with a personal story of the Grad School:
I took the Law & Econ -Grad class of Robin Hanson (Econ 841). We had to present an original paper for part of the number. I had thought of what I thought was a very smart model. Mathematics worked out and it was pretty nice. I presented the newspaper and Dr. Hanson said only one thing: “This is interesting, but where is the economy?” He blew my model with that one simple question. I couldn’t answer. The math was exactly. The model was logically perfect. But it didn’t explain anything. There was no theory. It was little more than “what if?” I learned two important lessons that day: 1) If I never wanted to be so embarrassed again, I should ensure that the theory is recorded, and 2) give someone sufficient assumptions, and they can prove everything they want.
Good theory prevents a bad vision. Bad theory, how mathematically accurate, regardless of how many chic Greek letters you throw will mislead.