11 Big Myths About the Economy That Are Destroying America
Continued from previous page
Myth 10: Trade is always win-win.
That trade always benefits both parties is perhaps the most fundamental dogma that people take away from their Econ 101 courses. In discussing trade theory with students and politicians, academic economists use fairy tales rather than history. There is the fairy tale about comparative advantage: England was good at producing wool, Portugal wine, so they trade and both are better off. There is the fairy tale about how because market transactions are always voluntary and always beneficial that trade, being simply a market transaction across borders, is always win-win.
But Econ 101 never explains how nations like America, Britain, Germany and Japan have used national industrial policies over the past century to become industrial powerhouses. And Econ 101 never explains how foreign mercantilist practices, like those China is embracing, can hurt the U.S. economy. Higher-level students are sometimes introduced to the complexities of real-world trade, but academic economists fear that sharing nuances with the general public would unleash an epidemic of know-nothing protectionism.
But for most of the production of traded goods and services, comparative advantage is meaningless – the Koreans and Japanese are not good at making flat panel displays because they have a lot of sand, they are good at it because their corporations and governments targeted it for competitive advantage. Moreover, corporations locate their subsidiaries in particular nation-states to take advantage of local government subsidies and tax breaks or increasingly because of government requirements to produce locally. Econ 101 to the contrary, the location of factories and innovative research complexes is not determined by comparative advantage. Increasingly it is the artificial outcome of negotiations among multinational corporations and territorial states. And the outcome of this “free trade” can be detrimental to the U.S. economy if it hurts, as it has, key U.S. high value-added industries.
When the U.S. economy faced little competition and was largely based on industrial mass production industries, it was perhaps not so bad that policymakers relied on Econ 101 as their guide to economic policy. But in a complex, global, technologically driven economy in which nation-states compete to capture markets and key links in global supply chains, relying on Econ 101 is like a physicist today relying on Newton. It’s time for economists to fess up and admit that theirs is not a science and that what passes for Econ 101 is largely misleading. But the public, the media and politicians shouldn’t wait, for it may be a long, long time coming. Rather, they need to understand that a dumbed-down Econ 101 version of neoclassical economics no longer should serve as a road map for economic policy.