The Ivory Tower is Crumbling on Trade Theory

January 10, 2017

by Michael Stumo

The American Economics Association is fretting the fact that their economic theories are no longer trusted. University education material is starting to include criticisms of and alternatives to old trade theory that is impervious to acknowledgement of glaring and persistent failures.

On the second point, I just had a long interview with a fellow putting together trade materials for MBA and other university students. His employer is a publisher of these university educational materials. He is charged with including comparisons of classical trade theory with criticisms and alternatives.

We had a long conversation about why old trade theory does not work, including persistent deficits, job losses and US economic decline. The interviewer was very interested in the fact that mere tariff reduction is "kindergarten" level thinking because foreign countries use currency, subsidies, tax strategies and other means to game the system.  

He was also interested in the solutions... (1) a national goal of balanced trade and (2) optimizing the "composition of trade" meaning that we increase manufacturing and agricultural supply chain production rather than selling Hollywood movies abroad. We went through the standard claims that "cheaper consumer prices justify all trade", "trade always causes growth," "trade causes world peace," "we'll start a Smoot-Hawley trade war that will be devastating."

But the big point - and the reason I'm describing this conversation - is that our ideas are now penetrating university education materials. Virtually all economists and business students were taught kindergarten free trade. That is now changing.

Separately, the American Economic Association just had its annual conference in Chicago. But they are no longer doing agenda setting research... well they are doing research but not setting any agenda. The public does not trust them anymore. They have their pet models and theories that are impervious to the experience of American workers and citizens.

“The economic elite did many things to undermine their credibility while people’s economic fortunes were taking a turn for the worse,” said Steven Davis, an economist at the University of Chicago. But a road map for regaining trust is elusive. “I used to think facts and analysis will ultimately carry the day but now I’m not quite sure.”

The majority of the economic community supported every trade agreement ever signed, despite the fact that they never read the agreements. They saw the words "free trade agreement" and that was enough for them. Anyone who said otherwise was a protectionist and an isolationist.

Many academic economists have been champions of free trade and globalization, ideas under assault among rising populist movements in advanced economies around the world. ...

Surveys from the Pew Research Center have documented dwindling support for free trade. In 2014, 60% of Democratic voters and 55% of Republican voters supported such trade agreements. In an October survey, however, support among Democrats had fallen to 56% and support among Republicans had nose-dived to 24%.

Economists (wrongly) consider themselves scientists but they refuse to jettison old trade theories when the data refutes them. Instead they simply talk louder.

We are in a new era when the Ivory Tower is shaken. New understandings must replace the old conventional wisdom. 

We need to set a new goal of balanced trade as the new fundamental objective for the US. Indeed, that is the forgotten objective of old free trade. We will produce more of what we consume and harvest the good jobs that come with that production.


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  • Bob Sipp
    Many thanks for being an early believer in the real facts…wealth is only created by manufacturing things that people need/want from raw materials…not from services like banking, Hollywood films, and legal consulting.