(Um, I was not trying to make an economic argument in favor of protective tariffs; I was asking for the argument why that’s impossible.)

The case for protective tariffs is perhaps not purely economic, then: If country A does not, after all, have even a long-run comparative advantage in sector X, but it considers it a matter of national security to be self-sufficient in X, then it will find it politically expedient to subsidize domestic X (through tariffs) in order for it to grow.

Perhaps X even directly subsidizes domestic X in order to allow it to undersell on the world market. What, then is, is the most economically advantageous response for country B, which finds itself unable to sell its X in A and also underbid by A for its X to countries C, D, and E? There is long-term distortion of the market in A–the government is expending resources to let domestic X turn a profit world-wide with low bids, and the people are prevented from buying world-market-priced X–but how can country B profit from this distortion in the short run?

In short: How should the US respond to (say) Chinese tariffs and subsidization?

So to make your “classic case” work, you’ve got to make a convincing argument that the following are simultaneously true: a) Country A has a (long run) competitive advantage at producing good X; b) the government is aware of this long run competitive advantage, and c) private investors are either unaware of the long run competitive advantage, or, for some
reason, unable to make investments. It’s difficult to imagine circumstances in which b) and c) are simultaneously true.

Note too that while a), b) and c) are necessary conditions for your argument to work, they are not sufficient conditions. To make them sufficient, you’ll also have to prove that d) a government empowered to favor particularly industries will use that power both wisely and beneficently.

The classic case for protectionist trade policies in under-developed country A is that erecting temporary tariff barriers to free trade in industry sector X allows A’s home-grown sector X to develop and prosper through domestic sales. After achieving robustness, domestic X industry can gradually be weaned of the tariff protection and emerge into world-wide competition. Thus, the people of A (outside sector X) have subsidized the development of X, which then can pay back to everyone else in A by its now respectable world market competence.

Such is the theory, anyway. I believe it’s pretty well subscribed to by a lot of nations. Do events bear it out? Does any theory suggest it ought not to hold? Theory suggests there’s been net transfer of wealth from A’s non-X sector to X, but does theory counter the notion that incubating X is long-term helpful to A as a whole?

First, sometimes simplifying assumptions are good and point to a truth like a point on a map, and sometimes they are wrong and point us in the wrong direction. If anything is clear in the last year or so, its that people are influenced by other things than rational action. If you give them too many 401K choices, they won’t participate, if you allow them to churn every year, they will switch to the plan with the best most recent track record, when logic and regression to the mean would indicate they should stay put. Herd mentality leads to systematically overpriced real estate. You know these things professor. This isn’t a point on a map, people aren’t always rational actors and frequently enough it leads to bad decisions and bad pricing. Talk to Thaler, he used to work at Rocestor.

Second, about cameras, we can meke the ill advised decision to ignore traditional externalities if it keeps your thin reasoning consistent, even so there is still a second hidden assumption in your example. You specifically chose a well established consumer good, a camera, to make your point. There are other types of goods that blur the lines considerably. It is very clear to me that you have never actually gone up against a Chinese competitor. They play by a different set of rules. Their companies operate in a blur of public and private sectors that is confusing to Americans used to a strict separation of the two. The state can, and does, intervene and subsidize at any time. The companies mix and match suppliers, they buy, copy, or steal ideas and churn out product just good enough and just cheap enough to sell. Even American companies that manufacture in China can’t compete.

Copyright law in China is a bit different. There I can find a publisher of your book and churn out copies to sell. Should I be allowed to? (If you really think you are protected in this respect, I have a knock off CD to send to you). Everybody would be better off if it was available for $5 instead of $20. Or should your book be protected (like your tenured job)? In the area of non consumer goods, and non information goods (like books and more importantly software), take a look at what Huawei is doing in the area of Cellular Infrastructure. They are essentially giving away 4G technology, driving industry giants Alcatel Lucent, Nokia, Motorola, and even Ericsson out of business. Because 4G systems are so complicated and expensive, Huawei figures to drive out all competitiors as doing this now will tie up the market for decades. Perhaps they expect to make it up on the back end, perhaps they just want jobs for the people, we don’t know. At any rate, this is predatory pricing professor. Perhaps a little protection could be in order?

Your comment is long, and several parts of it merit replies, but let’s start with this:

First the argument assumes that everyone is a rational economic actor, which we know is not true.

This is very like saying that a map of St. Louis cannot possibly help you find your way around St. Louis because the map shows the St. Louis Arch as a mark on a piece of paper, which we know is not true.

The point is that all models make simplifying assumptions; that’s what makes them models. And simplifying assumptions, by definition, are not true. That’s not enough to discredit to model. For that, you’d have to point out a specific irrational behavior that is both a) plausible and b) undermines the conclusions of the model.

The model I gave you says that an American camera maker sells his cameras for $100. A Chinese camera maker comes along and offers cameras for $50. For every camera sold, this saves an American buyer $50. As for the American seller, he can always match the Chinese price, in which case he’s out $50, so that his loss is balanced by the consumer’s gain. Or perhaps he can limit his losses by switching from the camera business to some other business, in which case his loss is *over*balanced by the consumer’s gain.

Now: What *specific* irrational action do you think one of these agents might take that is both plausible and overturns the conclusion that the consumer’s gain must be at least as great as the producer’s loss?

(P.S. I understand that you made several other points, re externalities, etc. Here I am trying to focus attention on ONE of your points, namely the role of irrationality.)

You’ve been kind enough to respond to one post, so I might as well get a couple of other points of difference off my chest.

You suggest that no serious person doubts that people have free will. I’d differ in the sense that I think people have the potential for free will, but not the abiltiy to exercise it nearly so much as they think, believe, or more accurately fantasize that they have.

First, on a biological level, if you go to bake some cookies and you accidentally brush your arm against the hot oven rack, you will immediately pull your arm away. You’ll pull it away without thinking and even before any pain registers. This act of pulling away can’t be said to include any real act of free will. It was automatic and instinctive. Just as much of our lives is.

More complicated emotional examples might include getting angry in traffic, being irritated by your mother in law, annoyed at the kids for not picking up their rooms. No rational person would “choose” to be upset by these things, but they bother us anyway, and upset we sometimes get. Usually, it’s automatic (and then rationalized as appropriate free will after the fact.)

So as much as you think free will is right in our faces all the time, so too is the lack of it. If you don’t want to believe ole Izzydog, resolve to yourself that you are going to prove him wrong. Open every door you go through this week with your left hand. I’m willing to bet you can’t do it, and if you are honest, when you review your week (or even just the first day) you won’t even remember how you went through most doors. If you can’t exercise free will over such a simple thing as opening doors, how can you possibly exercise free will over more complicated matters?

After all, the whole obesity epidemic is a walking example of how little free will people have (who freely chooses obesity?), and how the food industry understands what you may not. The right combination of sugar salt and fat will keep you automatically coming back for more.

As for Aumanns argument and the example of the two agents, more information being conveyed by the second agent, and each subsequent round, I wonder if it doesn’t really account very well for the courage of conviction of the two agents. Otherwise, how do you account for the surprisingly common phenomena of false confessions?

A few years back, I read an article about a number of people that confessed to crimes they didn’t commit (and later wanted to be released). Apparently this is a well known phenomena in law enforcement. Using standard interrogation techniques (not torture!) a fair number of innocent people will eventually confess to a crime they didn’t committ. Presumbably the interrogating officer is a truth seeker, and the person being interrogated has a perfect understanding of the truth (they did not committ the crime). And yet, a surprising amount of the time, a confession emerges.

As I recall from the article, the reason stated for the false confession is the confessor is usually of below average intellegence. After a lifetime of being showing that they are wrong about things, they break down relatively easily because they are used to doing so.

I suspect if you can find the data about false confessions, it may point to a loophole in Aumann’s argument.

It has been a very long time since I studied economics, but it does strike me as semantics to claim that tenure is a voluntary contract. On the one hand one could consider it as such. It’s a contract between universities and professors But on the other hand, for a student and consumer of university goods, it is in no way voluntary, and tuition cost is probably higher because of it. From the perspective of a student, the game is rigged such that a student can’t go outside the university system to obtain a degree of equal value because all serious universities engage in the practice of tenure (at which point you might argue that as economics suggests if a degeree is worth more a student should be willing to pay more. To which I would reply it’s the university brand itself, not the practice of tenure that provides the signalling value of a university degree — in fact if Rocester is like many universities I can graduate without ever having been taught by anything but non-tenured TA’s and the degree is worth just as much).

The job of economics professor is protected even though there might be an equally or more qualified, much less expensive, teacher of economics available. If you believe education is good for both individuals and society, then tenure certainly is a reduction of wealth to all Americans, and very much a university system “policy” that exhibits all the hallmark signs of protectionism (as a student I am prevented from getting an equally valuable degree from an institution that does not employ tenure).

The arguement I found in the Big Questions was about $75 cameras in a world where they previously sold for $100. First the argument assumes that everyone is a rational economic actor, which we know is not true.

But even if it were true, consumers never have enough information to make fully informed decisions. The argument for $75 cameras said nothing about externalities (I understand we will visit externalities in a chapter I haven’t read yet so I will stay tuned and apologize in advance if the example is revisited). How was the $75 dollar camera produced? Did it involve child labor? Did it throw tons of coal burned pollution in the air that wafted over the ocean to the US? Does it involve the use of a chemical that leeches into the groundwater and will cause a cancer spike in 20 years? Supposidly everybody is better off with a $75 camera, but maybe not. Just because money is easy to count, and other things more intangible and difficult to account for (and so we don’t), does not in any way “prove” that we are better off in a world of $75 cameras.

Even if the cameras were made in exactly the same way (never are), and everybody is a completely rational actor (they aren’t) and all $100 camera sellers in the US exit the business, the example doesn’t account for the true cost to American society. What about healthcare for the newly unemployed? What about social services? What about future costs related to kids growing up in poverty? What about all the other inconvenient truths about unemployment that economic models assume away? Account for these things, and thousands of others, and maybe we can start to have a conversation about whether or not we are better off in a world of $75 cameras.

Models are models, and as you suggest, they can guide our thinking. But the $75 camera model is so simplisic, it’s akin to a person who believes in God with a long white flowing beard, sitting on a throne, finding good parking places for us. It doesn’t serve.

The main ideas are all in this short post.

You can reverse the roles of America and China.

But put that aside. The argument you found in The Big Questions proves that protectionism must reduce the total wealth of all Americans. It does not prove that protectionism must reduce the wealth of any specific American. So it can be perfectly possible to understand and accept the argument, and still lobby for protectionist measures.

In fact—I don’t have the book in front of me so I’m not sure—but I *think* I dealt with this in a footnote. The word “protectionism” sometimes refers to a political preference and other times refers to a false belief about the effect of certain policies on national wealth. It is the false belief, not the political preference, that the argument addresses.

I’m about half way through the book and enjoying it, so thank you. I’ll finish it in the the next few days. But for now your claim about protectionism strikes me as one of those absurdities that arises from mathmatecal models of neoclassical economics that refuses to die, and simply doesn’t work (I know I know I know, we are all supposed to be rational actors, markets always produce equilibrium, the latest crisis was just a blip, and on and on it goes). Understandable, I guess, since mathmatics is your God, or at least what you state as your first principle of belief.

So let’s apply to same test you apply to true believers to demonstrate that economists don’t really believe that protectionism is always bad. For true believers, you basically argue that based on everything we know about deterrence, believers should be more law abiding than non believers. Since there is no evidence to support such a claim, you conclude that believers simply haven’t examined their beliefs and they aren’t really believers.

By that same reasoning, tenure has to be among the most blatent forms of protectionism there is. But based on what little I know about tenure, I don’t see economics professors rejecting tenure at a higher rate than professors of other disciplines, so therefore I should conclude that most economists aren’t seriously anti-protectionist. They just think they are.

Are you tenured professor?