Krugman on Gains from Trade
By David Henderson
Paul Krugman has posted his slides for a lecture on gains from trade. They’re excellent.
One fun highlight on the last slide is a quote from my fellow Canuck, the late Harry Johnson:
Second-best policies are usually recommended by third-best economists working for fourth-best politicians.
There is one slide, though, that displays Krugman’s nationalism. On the third-last slide, he lays out the argument that there can be an optimal tariff if the country imposing it has the power to affect world prices. Krugman then gives the standard economist’s criticism of naively imposing this tariff. He writes, “This is optimal only if the foreigners don’t react. Unilateral optimal tariffs can lead to “optimal tariff warfare”, which makes both countries worse off.”
Notice what criticism Krugman didn’t make: he didn’t say that the optimal tariff is not optimal at all when you consider world welfare. It’s optimal only from the viewpoint of residents, considered as a whole, of the country whose government imposes it. Thus my statement that Krugman displays his nationalism.
I remember my first trade course, which I took at the University of Western Ontario in 1971-72 from a first-rate trade economist, J. Clark Leith. The course was so eye-opening that I highlighted it in Chapter 2, “Hooked on Economics,” of my book, The Joy of Freedom: An Economist’s Odyssey. Leith was laying out the various arguments for tariffs and showing the flaws in each. The one exception was the optimal tariff. But then he made the same point that Krugman makes above. I raised my hand: “But why is it proper only to include the well-being of Canadians?” I asked. Leith paused and then said, jokingly, “What? We should consider the well-being of”–and here he named residents of another actual country but I cannot, for the life of me, remember which one. But he asked it rhetorically, as if he thought that of course we shouldn’t consider their well-being. He also seemed ticked off and so I didn’t pursue. But I wanted to say, “Of course we should consider their well-being. You told us earlier in the course that you were in Ghana trying to help them with their economy. You’re saying now that you didn’t care about them?”