[Note for bibliographic reference: Melberg, Hans O. (1997), Why don't people
believe that free trade is good?, http://www.oocities.org/hmelberg/papers/970913.htm]
Why don't people believe that free trade is good?
Four mechanisms that distort our beliefs
by Hans O. Melberg
Introduction
Free trade is almost always good. Theoretically this was proven by David Ricardo almost
200 years ago (comparative advantage), and empirically it seems true to say that the world
has experienced most growth when free trade was the rule. Yet, many people fail to
understand the free trade argument, and they often support protectionism. Thus, the
question I want to examine is this: Why do so many people believe that free trade is bad
when economists have showed that free trade usually is good?
Before I answer this question, I must make one qualification. I do not want to turn
this into an essay about the economic theory of free trade. Obviously, I need to say
something about this theory, but the main focus here is not whether free trade is
good or bad, but why people hold the beliefs they do about free trade. For instance, there
are several respectable theoretical arguments against free trade, such as when market
imperfections create supra-normal profits (Airbus vs. Boeing being the standard example).
My focus is not on those that use these arguments, but on the intuitive beliefs of most
people. In short, I want to examine several cognitive mechanism that I believe partially
explain why people believe free trade is bad.
My argument is short and simple: That beliefs about free trade are shaped by a number
of (cold) cognitive mechanisms which leads to a bias against free trade.
1. Zero-sum bias
People commonly think that one man's (or country's) gain, must be another man's loss. With
this premise merchants must be selfish people who benefit at other people's costs. As an
example of this old attitude, one might quote St. Jerome who wrote that "All riches
proceed from sin. No one can gain without another man loosing." (as quoted in Viner
p. 40).
Still, one might raise two questions. First, why did (do?) people base their beliefs on
a zero-sum premise. Second, even if one thinks about wealth as a zero-sum game, it is not
immediately obvious that one should subsidise export and make import difficult. A zero-sum
belief should make people want to import as much as possible and export as little as
possible. Why, then, do merchantilists and modern strategic traders promote export and
discourage import? The answer lies in people's conception of wealth. The mercantilists
believed that precious metals was the true measure of wealth, not the amount of goods in
themselves. Thus, since export increased the store of precious metals, and imports
decreased this store, export became good while import became bad.
What about the first question - why do people believe that trade is a zero-sum game?
One suggestion, made by Jacob Viner, is that people reasoned by analogy from power.
According to Viner, there is a constant amount of power to be shared, so if I increase my
power this must always decrease somebody else's power (but see Jon Elster for a more
complex picture). By analogy people then concluded that wealth must have the same
property: If somebody's wealth increased, another person's wealth must decrease. From this
the inference went to countries: if the wealth of one country increased, it must decrease
in another country. Thus, one possible explanation of the zero-sum bias, is incorrect
analogous reasoning.
2. Money fetishism
When people today say that buying imports is like "sending money out of the
country", this reveals that people of today, like the mercantilists long time ago,
commit the fallacy of using the amount of money as a measure of wealth. The merchantilists
could, perhaps, be forgiven for believing this since their money was precious metals which
has some intrinsic value to many people. Today, however, we use paper-money with no
intrinsic value. Hence, to say that import is like sending profit out of the country,
reveals a fundamental misunderstanding about money. It is not valuable in itself. In fact,
what could be better than receiving goods in return for plain paper (i.e. imports)!
The very fact that people believe that money is intrinsically valuable requires some
explanation. Once again, some kind of cognitive mechanism seems required. For instance,
Karl Marx spoke of commodity and money fetishism. Commodity fetishism, as explained by Jon
Elster, is "the belief that commodities have value in the same sense that they
have weight or colour." (Making Sense of Marx, p. 96, emphasis as in the
original). However, value and colour differ since colour is an inherent property, while
value is a relational property. The difference can be explained with an example: To say
that "A is x cm tall" does not require comparison with another object, however
to say that A is taller than B is a relational concept. Nothing is "taller" in
itself (this example is taken from the mentioned book by Elster). Since most people do not
make this rather sophisticated distinction, we sometimes think of relational properties as
inherent properties. In this way, money is viewed as having value in itself.
3. Concentrated costs, distributed benefits
A third reason why people are wrong about free trade, is that the costs are concentrated
and highly visible, while the benefits are almost invisible and widely distributed. To
open for free trade in textiles has very visible consequences, since people in the
domestic textile industry will be unemployed. Whole communities might be hard hit if they
depend on the income from one large textile factory. The benefits of free trade, on the
other hand, are less visible. That a lot of people get a little cheaper clothes is
significant in aggregate, but for an individual it is not that significant. In sum, at the
individual level there is an asymmetry in the perceived costs and benefits of free trade.
There are two possible consequences of this asymmetry. First, the public choice
conclusion that pressure groups for protection is stronger than free-trade groups. This is
so since it is difficult to organise a group when each individual only benefits a little,
while it is much easier to organise groups when the individual gains are large (such as
for people who might loose a job if the protection is lifted). Second, the asymmetry might
affect people's beliefs. As demonstrated by Kahneman, Slovic and Tversky in Judgment
Under Uncertainty: Heuristics and Biases people often commit (systematic) mistakes
when forming their beliefs. One such mistake could be that people focus more on the size
of the effect than the number of people affected [Similar to the effect observed by Slovic
in the mistakes committed by people when choosing between a p-bet and a $-bet: People
focus more on the dollars than the probabilities although the two clearly has to be
multiplied to see which lottery has the highest payoff].
4. Indirect links (Short Run vs. Long Run confusion)
A fourth problem in belief-formation, is the failure to take account of indirect effects
(third variables). To give a simple example, most people believe that pedestrian-crossings
is a good idea. However, recently a report argued that the number of accidents involving
pedestrians had increased after the introduction of pedestrian crossings. The reason was
that people became less careful after the introduction of the crossing. Thus, a third
variable intervened to reverse the commonly believed effect (reduction of accidents) of
pedestrian crossings.
The third effect involved in the free trade dispute, is that the costs of free trade is
changed over time. For instance, the elimination of protection for the textile industry
will most likely make some textile workers unemployed. However, free trade also implies
that the real incomes of a lot of people is increased (since they get cheaper clothes).
Being able to buy cheaper clothes, they will have more money to spend on other goods.
Thus, demand will increase in some sectors, which in turn will need more labour. Hence,
those who become unemployed in the textile industry, can get jobs in other sectors after
some time.
Of course, the qualification "after some time" is quite significant. If the
adjustment period is very long, then one might argue that the costs are quite high (even
temporary costs are real costs!). After all, the Polish farmers cannot become computer
programmers overnight. [Note: there is a parallel here to Elster's discussion about
distinguishing between equilibrium effects and transitional effects. See his discussion of
causation in Tocqueville and the article The Possibility of Rational Politics.]
Testing these explanations
The discussion of the four mechanisms described above do not prove that people's believes
about free trade are actually, and significantly, affected by cognitive mistakes. To do so
one must conduct empirical studies of what people actually believe (Do they really believe
that free trade is often bad?). Moreover, one would have to trace the links between the
mechanisms and the beliefs (Does the zero-sum bias exists and are people's view about free
trade really influenced by this, and to what extent). To do this, one might use
questionnaires or conduct simple experiments (see Testing cultural explanations for
more on this topic).
One could also investigate the internal relationship between the mechanisms. Are they
all needed to create the mistaken beliefs about free trade (in the same way that all the
ingredients of a cake are needed to produce the flavour)? Or, are some mechanisms more
important than the others? And, maybe the mechanisms are related (that one is
"deeper" or the "cause" of the other). These are questions that could
be investigated empirically.
Conclusion
So far I only have a story, some anecdotal evidence, and some speculative thoughts. I do,
however, believe that the topic is important enough to merit further investigation.
Certainly, the larger topic, how our beliefs are affected by mechanisms that distort our
judgement, is important in the sense that an awareness of these mechanisms can make our
beliefs more correct and increase our welfare. Free trade should be a prime example in
this respect.
Sources
Elster, Jon (1985), Making Sense of Marx, Cambridge: Cambridge University Press
Kahneman, Daniel; Slovic, Paul; Tversky, Amos (1982/1994), Judgment under Uncertainty:
Heuristics and biases, Cambridge: Cambridge University Press
Krugman, Paul (1994), Peddling Prosperity, New York/London: W. W. Norton &
Company
Viner, Jacob (compiled by Douglas A. Irwin) (1994), Essays on the intellectual history
of economics, Oxford: Princeton University Press
Afternote Do economist think differently than most other people about free
trade?
A few facts
89% of economists in the US think trade agreements between the U.S. and other countries is
good for the economy, compared to 55% of the general public. Only 3% of economists think
trade agreements are bad for the economy, while 28% of the general public think so (p.
111). 68% of the general public think that one reason why the economy is not doing as well
as it could, is that "companies are sending jobs overseas". Only 6% of
economists agree (p. 114)
Source: Blendon, Robert J. et. al., "Bridging the Gap Between the Public's
and Economists' View of the Economy", Journal of Economic Perspectives, Summer
1997, vol. 11, no. 3, pp. 108-118.
In another survey, 95% of economists in the U.S., and 88% of international economists,
supported, or supported with qualification, the proposition that "tariffs and import
quotas reduce general economic welfare."
Source: Frey, Bruno et. al. (1984), Consensus and Dissension Among Economists: An
Empirical Inquiry, American Economic Review, vol. 74, pp. 986-94
[Note for bibliographic reference: Melberg, Hans O. (1997), Why don't people believe
that free trade is good?, http://www.oocities.org/hmelberg/papers/970913.htm]