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the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ...
CAMP ENRON:
... gateway to the next Progressive Era?
Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew was smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.


OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Tuesday, May 14, 2002

 
--- Free Trade and Stolper's Whole Truth ---

If an economist was held to a quota of one brainchild per lifetime, the Stolper-Samuelson Theorem wouldn't be a bad pick. Young Wolfgang Stolper had a counterintuitive afterthought over 60 years ago. He checked it out with Paul Samuelson, and learned he'd hit the intellectual jackpot.

Using nothing more than standard competitive market theory, Stolper drew one non-controversial straight line, and then another. Their intersection determines an equilibrium point for factor prices in an island economy ("autarky"). Stolper then supposed a trading partner, drew another straight line, and ... can this be right?! Connect the dots ... relative scarcity changes ... product prices change ... factor prices changes ... factor allocation changes ... real income changes, and ... AAACK! Real income DROPS for a broad class of market participants, even as real output for the whole economy RISES.

Begin with two resourceful traders in an isolated trading "universe". Open the door to a third player, and net real wealth is created ... but one player or another might end up absolutely worse off (and even more severely disadvantaged in relative terms, as the neighbors move upscale). Start with two trading islands, allow a third island into the trading circle, and one whole island could end up worse off.

And there's nary a loose link in the entire construction, no meddling dead hand of government, no strained approximations or corner-case assumptions, no transaction costs, sunk costs or stranded assets. There's no escape from Stolper's result without rejecting the entire corpus of supply-demand market equilibrium economics. The idea that "trade is good for everybody" just doesn't hold water ... at least not in the realm of free-market economics. What are the implications?

Stolper decisively refutes the central marketarian shibboleth. Free trade creates winners and losers. Even in the most pristine libertarian SIM-world, opening a trade bridge can void the free-market consumer warranty of Pareto optimality (which proscribes making anyone better off by making others worse off). That's a big deal, because Pareto optimality is the definitional bedrock of all the market theology we absorbed in Econ 101 -- that free markets are good because they allocate resources "optimally".
Libertarian polemics and Stolper-Samuelson analysis rarely intersect. I say "rarely" only out of an abundance of reserve ... out of thousands of googled citations for Stolper, and tens of thousands for libertarian trade-theoretic watchwords, institutions and heroes, I have not found a single libertarian acknowledgement or critique of Stolper's Theorem.
Stolper also knocks the pins out from under a load of left/labor/Green trade dogma -- that trade is OK in theory, but only if both trading "islands" rise to similar labor and environmental standards (else it drives a "race to the bottom" ... a competition for lower standards). Sorry. Suppose, by fiat, we can decree all those protective standards. Large segments of one or both populations can end up on the losing end of the stick.

Stolper's result also casts a dark shadow over the usual tariff-based protections. Drawing similar lines on similar charts, and connecting similar dots, we see that tariffs can also indirectly reduce real incomes.

Incidentally, similar effects obtain when we relieve trade impediments within an economy ... when we add bridges or freeway lanes, or invent faster, cheaper ways to commute and communicate, or create recognizable national brands, or resolve regulatory differences between neighboring jurisdictions.

So what is Econ 101's good news about free trade? When a pre-existing trade barrier is removed, the combined economy -- Island A plus Island B -- can produce more of everything. In fact, Island A -- collectively -- can afford more of everything, and so can Island B -- collectively. That's happy news -- in general -- which sadly does not extend to every laborer or proprietor on every island. [In the USA, where capital is abundant, relative losers will tend to be the 98% of us whose lifetime incomes derive mainly from labor.]

When you hear the virtues of "free trade" debated in the public square, remember:
(1) Market fundamentalists either don't know what they're talking about, or don't think you can handle the truth.
(2) Classic protectionists guard their winnings at the expense of someone else's ... maybe yours.
(3) Third Way optimists deal with the subject without dealing with the hard issues, or they deal from another deck altogether -- playing the "creative destruction is inevitable, let's get over it" card.

There's a Fourth Way, too -- a Liberal dose of Socialism. Accept the aggregate (social) market economic benefit of trade, tax some of the resulting collective gain, spend that on general public goods and/or subsidies targeted specifically to trade-game losers.

That's where GWB comes down in his latest bid for Trade Promotion Authority, a.k.a. "Fast Track", with emphasis on "wage insurance" expenditures for affected workers. This won't win many admirers in many quarters, but it does contain a germ of a gem of enlightened trade policy.

For my part, I favor combinations of (3) and (4) ... though I have approximately zero confidence in GWB's ability to juggle the competing pieces.

Wolfgang Stolper, by the way, never hatched another big idea, and passed away earlier this year.

See Intl Econ Glossary for general exposition and related vocabulary, and IESC for a concise technical exposition.