Ricardo's Difficult Idea Eludes Wonks
Alex Tabarrok has a timely post that links to another Paul Krugman classic on the gulf between economists and noneconomists on the theory of international trade. Krugman writes,
it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, “what would happen if people who work for such low wages manage to achieve Western productivity?” The economist’s answer is, “if they achieve Western productivity, they will be paid Western wages” — as has in fact happened in Japan. But to the non-economist this conclusion is neither natural nor plausible.
Today, I went to a media event sponsored by the New America Foundation. The first topic was the state of the economy, and the topic of international trade came up. Numerous audience participants and panelists displayed ignorance. Michael Lind, a panelist, talked about the “need to create comparative advantage.” You cannot understand the term “comparative advantage” and still talk about a need to create it. He also talked about low wages as a source of comparative advantage. Once again, that is an abuse of economic language.
Of course, Lind is not exactly new to fallacious economic reasoning. The Krugman piece refers to a 1994 article by Lind. Krugman writes,
The question here is not why Lind got these numbers wrong. It takes considerable experience to know where to look and what to worry about in economic statistics, and one should not expect someone who does not work in the field to be able to get it right without some guidance. The question is, instead, why Mr. Lind felt that it was a good idea to make sweeping pronouncements about this subject, when he clearly was unwilling to invest time and energy in actually understanding it.
At today’s event, Lind was on the same panel with Martin Baily, a former Chairman of the Council of Economic Advisers under President Clinton. Baily got the economics of outsourcing exactly right, pointing out that full employment is a macroeconomic issue rather than a trade issue, and pointing out that our economy as a whole benefits from outsourcing but that in his opinion policies are needed to ease the adjustment problem for workers who have to switch occupations.
But Lind was given equal billing with Baily. I know that Baily is a qualified economist and that Lind is a charlatan. But my guess is that the media attendees did not know that, and they probably found Lind easier to follow.
For Discussion. How would you explain to a layman the theory of comparative advantage so that the layman would not make the mistake of calling low wages a source of comparative advantage?