Predicting Trade Wars
As the aphorism goes, prediction is difficult, especially about the future. But sometimes, the incentives involved and some basic economic knowledge help prediction, at least regarding the not-too-distant future. Having an idea of how Leviathan works, which can be considered a sub-domain of public choice theory, is also useful.
In early May, I wrote for Regulation an article titled “How’s Your Trade War Going?” As Regulation is a quarterly magazine, my article will soon hit the stands, and has just hit the electrons. The outlook has not improved, but I think I did not forecast the current situation badly—besides explaining some aspects of the economics of free trade.
What was in store has been rather obvious since the presidential campaign and the election of 2016. In a tweet of last week, I wrote:
I still find this reaction puzzling, especially from intellectuals who should know better.
Why so many people believe in protectionism after more than two centuries and a half of economic criticism is even more puzzling. It may have to do with the fact that many have not been exposed to economics in their formative years, combined with a psychological feature that John Maynard Keynes mentioned in the closing paragraph of The General Theory of Employment, Interest and Money (1936):
Many of us try to avoid this cognitive trap and make Keynes wrong. It is arguably much more difficult for the gerontocrats who govern us (whatever their political affiliations). If changing one’s opinions may be feasible in old age, changing one’s emotions is certainly difficult. And protectionism is based on emotions or, at best, on unexamined value judgments. I am keeping my mind open, but I think they will understand free trade when pigs fly.