EconTech

I won’t bother with the full post, [Edit: Which you can find here: Trade and Inequality] but this caught my attention:

Samuelson — who btw is a Nobel Prize winner and very much a mainstream neoclassical economist — has also published an important paper which shows that, theoretically, under some (quite plausible) circumstances a productivity gain in one country can cause permanent economic harm to the country that is its trading partner, due to a reduction in potential gains from trade between between the two countries.

This was a popular interpretation of the results of the paper. It is completely wrong, however. The paper showed that if 1) you start with two countries with GDP’s X and Y, 2) you open trade, moving GDPs to X+x, Y+y ; x > 0, y > 0, 3) You EQUALIZE productivities while keeping one country’s productivity unchanged (if your setup has one country that is an absolutely inferior producer of both goods in the model, it makes sense to have that country increase productivity to the rich country’s level), 4) GDPs return to X and Y.

What is going on here? Comparative advantage, duh? (I mean, it is international trade, what else did you expect the answer to be?) The point is that if the countries have the exact same productivity levels across all goods, then there is no room for comparative advantage (that is, comparative advantages in all goods are equal) thereby causing there to be no gains from trade.

Let me say that more clearly, the Samuelson paper shows that countries with equal productivity levels HAVE NO GAINS FROM TRADE. THERE ARE NO LOSSES IF YOU COMPARE TO THE AUTARKY BASELINE, which is what we always compare to. Yes, if your baseline is a completely open economy, and then you remove comparative advantage, then you will see losses. I find this a strange baseline to work with.

However, even if we go with that, productivity equalization is not a remotely plausible circumstance. Capital-specific knowledge, various management techniques, regulations, production environments, etc., etc. will all combine to create different levels of production efficiency among different goods. Even things as simple as distance from raw materials will cause the inputs to production to have different costs and therefore change what is the most efficient mode of production.

I am, of course, interested in the places where international trade mucks things up for the poor. It is something I post on more often than probably any other topic. However, this argument and line of reasoning will get you nowhere.