In one recent essay at American CompassMichael Lind attempts to refute certain aspects of economists’ plea for free trade. Others to have addressed the numerous empirical, factual, and theoretical issues in his essay. I will focus on just one specific claim. Lind writes:
The attack on tariffs as regressive taxes unites two of the themes of early 21st century neoliberalism. One of these is the left-neoliberal dogma that every individual tax – and not government policy or the economy as a whole – must be progressive in its effects. The other is the right-wing neoliberal dogma that deregulating trade and immigration to lower wages for workers and thus lower prices for consumers is the “efficient” and therefore best policy, as long as the “winners” compensate the “losers” – preferably in the form of redistribution via the tax law.
For the sake of space, I will ignore his claim on left-wing dogma and focus on the claim of right-wing dogma: “deregulating trade and immigration to lower wages for workers and thus lower prices for consumers is the efficient” and therefore the best policy. , as long as the “winners” compensate the “losers” – preferably in the form of redistribution through the tax code. Lind doesn’t provide any quotes or links to support his claim, so it’s hard to tell exactly who (or what) he’s responding to here. Open any trading manual and you will not find such dogmas as he claims there are.
On the contrary, me think he refers to a possible outcome in international trade called the Factor Equalization Theorem, which is independently derived from Wolfgang Stolper and Paul Samuelson in 1941 And Abba Lerner in 1952. I will spare you, dear reader, the technical details, but I note that the theorem states that, under certain circumstances, when two countries trade, the trading partner that has relatively abundant labor will see wages rise and capital returns rise fall, while the country that does will see wages rise and returns on capital fall, while If there is relatively much capital, returns on capital will rise and wages fall. According to this theorem, factor prices (wages and returns on capital) will be equal for all trading partners: wages will be equal between the two countries and returns on capital will be equal between the two countries.
Assuming I am right in saying that he has adopted the Factor Equalization Theorem, Lind seems to be taking advantage of it, attaching certain claims to it that no one actually has, and claiming them as dogmas of free trade. The problem is that the statement has not held up well in empirical research. The assumptions therein are too strong. In particular, the theorem requires that labor be virtually identical across trading partners (the same goes for capital). In reality, labor is not identical with many trading partners. American workers are extremely productive: We operate in a capital-driven economy with strong and stable institutions, high education, and generally good access to productivity-enhancing infrastructure. Chinese workers, on the other hand, are not: they are much less productive. According to the World Bankthe average Chinese worker produces about $42,000 worth of goods and services per year. Conversely, the average American worker produces approximately $150,000 worth of goods and services per year, making the average American worker 257% more productive than the average Chinese worker. A Chinese worker is not a good substitute for an American worker. We should not expect US wages to fall toward Chinese wages because of trade. Indeed, we don’t see American wages falling.
To make this point less abstract, consider this: the New England Patriots, my hometown football team, are in desperate need of a good quarterback. I, a 35 year old man, would like to play for the Patriots. In fact, they could offer me the league minimum wage ($795,000) and I would immediately quit my job and play for the Patriots. Millions of other New Englanders (and Americans for that matter) would also take him up on that offer. So why did the Patriots offer 21-year-old rookie Drake Maye from UNC nearly $60 million ($36 million over four years plus a $24 million signing bonus)? The answer is obvious: he and I are not nearly the same. No one would reasonably expect our wages to equalize (mine go up and his go down). The statement does not apply in this case.
Factor price equalization is more likely to occur between very similar trading partners like the US and Canada: the technology is similar, there are lower costs associated with relocation, and employees are comparable. But factor price equalization will not arise naturally from trade, as Lind seems to think. In reality, just the opposite could just as easily happen. Factor price equalization is a special case of trade and not a general case.
Jon Murphy is an assistant professor of economics at Nicholls State University.