TPP and the Economics 101 ideology

25 May, 2015 at 10:01 | Posted in Economics | Leave a comment

economics-101I’ve written several times about what I call the Economics 101 ideology: the overuse of a few simplified concepts from an introductory course to make sweeping policy recommendations (while branding any opponents as ignorant simpletons). The most common way that first-year economics is misused in the public sphere is ignoring assumptions. For example, most arguments for financial deregulation are ultimately based on the idea that transactions between rational actors with perfect information are always good for both sides — and most of the people making those arguments have forgotten that people are not rational and do not have perfect information.

Mark Buchanan and Noah Smith have both called out Greg Mankiw for a different and more pernicious way of misusing first-year economics: simply ignoring what it teaches — or, in this case, what Mankiw himself teaches. At issue is Mankiw’s Times column claiming that all economists agree on the overall benefits of free trade, so everyone should be in favor of the Trans-Pacific Partnership, among other trade agreements.

This is what Mankiw writes about international trade in his textbook (p. 183 of the fifth edition):

“Trade can make everyone better off. … [T]he gains of the winners exceed the losses of the losers, so the winners could compensate the losers and still be better off. … But will trade make everyone better off? Probably not. In practice, compensation for the losers from international trade is rare. …
“We can now see why the debate over trade policy is often contentious. Whenever a policy creates winners and losers, the stage is set for a political battle.”

Yet, in his recent column, Mankiw says that opposition to free trade is because of irrational voters who are subject to “anti-foreign,” “anti-market,” and “make-work” biases. He doesn’t mention what he said clearly in his textbook: opposition to free trade is perfectly rational on the part of people who will be harmed by it, and they express that opposition through the political process. That’s how a democracy is supposed to work, by the way.

Mankiw’s column is a perfect example of how ideology works. It provides a simple way to interpret the world — people who don’t agree with you are idiots or xenophobes — while sweeping aside inconvenient evidence to the contrary. And first-year economics is as powerful an ideology as we have in this country today.

James Kwak

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