Russ Roberts

Munger on Fair Trade and Free Trade

EconTalk Episode with Mike Munger
Hosted by Russ Roberts
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Munger.jpgMike Munger, frequent guest and longtime Econlib contributor, speaks with EconTalk host Russ Roberts about fair trade coffee and free trade agreements. Does the premium for fair trade coffee end up in the hands of the grower? What economic forces might stop that from happening? They discuss the business strategy of using higher wages as a marketing strategy to attract concerned consumers. They turn to the issue of free trade agreements. If the ideal situation is open borders to foreign products, is it still worthwhile to negotiate bilateral and multilateral agreements that requires delays, exemptions and a bureaucracy to enforce? What is the cost of including environmental and various labor market regulations in these agreements?

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Highlights

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Podcast Highlights
HIDE HIGHLIGHTS
0:36Intro. Fair Trade coffee. Idea is that coffee farmers are exploited and don't get enough of the price, so by paying a little more voluntarily at shops that offer it, the farmers will get some or all of that premium. But how much of the premium goes to the farmers? To guarantee the input price, raising the final price doesn't work. Tips handed directly to the farmer would work. Premium not exactly same as a tip: not necessarily for excellent coffee, but for the lifestyle of the farmer. Certain number of people growing coffee. Increase in price will be dissipated by rent-seeking. People will spend resources trying to win the extra premium.
8:06Wal-mart example: People don't make enough money is the claim, exploited. $9/hour is average at Wal-mart, even though above minimum wage is still a difficult lifestyle, $18,000/year. Thought experiment: tip jar, voluntary welfare payment. Condescending, but maybe the worker would appreciate it. As a result of this program, workers are earning, let's say, $12/hour, by generosity of shoppers. Job gentrification. The people who would have taken $9/hour are no longer competitive for those jobs. Or it might lower the wage at Wal-mart so that the total goes back to $9/hour. If there became social pressure to leave money in the tip jar, many people might shop elsewhere. Empirical question: do enough people really enjoy paying more. Costco brags that they pay more than Wal-mart. Probably get slightly higher quality worker. Voluntary minimum wage gets dissipated through supply side responses.
17:19Growth and development model. Suppose you come up with a recipe for how a developing nation can become wealthy and prosperous. Is your goal to keep a lot of the population in agriculture? Probably not, because agriculture is just much harder for division of labor, the big source of wealth, to be used in. Subsidizing coffee farmers creates a kind of zoo, farmers I can go visit. If you work in a market that doesn't pay a lot, you need a different kind of employment. U.S. agriculture is very capital-intensive, very little employment but lots of food, very productive. Coffee is a hand-business, hard to harvest mechanically. What else could we do? Trade agreements might work. Are there artificial barriers that keep monopoly profits as middlemen? Government is trying to keep the price down. What else could we do? We could drink more coffee, say everyone doubles his coffee consumption: drink one, throw one away. That would increase the demand, but would it be better than the current system? Wasting resources, though, like Bastiat's "Seen and Unseen," is never a good idea, makes world poorer, though it might increase coffee farmers' welfare. Buying stock in coffee companies would raise their wages, though, because it would expand factory processing of coffee, raising demand for farmers to supply enough coffee for the factories. Or farmers would get factory jobs, either way raising their wages. Bruce Bueno de Mesquita, foreign aid, international aid seems to help leaders and thugs more than the citizens. So maybe reducing foreign aid might help the farmers by doing less to solidify the power of the leaders. Giving away used clothing decimates domestic clothing industry. Lifting people outside of poverty is a fool's game, depressing implication: do nothing. Hayekian: we don't have the knowledge to make these kinds of changes. First rule: Do no harm. Peter Bauer, From Subsistence to Exchange. Theory of development. Milton Friedman: It's impossible to do good with other people's money. Referring to incentives involved.
33:57Free Trade Agreements. Preserves some of the control of rewarding countries, but not as direct aid. Provides access to the market. Shoe example: makes our consumers better off. Trade makes both sides better off in economics, but many people instead argue that free trade agreements make both sides worse off. In upcoming election sprint, we'll hear a lot about this. Benefit to foreign nations is not that they would get to sell us stuff, but that they would get to have some of our stuff. Current system of bilateral or multilateral negotiations is mercantilist: we will both be better off. It's not like we will be giving up something. Unilateral is first best on economic grounds. Trade agreements are only second best, preserving ability to be a nanny.
40:52CAFTA, tariff-free trade, argument is that it's good for both sides, but when we negotiated it we specified certain products to take them out of the list to be traded freely: sugar lobby in U.S. said it had to include an exemption for sugar. It's not really a free-trade agreement at all. One argument is that economists should in fact oppose free-trade agreements because they bureaucratizes trade and also puts the U.S. President in awkward position selling and backing a discredited mercantilist idea. Friedman hated these long agreements. Other view is that they move us in the right direction. Worker Adjustment and Retraining Notification Act, WARN, 1988, requires 60 days' notice before a company leaves the U.S.--to protect loss of jobs. By that argument, China actually lost the most manufacturing jobs; though those people got other jobs. Problem of how you count; we count only the lost jobs, not the gained ones. Increased productivity means lost--displaced--jobs during transitions. WARN act provides money for retraining.
49:21But why only pick transitions associated with trade? In last 30 years, U.S. manufacturing has been reduced as a source of employment but has increased in productivity, doubled production. Turnover in labor force. U.S. economy in a given quarter churns jobs all by itself. Trade piece is tiny by proportion. Job loss is part of dynamic process. Hayek, two kinds of security. Unemployment insurance helps with transition. But don't want to guarantee forever. Environmental and safety regulations: should we require developing countries trading with us to have the same restrictions as U.S. on grounds that it will be good for them and if they don't, trade won't be on fair playing field because we'll be more restricted than they are. These policies reduce the opportunity for division of labor. These policies are luxury goods, regulatory policies that would be too costly if you are a poor country. In a poor country workers might prefer less safety and higher wages. Arrogant. Bootleggers and Baptists argument: trying to keep jobs in certain sectors in the U.S. and we are gussying it up by making it look moral.

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COMMENTS (49 to date)
Floccina writes:

I am so glad that you mentioned what would happen if Wal-Mart raised wages. In every Wal-Mart that I have been to it seemed that the Wal-Mart employees are obviously not the same as the employees at places that play more.

Max writes:

Hey Russ (Dr.Roberts?... as you prefer)

I didn't quite understand the argument against giving out our surplus "whatever good" over to 3rd world countries. It would seem that if we dumped our excess goods over there it would free up their labor force to work in other sectors and would increase their total output (with the include goods from us) instead of decreasing it. For example, I don't happen to have a maid, but lets assume a maid service showed up at my door and told me that they'd send some maid every Tuesday and Thursday to do all the maid-like tasks in my house (the dishes, the laundry, dusting and vacuuming, etc.). I'm fairly certain that my productivity and standard of living would increase were this to happen, as I can now specialize further in some other field - any other field in fact - and be better off.

Am I missing something?

Thanks by the way for a wonderful Podcast, I'm an econ/philosophy/science student and I absolutely love catching you every Monday, a long-time listener first time commenter you could say.

Brad writes:

A historical look at the spread of WalMart coinciding with 1990s welfare reform and Hillary Clinton's position on its board of directors should undercut all these claims of WalMart underpaying workers. These are exactly the kinds of jobs everyone wanted welfare recipients to go out and get. Also, my off-hand observations tell me that a Costco needs fewer employees per square foot (or per dollar of revenue) than a WalMart does. Of course more productive workers will command a higher wage. I'd be interested in seeing data culled from quarterly reports that supports my observation.

Nathan writes:

Max, imagine that you received the maid service, but instead of coming on a regular schedule the maid showed up unpredictably; sometimes at 3am, sometimes 10 times a week, sometimes once a month, maybe showing up in the middle of a dinner party (a dinner party you cleaned up for because you had no idea when the maid would show). You can imagine your net positive could turn into a net negative in this case. Similarly, I that Roberts and Munger were alluding to the capriciousness of foreign aid as a significant drawback; and that it is unlikely for that aid to be anything but capricious given how little information the donors have about the recipient's situations.

Max writes:

I forgot to mention that the maid was coming for free, but I can see that you realized I meant to say that Nathan ;)
Yes, I can certainly see how if the maid came at random intervals and did different jobs in different ways each time it would probably work out to a net-negative. To stick with the analogy though, I would still welcome it - as I could always choose to not answer my door when I thought her contribution would be a net-negative at that time.

Would it make sense then to say that : if foreign aid was given non-capriciously, with set amounts at given intervals, and with accountability (to make sure that local cleptocracies weren't taking advantage of it) that it would be a net benefit? Or would it still do more harm than good?

Nathan writes:

Max, I can think of a couple ways to answer the question in your second comment.

1) If all your conditions were met then it could be a net benefit; affecting the economy like a natural resource, that is, an input to the economy that is there independent of the organization and skills of the people and capital.

2) If my uncle had wheels and pedals he'd be a bicycle. :)

Perhaps it gets back to the Friedman quote that no good can be done with other people's money.

Paul writes:

When i was in high school i knew some girl who had a snow hat which was made in a third world country and she paid a fair trade premium for it, i think it cost around 30$. I remember asking her "wow, that must be really great for the people who make those, I bet the people who make normal hats wanna get that job" and she was like "i guess i never thought of it like that"
:P

Max writes:

Well put Nathan. As Russ likes to say, I am sympathetic to this view ;)

Drambuie_man writes:

Nate&Max> I think part of the argument as well as from an economic development standpoint. To take the "maid" idiom, if you got used to the maid from birth, you may never have learned to wash your own clothes, or make your own coffee. In short you would have become the national equivalent of Paris Hilton (or perhaps her public persona).

To bring it back to the podcast, garment manufacturing is one of the lowest rungs of development. The same can be said for basic food processing to preserve produce on a large scale. If you give clothes and food, an economy may never go through this development, and as a result may reach any higher without this stage.

Wes Johnson writes:

Interesting discussion as usual, professors.

Maybe you can clear up what I think is some inconsistency in your views, as expressed in this podcast and elsewhere.

You make two claims, both of which I agree with individually, but I am not sure they are consistent.

First, you oppose protectionism. If I may paraphrase, if lower cost widgets are made in other countries, we are made wealthier by taking advantage of the lower costs rather than imposing tariffs to "level the playing field" and "protect" domestic widget producers.

On the other hand, you note in this podcast and elsewhere that the reason that foreign aid rarely if ever works to do anything but perpetuate the need for aid is that the influx of aid destroys the local economy, as local producers can not compete with the free foreign aid, and the economy as a whole is thereby worse off.

It seems to me that protectionists make essentially the same argument: domestic producers can not compete with the influx of cheaper goods, and the economy suffers as a result.

So, aren't you really arguing for trade barriers for some countries so that they can be protected from free money and goods?

Wes Johnson writes:

Interesting discussion as usual, professors.

Maybe you can clear up what I think is some inconsistency in your views, as expressed in this podcast and elsewhere.

You make two claims, both of which I agree with individually, but I am not sure they are consistent.

First, you oppose protectionism. If I may paraphrase, if lower cost widgets are made in other countries, we are made wealthier by taking advantage of the lower costs rather than imposing tariffs to "level the playing field" and "protect" domestic widget producers.

On the other hand, you note in this podcast and elsewhere that the reason that foreign aid rarely if ever works to do anything but perpetuate the need for aid is that the influx of aid destroys the local economy, as local producers can not compete with the free foreign aid, and the economy as a whole is thereby worse off.

It seems to me that protectionists make essentially the same argument: domestic producers can not compete with the influx of cheaper goods, and the economy suffers as a result.

So, aren't you really arguing for trade barriers for some countries so that they can be protected from free money and goods?

The other Max writes:

On Fair Trade Coffee:

The discussion in the podcast about "Fair Trade" coffee reminded me about an anecdote I heard from the Chairman of Economics at Indiana University. He said that a grad student went to South America for some field research and came across a registered fair trade coffee distributor. The distributor's job, which requires a "fair trade" license, is to buy coffee that is fair trade approved from a producer and then sell the coffee to a foreign buyer who altruistically values the fair trade premium. The grad student observed that the buyer went up and down the market looking at both regular coffee and fair trade coffee and made a rational, albeit questionably moral, decision: buy the regular coffee, mark it fair trade, then sell it to the altruistic buyer, and keep the unusually higher profit.

I found this scheme rather hilarious, as did the econ professor, however when I told a Labour Studies professor about it she was horrified. Her response? "Well, he shouldn't be able to do that!" Clearly, the idea of utility maximization is missing in the labour studies department.

nick writes:

Your interview with Mike Munger was a lot of fun, as the previous Munger episodes have been. I love Mike’s irreverent, think-what-you-may wit. I think, however, I spotted at least one error, two if an inconsistency counts as an error. First, Mike said breaking lots of windows would create lots of jobs. But wasn’t one of Bastiat’s key points with that story that there would be no net new jobs created; jobs would merely be diverted from other businesses to glaziers? If I spend money to fix my window I can afford one or two fewer tickets to the theater and one less extra gets a part in the production.

The inconsistency is Mike’s argument that U.S. subsidies of agriculture make certain countries worse off because the U.S. subsidies make them unable to compete in agricultural products that they otherwise would be able to compete in. That’s intuitively appealing and I have always accepted that. But wait a minute: earlier in the interview you were both agreeing that agriculture was inherently inefficient, that is, division of labor is harder to come by, and that it would be good to encourage coffee farmers to get out of the coffee growing business and into more productive industry. Why doesn’t the same logic hold for the farmers in countries to whom we give food or to whom we sell subsidized food? The countries consumers get cheaper food, and they have more money to create jobs in other sectors where scale economies and division of labor mean higher productivity and wages.

shawn writes:

one thing to add to max and nate's discussion:

max...your house would be particularly helped out by the introduction of a maid (with caveats as nathan so aptly pointed out) only because you are skilled enough to do something else.

when a maid shows up at at a maid's house, and that maid doesn't have any other things to do, do you think that's a good thing for her?

nick...you understand exactly what munger was saying about the window....his point would be the same as yours, he was being sarcastic and assuming everyone would get the joke (as you did, but you didn't understand you did). :)

nick (and also wes), the inconsistency is only inconsistent if you assume that there is capital in poor countries TO invest in other industries that could provide greater returns on investment via division of labor. there IS (relatively) no capital in countries receiving foreign aid, and no job skills by its poor farmers that could be used much of anywhere else (that's a major argument against pricing out local farmers with 'free' food: they are the first tier in industry, and the little surplus they create can be used to barter for other goods--seeing a division of labor starting?). In fact, i'd bet that most of these poorest countries (or governments thereof) wouldn't even welcome in a nike or other cheap labor utilizing megacorporation that could actually do them some good (and our local anti-walmart crowd would complain that we were exploiting them if the megacorp went in).

now...i'm an architect, not an economist (and I didn't stay at a Holiday Inn Express last night), so I'd welcome any clarification on points I made here.

PSB writes:

Hi Russ, Just discovered your econtalk webpage it is great! I have a few observations:
1) Regarding your Wal-Mart tip jar analogy. The answer is most certainly lower wages. The whole restaurant industry works on that model. (I have worked in the restaurant industry in two states Georgia and New York. I imagine it’s the same in other states). Restaurants can pay tipped employees less than the minimum wage. Last time I checked in GA the minimum was 2.35 per hour. Anecdotal evidence suggests that almost all restaurants pay the minimum. Starbucks baristas are generally not considered tipped employees so the tip Mike leaves is truly gravy.

2) I would be interested in hearing from someone who knows the empirical literature discuss the impacts of environmental and labor standards on the economies of developing countries. The argument is made that clean air, water, and minimal workplace safety standards are luxuries and for those countries with a middle class. Therefore we do more harm than good by shutting down or boycotting firms and countries we feel exploit labor. Seems like those are the same arguments that were made in this country nearly one hundred years ago when “do-gooders “ attempted to prohibit child labor, require safer work environments, and encourage other worker protections. I’d like to see some empirical evidence that suggests that indeed it was the creation of the middle class that encouraged safer workplaces. It seems possible that safer work places with greater job security may have also encouraged workers to invest in human capital such as education; this would increase their productivity and allow for greater wages. Thus the arrow of causation might run in the opposite direction.

Keep up the good work
PSB

Andrew Stewart writes:

Russ:

The other night Mitt Romney suggested that maintaining price supports on agricultural products was a strategic question, like petroleum. He suggested that without these supports we would be prone to be held hostage to foreign producers as we are with oil producers today.

As a free trade supporter, I am discouraged by an argument made by an otherwise conservative politician who is so willing to compromise on sound economic arguments that ends up injuring us. Minimum wage and agricultural price support policies are two of the most prominent of these.

Brian-NJ writes:

Hello, I am a neophyte to these types of economic issues and educational podcasts and thank you for providing a wonderful opportunity for me to learn and become involved with the discussions. I urge anyone to correct me or contest me for the sake of bettering my understanding of these topics.

With that being said I am also an advocate for human rights. When Bill Richardson was asked by Wolf Blitzer during a debate which was more important, national security or human rights, he stalled a moment with the deer in headlights reaction but ultimately answered human rights. Other candidates did not echo this decision. I think the same can be asked of free trade and human rights. My opinion is shared on both topics which is, human rights is national security, human rights is free trade, there is no distinction. I will no longer refer to national security. You cannot have a productive business without productive workers, if there is no shield on that blade and a worker looses a limb production quotas will not be met, and possibly medical expenditures will impact costs. I understand a hungry worker will choose wage over working in a safety cage, but we found out in this country that safety regulations proved cost effective. I know there are a plethora of safety regulations within OSHA that may seem insignificant to a starving third world countryman seeking employment, however desperation breeds negligence, increasing the odds of injury or death, which in turn expands the cost of doing business, with a far worse fear to business, the possibility of forming unions amongst the agitated workers, in turn sending prices soaring. With minimal institution of safety regulation you enhance the odds of not having injured disgruntled workers, greatly reducing the possibility of unionized labor (and in some cases unofficial/illegal unionized labor) keeping cost at a minimum with a slow and gradual increases. If everyone was in a healthy environment there would be no reason to force any drastic changes.

Unfortunately, it is my opinion that hungry people will neglect their safety if it means feeding their family, this lowers their value as an investment. Safety might not be of interest to developing foreign business, and yes it would probably take an established middle class to have those regulations implemented, but I think we can save quite a bit longterm on a steady market as opposed to a few years from now when an established trade is made but prices soar due to the emergence of the supposed middle class and their demands on safety regulation(I could only imagine how inflated the demands would be at that point). Perhaps the free market will allow trade to shift to a new market; another developing country poised to manufacture the same goods, one whose situation is similar to the initially described developing nation's was years earlier, but wouldn't that create a strain on the people? Creating unemployment and possibly affecting their human rights(war, riots,etc.) possibly making it even more difficult to establish future relations thus ending the super lateral free market?

It seems a small price to implement standards on safety in developing nations. It could be a time limited regulation where the developing nation must adhere to a certain set of guidelines for ten years. After this period the restrictions are greatly reduced to restrictions on extreme hazards, which then end within five years at which point the decision is left up to the particular state. This gives ample time to develop a model for that countries safety guidelines, and for the workers to be well educated on the dangers included in the working environment.

I've always thought of the free trade thing in these terms. Its like going to country X and asking someone if they want to be involved in a nascar race which no matter where they place they make money. Unfortunately for that person they hardly ever drove a modern car and strapping on a five point harness is up to them.

just a thought.

Jeff Henderson writes:

Brian,

While I think I have a different point of view, I really admire your open-mindedness.

First off, I actually think that safety regulations are a violation of human rights. A human being has an inalienable right to do what he or she wants with his or her body, provided that he or she does not violate anybody else's rights. So if a worker wants to forfeit a safety measure in order to gain higher wages, and the employer complies, it would be a violation of the worker's rights to enforce safety regulations that would prevent the worker from gaining these higher wages.

Secondly, I agree with you wholeheartedly that safety measures can actually increase productivity in many cases. In these cases, businesses in a free market that implement these measures will certainly outperform competitors that that do not (because the measures increase productivity). So in cases where safety measures increase productivity, it is unnecessary for the government to mandate them.

But it is also possible for safety measures to decrease productivity. For example, it would be an improvement in safety for all maids to dress in a head-to-toe hazmat suit, but it would hurt productivity in many ways. The question in these cases is whether the trade off between safety and productivity is worth-while. The only person who is qualified to make that decision is the worker whose safety is affected by the measures and whose wages are affected by the productivity. The decision the worker makes is by definition the best decision, because who else can determine the value of unit of the worker's safety in relation to a unit of wage?

John Henry writes:

Another great Podcast. I particularly like the way you and Charlie Munger play off each other here and in other podcasts. Great synergy.

I have two comments

1) As most people do, you seem to view Sam's Club and Costco as being in the same business or the same retail sector. Actually, they have very distinct business models. Sam's Club targets small to medium sized businesses and tries to be their warehouse. Costco, on the other hand, targets individuals who like to shop infrequently or have large families and like to buy in quantity. At it's heart, though, Costco is a retail store, Sam's is a wholesale store. This has a lot to do with the quantity and type of employee each has.

Sure, there is lots of overlap. But they are not the same. Or even that similar. (I am a member and frequent shopper at both stores)

2) One of you suggested buying 2 cups of coffee and throwing one away. My late father in law lived in Puerto Rico all his life (as I have since '71).The main industry in PR used to be sugar cane and in the 30's till perhaps as lat as the 50's it was a custom to put lots of sugar in coffee (that custom survives) but to also throw a spoonful of sugar on the floor. There was an expression which I now forget but it was the Spanish expression of "For the cane workers" or something like that.

So, in this day and age your idea may sound a bit ludicrous. But it is not ludicrous in some cultures and epochs.

I look forward to your discussion on immigration. Actually, I look forward to your discussion on anything!

John Henry

lowcountryjoe writes:

To Max, Nathan, and Drambuie_man:

Max, as much as I like Mike Munger – in full disclosure he is my favorite guest – I think that you’re on to something and I am quite surprised that Russ did not so much as raise even the slightest objection when Mike had said this [minute mark 28:50 through 30:05].

I understand the counter argument that Nathan makes regarding the inconsistent delivery of maid service – an analogy for a random delivery of clothing and food from altruistic providers to those who, absent the random deliveries, would produce it themselves for themselves. There are two counter-counter arguments to that; 1) Mike Munger used the words decimated domestic industry which would be hyperbole if the deliveries were really random or inflicted with the ‘make-work bias’ if the deliveries are very consistent [Russ Roberts’ own co-blogger, Don Boudreaux sums up why Russ should have objected when he wrote, “The economist understands also that jobs are a cost, not a benefit.”] 2) That if giving away surplus such as previously worn clothing or uneaten food is destructive to industries, assuming that the delivery of these were consistent and not filtered through tyrannical middle men and government, then the same could be said of charity, too. And I don’t think that anyone would make the claim that non-coerced charity causes net losses to charity’s beneficiaries.

But then I also understand Drambuie_man’s position: that charity can cause dependency and that such dependency will probably lead to sloth and a misallocation of resources that, when circumstances change, would cause unrest. The old proverb about teaching a man a fish as opposed to just giving him a fish is the best analogy I can think of here.

Still, after Russ had written the following as earlier as November:

Then there’s the mercantilist nightmare: We import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff?

It should seem that Russ would have been skeptical of Munger’s assertion of foreign charity [given the prior assumptions I outlined above] leading to net losses to foreigners even if some of their industries were decimated. Munger, though, is much too charismatic and deft with his humor to argue with and possibly even catch in an error to begin with. Perhaps Munger will be around shortly to respond to his critics and his defenders.

lowcountryjoe writes:

Link botch. The underlined portions of my last post were supposed to be links.

First web address: http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/boudreaux/s_310081.html
Second web address: http://www.foreignpolicy.com/story/cms.php?story_id=4044

Russ Roberts writes:

A number of you have raised the issue of consistency on how we talk about trade and aid.

First, I want to mention that Mike is out of commission for now, otherwise, he'd have been all over this discussion. When his schedule allows, I'm sure he'll have something to say on the topic. In the meanwhile, let me make a few observations.

Lowcountryjoe has the starkest example of my views on this: getting cheap stuff, or better yet, free stuff, expands your opportunities and makes you better off. That's why we trade and it's why we innovate. They are the ways to get more from less and improve our standard of living and the richness of life in all dimensions.

But of course, free trade isn't good for all Americans at every moment in time. If for some reason Japan wanted to send us free cars it would be very hard on workers and investors in the American auto industry. The example I really like is health care workers if we were able by magic to eliminate all disease and live to 120. That would be a glorious thing. In the short run, it would destroy a lot of jobs in the health care industry but eventually, they (and the talented people planning careers in medicine) would find other things to do and our measured financial well-being would be higher. If it happened overnight, the short-run effects would be very negative. But either way, who would stop this health care miracle in the name of keeping doctors' salaries high in the short run?

So trade, getting cheap stuff, makes most of us better off, but not all of us. In the long-run (and in America, the long-run is fairly short), economic change from all sources tends to raise the standard of living of almost all of us.

Now let's look at foreign aid. There are at least two kinds we'd want to distinguish. The first is sending money overseas that mainly ends up in the hands of autocratic leaders. In the podcast, we point out that this mainly benefits the leaders and their cronies. The more interesting case is food, say. Or cheap clothing.

Sending a poor nation free food on a regular predictable basis will eventually make that nation better off. In the short run, as in the case above, it will hurt farmers in that country. But as long as the food aid is predictable and persistent, they presumably would know to switch to other things and the recipient nation as a whole would be better off.

As some of you have pointed out, the food aid is not predictable or persistent. Still, it would seem to help poor nations even though some of the people (and they may be the poorest) may end up worse off in the short run. If labor markets are not very effective in that country, it may be quite difficult for people to move easily into alternative occupations and that would also be problematic.

I think those are the main issues--the unpredictability of the supply of aid, the likelihood it gets to the people you are trying to help, and the transition into alternative occupations even when the kind of aid is reliable.

I think there is more to say about dependency, but I will save that for another comment.

Bruce G Charlton writes:

Very enjoable and illuminating discussion.

But I think there may still be more to say on the Fair Trade phenomenon. A briefer critique, perhaps?

Over here in the UK Fair Trade has become a major, major aspect of moral self-expression for left-moderates: Fair Trade is essentially a religious practice (like recycling).

For examples, the Episcopelian Church (ie. The Church of England, with the Queen as its boss) is now primarily a Fair Trade organization so far as I can see (all its coffe mornings and meetings advertized as such, its newspapers full of Fair Trade discussion), the county of Cumbria (containing the Lake District - probably the most beautiful area of England) is now a Fair Trade zone, and my employer (Newcastle University) is compulsorily Fair Trade in its cafeterias - no other produce is avaialble if a Fair Trade product can be found.

The implicit assumption is that you approve Fair Trade unless you are evil. In practice, of course, when given the choice, people only buy Fair Trade exclusively when they are compelled to do so - but this compulsion is now regarded as not only justifiable but something worth boasting-about.

Ho hum...

Michael Munger writes:

Thanks to Russ for the assist. I have a herniated disk, and am taking drugs that have nearly convinced me I could fly to foreign lands without a ticket, or even a conveyance. Just FLYYYYYY.....

Ahem. Anyway, there are three observations I'd like to make about the "inconsistency" objections, which are in fact interesting.

1. In third world nations, selling used stuff, or food, to each other is an important activity. More significantly, clothing and nonperishable food items function as a store of value and medium of exchange, two of the key aspects of currencies. If we flood such nations with "free" food and clothing, we wipe out their tiny stocks of accumulated wealth, by inflating prices of all other goods in terms of clothing and food. True, we may improve their survival chances. But we make them utterly dependent on continued shipments of food and clothing, because we have wiped out the tenuous local system of saving, and the de facto currency. If their currency were sound, and their banking system allowed savings, the effect would be much less.

2. The unemployment rate in these countries is already extremely high, and the opportunity cost activity is...doing nothing, and just waiting on the next shipment. There is no "next best" employment, other than indigence.

3. Russ, as usual, has the key point. The #1 and the #2 problem would be fine, if the supply were consistent, predictable, and reliably stretching into the future. The problem for the street vendor is that you have sunk all your tiny capital, and maybe borrowed a few dollars, to get some shirts and work pants to sell in the market. The unexpected (and irregular) arrival of a ship of used clothing in the harbor wipes you out, bankrupting you. If the shipments were predictable, people could account for them, and the wealth of the country might well increase.

Nick writes:

Russ, I have been an avid listener for a number of months now. Thanks for spending the time and effort. I am someone previously uninterested in economics and now I find myself quite engaged.

If you take suggestions for topics there is one I'd like to offer.

Open source business models vs traditional. I am very interested to hear an economist point of view on this.

Thanks again.

Schepp writes:

Russ, Mike M, Max and Nathan,

I have been listening a long time and conversation with Russ and Mike are always my favorite. Great job guys and thank you for allowing this discussion. Mike's Museum comments were outstanding and seemed to sum up the prediciment. I agree with Mike again that removing trade barriers is the best way to benefit poor nations. However, when I heard the podcast, I thought the same thing Max concluded. I agree that free cloths will induce rent seeking, cronyism, uncertanty in delivery or dependence on free stuff and localized industry displacement. These negative factors will reduce the value create by the free stuff. I still think that the comments that lower price stuff(free) is a net negative is contary to Libertarian thought. I am unconvinced that the opportunity cost for time is zero. That is like saying the demand curve is zero sloped for labor in poor countries. If these negative costs exceded the value of the free stuff the poor would go back to making their own cloths.

My view free stuff is very inefficient and free trade much more efficient, but free stuff is not a net negative.

LowcountryJoe writes:

Mike,

My first reaction to your reply would have been to be skeptical about the food and clothing items taking on the characteristics of money. However, I believe you because it's you. But I cannot help thinking that you're stubbornly wedded to your position on this one. I just have a hard time seeing you work Bastiat in reverse and come to your conclusion -- the 'fixed window fallacy' where, after it was determined that the broken window needed to be replaced, the Glassier Fairy shows up and repairs the window before the planned economic activity (the fixing of the window) would be set into motion. And that the work of the Glassier Fairy causes a net loss to the store owner and the micro economy where the store owner lives.

For bullet number one, I concede that such a [Byrd] dumping of clothes and food would be inflationary. But, how inflationary would it be since food and clothing are dual use monies that will most likely now be consumed instead of used as a medium of exchange. And, would a new money take the place of the old money if enough clothes and food came into the economy through charity?

Is your bullet number two viwpoint the result of an absence of property rights? This makes a huge difference because you would think that an alternate use of potential production time would emerge as clothing and food needs were met.

I have nothing to say to bullet number three directly but, I will go rhetorical on you, Mr. Segue Meister: if you and I were resident citizens of this hypothetical country getting food and clothing through charity and if you were to bring up this third viewpoint and I called you a protectionist, would I at least be on to something there?

Mike Munger writes:

Yep, LowCountry Joe wins.

ONLY if there are no clear property rights to land, and not even clear transferable title to piles of clothes, would my claim work.

This would have to be a country with ZERO economic institutions, and rampant theft without any police protection.

Because, yes, as Joe notes, if nothing else having enough clothes and food simply MUST be a net positive.

And, they would be, in the sense that people would now have enough....food and clothes! The reverse Bastiat is a nice turn of phrase. I think I will use it as an example. Thanks for listening, and for such good questions. You are likely right: I am retreating from my position only after I have clearly been shown up!

with regards,
Mike

Russ Roberts writes:

Mike (and lowcountryjoe and others)

First, the currency/inflation issue is a red herring. Let's ignore that.

Second, I have read so much about the harmful unintended consequences of foreign aid that I've ignored the potential analogy to trade and the discussion here has made me think quite a bit, which is fantastic. So let me try and sort out the issues.

Lowcountryjoe asks--"if you and I were resident citizens of this hypothetical country getting food and clothing through charity and if you were to bring up this third viewpoint and I called you a protectionist, would I at least be on to something there?"

Yes, you ARE on to something but it's not quite analogous. I'll leave it up to you to decide if it's analogous enough.

Here's the issue. Let's suppose the US proposes to make a large one-time gift of a food to a poor country. You and I are residents of that country. You run a small business in the city. I am a farmer on the edge of subsistence. The food gift from the US will lower my income. It will make you better off. You are happy to have free food. I am not happy. Yes, I get some of the benefit of the free food in two ways--I get free food which is pleasant and you, having to spend less on food will be able to do something else with your money that might end up helping me. But the net effect on me is negative. I am worse off. Yes, the gains to you probably outweigh the losses to me. So the net gain monetary gain measured across all people in our country is positive. But the gains are not distributed equally.

Is someone in our country who opposes accepting the gift of food a protectionist?

Yes, and that is the sense that this story is analogous to standard trade discussions.

But, there is an important sense in which the two stories are not analogous.

The US is supposedly sending the food to "make the poor country better off." But the poor country is not a person but a collection of individuals. Their welfare is not bound up together with each other. As we've seen, the welfare effects are going to be very different.

So for me, the question is this--is US food aid to poor countries a good idea? If it impoverishes the poorest people in those countries and benefits those who are doing fairly well, I think that's an ineffective way to make the world a better place. It is not protectionist to decide NOT to make a voluntary gift that will harm the most vulnerable people in another society. This isn't trade. It's a targeted export designed in theory not for the benefit of the US because the US gets goods in return, but rather for the benefit of the recipients only. Deciding not to make that gift because of the distributional impact on the poorest members of the recipient country is certainly not protectionist. (And I recognize that the US gives foreign aid for all kinds of selfish reasons Check out the podcasts with Bruce Bueno de Mesquita. But what we're talking about is whether caring people should be in favor of sending food to poor countries.)

I oppose protectionism in the US for lots of reasons. The standard textbook reason for free trade is that it creates more benefits measured in dollars relative to the losses measured in dollars. I don't find this story persuasive. I think the argument for trade is richer and more humane than this utilitarian story. I try and explore these issues in more detail in my book The Choice: A Fable of Free Trade and Protectionism.

Having said all that, a perpetual, on-going gift of food will cause farmers in a poor country to turn to something else. Ultimately, most if not all of the people in such a country will become richer from that perpetual on-going gift, presuming, as Mike and I have discussed a bit above, that the labor market in the poor country is relatively flexible. But actual aid cannot be relied on like this. It is not consistent and on-going, but erratic. That must make life challenging for poor farmers around the world.

I've learned a lot from this discussion. Thanks for all the great comments.

Salaam Yitbarek writes:

Fascinating discussion.

To take it a step further, countries that are likely to be seen as needing food aid are indeed those that have:

1. Dubious property rights laws. For example, Ethiopia, where all land is government-owned and 'leased' out for private use.

2. Not 'ZERO', but quite poor institutions, economic and otherwise.

3. High levels of corruption, institutionalized or other.

4. High levels of unemployment.

5. Low levels of urbanization. In Ethiopia, for example, 80-85% of the population is rural.

6. Poorly developed labour markets.

Of course, theoretically, these factors at worst make the net effect of food aid slightly positive, but not negative.

But if you consider the political impact of food (or any) aid - resource curse, accountability issues, rent-seeking, etc. - then perhaps we tilt over to a negative net effect.

Michael Munger writes:

Gosh, maybe someday if *I* get to host my own podcast show, I too can declare an issue unimportant by calling it a red herring.

Until then, I'll just have to say this: RUSS IS PROBABLY WRONG ABOUT OTHER STUFF, TOO!

He is clearly wrong about this, and anyone who has spent time in the third world recognizes the problem.

If the point is that this is a different problem, then that's fair enough.

Overall, tho, developing institutions are fragile, and you can do real harm by not recognizing the near-money properties of lots of commodities.

I rise to rail about this partly just because it's the holiday season, and poking at Russ with a stick pleases me at this time of the year.

But it is also to point out the fairly similar properties of another fascinating reading that I bet ET readers will enjoy. And that is Radford's article in the 1945 ECONOMICA, "The Economics of a POW Camp."

In that article, you find that cigarettes served both as a consumable and a currency. And irregular shipments of cigarettes, from outside (in this case, Red Cross packets) caused real problems in the "economy."

One of classics of the literature. Check it out.

Oh, and Russ: Happy holidays! Isn't red herring a traditional Channukkuh dish?

Unit writes:

The problem, as Russ illustrates above, is that through foreign aid the US Government decides who wins and who looses within third world countries. The analogy is with welfare programs and redistribution, not with trade. It's a top-down solution versus a bottom-up one. Trade is a discovery process. I think the proof that LowCountryJoe's argument is flawed is that, if he were right, then one could conclude that the US is now "dependent" on cheap imports and "unmotivated" to create new-wealth, etc...i.e. all the ills that plague Third World countries should also plague the US which is definitely not the case.

LowcountryJoe writes:

To Mike:

What is this, Al Gore on an election night? I had thought your concession post looked dubious and I just got some confirmation.

I also like poking with a stick and will eat the red herring over the crow any day. By the way, the Jewish Festival of Lights is always spelled with eight letters. Anyhow, I thought I could use another analogy here, one you probably wont appreciate as much as I do (I’m an Oakland Athletics fan).

Let’s say I’m a third-tiered MLB team and you’re a baseball team in a higher-strata, maybe not first tier but pretty close. Now let’s say you just give me three young players; a major-league ready, right-handed, starting pitcher with some playoff experience to go with a mid-season call-up the previous year, a stud line-drive hitting machine, in A-ball, being compared to Pujols, and a AA left-hander with a live arm (when it’s not hurting) but a bad wing. Now, the only thing that I had to give back in exchange was a veteran Left-hander with a good reputation but, himself, with a bad wing – essentially, nothing! Did you hurt my third-tier team with you charity? Sure, you may have hurt some players in my farm system but I think there’s a net gain over here, wouldn’t you agree? Yes, I thought so; I prefer the cheese, too.


To Unit:

I’m not following you. You say my argument is flawed and it probably is, but I just do not see how you get this: “if [I] were right, then one could conclude that the US is now "dependent" on cheap imports and "unmotivated" to create new-wealth, etc…” from any argument that I had put forward. Can you reply again so that I can see what you’re seeing? I chose my words very carefully [not carefully enough to avoid typos, though] in my previous posts so as to put forth my main points so that they would not come back to haunt me. I want to see my error.

LowcountryJoe writes:

No Mike, it's worse. I had one player mixed up with another. Scrach the left-hander in AA. It was a major-leaguer. Right-handed relief pitcher with a fantastic slider and a low ERA.

How much did you decimate our market, again?

Schepp writes:

Russ and Mike,

Thank you, You have created a clamoring bunch of podcast economists. I am sure if any of us listeners/commentators could get as many folks as you have to listen to two of us discussing economics for an hour a week, Russ and Mike could surely find a much more substantive area of dispute. I appreciate the extended discussion and congratulate the community created by this institution for inspiring learning conversations.

Thank you again for your great work.

Schumpeterian writes:

Russ,

Quote: "If it impoverishes the poorest people in those countries and benefits those who are doing fairly well, I think that's an ineffective way to make the world a better place."

Are you making the argument that we should take from the rich and give to the poor? Someone who is well off should not receive the same treatment as someone who is not well off?

Why are the people that are "doing fairly well" doing fairly well in the first place? Doesn't this imply that they have found a good use of their talents, where as a "poor farmer" has not? Shouldn't the "poor farmer" be encouraged to try something else?

By giving away things that the giver doesn't value (old clothes and excess food) the giver is signaling to the recipient that the recipient should be focusing on producing something else. It’s a signal that the recipient does not have an advantage or is occupying a crowded industry. He’s a mediocre hunter in a society of hunters when he should be looking at being a deli manager (reference to an earlier podcast).

It seems like by not giving the food we are trying to short circuit "creative destruction" and maintain our "zoo". (Excellent analogy Mike! And I would bet extremely true.)

Nicholas writes:

Russ,

Thanks for bringing the discussion back down to earth here; I have just one addendum. You state that when we give to charity we receive no benefit. Surely this cannot be; the feeling of well-being we receive must be valued greater then the cash value of the cloths and food we donate or else no donation would occur.

But it raises an interesting question: what would happen if the Salvation Army opened branches all over Africa selling cloths donated from the US? If they were still able to underbid local new cloths manufacturers would this then be seen as a more efficient way to get cloths, or would it still be a negative distortion of the market?

And if it is positive, why does an influx to the US of cash instead of just happy feelings make it so?

Nicholas writes:

Max,

It is less important to imagine what happens when the maid shows up at your house, and more important to look at the entire housecleaning industry. For you, it may be only a slight convenience to have a free maid show up, however it stands to reason that people who regularly pay for maid services see it as laying somewhere on a continuum from highly convenient to a necessity. And it also stands to reason many people who never required maid services before will not care to accept them now with all the hassle associated. Of those who buy maid services, and see it merely as very convenient, many will probably choose the free, if inferior and inconsistent. However, many will opt to continue paying for maids for numerous reasons. However the market exit will drive up the costs of these services.

Do the total costs to society outweigh the total benefits? Perhaps not, but what is certainly true is that the people who were presumably the intended beneficiaries of the policy (I.E. those who purchased maids’ services) are either paying more for those services then they were before, or are receiving a lower quality of service then they were before.

To be fair though, I do have to point out that this kind of unintended consequence is very rare with foreign aid. Not the part about worsening the condition of intended beneficiaries, that’s pretty standard, but in our example the parties who benefited were the citizens of the country at large, whereas in real life it is often their warlords and juntas. If the total benefit given to a warlord exceeds the costs imposed on the citizens of his country is this a successful policy? Marginal utility is increased, but I would suggest that there are other metrics that need to be applied in the analysis.

By the way, Schumpeterian, I don't believe that suggestion makes me a socialist.

Unit writes:

LowcountryJoe,

maybe my use of the word "proof" was a bit strong, and, correct me if I'm wrong, but I thought that you were one of those making the argument that there's no difference between foreign aid and trade since both benefit some, but cause harm to others. My point is that, if they indeed were the same thing, then trade would also display the problems with addiction to the above-mentioned benefits, and with well-known negative incentives to innovate that welfare policies have. But in fact such problems don't arise, QED. Now, what about private charity? Is that the same as welfare? Again, I don't think so. The reasons are I think twofold: first private charities do not promise of taking care of all of your needs, non matter what happens, which governments sometimes do (or at least people think they do). Secondly, private charities often want something in return from the people they help. Usually, they are trying to spread a certain faith, whether religious or secular. So in a way you could still consider this trade: the people that end up asking again for help somehow self-select (there's a discovery process going on). I could be completely off.

Schumpeterian writes:

Unit,

Are you sure that trade doesn't cause addiction? It seems like the US is addicted to cheap (low priced) Chinese goods and many families here could not maintain their standard of living without them.

And I think the negative incentives to innovate that welfare causes are specifically in the area that is subsidized. So if you subsidized a person's entire income (traditional welfare), they don't have any incentive to work. And in this case if you subsidize their food, then you discourage innovation in food, but encourage it else where, since they still desire an income.

So it seems like foreign aid and trade are still very similar on those points. No?

LowcountryJoe writes:

but I thought that you were one of those making the argument that there's no difference between foreign aid and trade since both benefit some, but cause harm to others..

I never explicitly argued that view specifically but I would come to that conclusion. I would go so far to say that outright foreign aid would actually be more beneficial (be more of a net gain) in the economy into which the foreign aid weny than would trade be.

This, of course assumes that there are property rights and that the aid -- in the form of clothing and surplus food -- is not filtered and distributed through some despotic regimes. If the assumptions are not in place, all bets are off. Oh, and please do not call me an American socialist, I do not believe that the aid should be given through taxation, coercion, or any other compulsory means.

...My point is that, if they indeed were the same thing, then trade would also display the problems with addiction to the above-mentioned benefits...

There are addictions in human nature...the desire to maximize one's utility given budgetary constraints; with no two peoples utility or preferences being the same even though the desire to maximize the utility is the same. This is a tad bit off topic on my part.

...and with well-known negative incentives to innovate that welfare policies have.

This is an interesting philosophical viewpoint, one I happen to subscribe to. However, others could probably argue that when one is so low on Maslow's Hierarchy Pyramid, the utility gained from a pair of clothing and some food, is enormous. I stop short here. While Bentham did much to promote the ideas of utility -- and it is highly useful to Micro, I do not carry my enthusiasm into the realm of redistribution.

don't think so. The reasons are I think twofold: first private charities do not promise of taking care of all of your needs, non matter what happens, which governments sometimes do (or at least people think they do). Secondly, private charities often want something in return from the people they help. Usually, they are trying to spread a certain faith, whether religious or secular. So in a way you could still consider this trade: the people that end up asking again for help somehow self-select (there's a discovery process going on). I could be completely off.

I've got to tell you that I like that. I had made a comment in a thread at the FreeRepublic a year or two back with a very similar viewpoint. The people I was arguing with were Christian social conservative who hated the idea of trade -- they were the type that would love their neighbor just as long as they were of similar appearance, I guess. I proceeded to tell them that the parallel story found in Luke 9, Matthew 10, and mark 6, was all about trade at its core; the service of teaching for the food and shelter given in exchange. They couldn't believe that I pulled that on them and would have continued arguing with me if it were not for one of them who joined in and wrote to the others that i had a point. I wish I could find that thread and post again.

Schepp writes:

Many of the comments here bring back the comments of Dr. Yandle in a previous podcast. From my perspective he was concerned with the exceedingly wastefully energy being spent to get to his family's Hummingbird feeder. While much energy was spent by the Hummingbirds without an educations the birds were making an economic decision. If it was less work to pay the rent (energy) for free food than find food in "nature" that is what they did. For some birds it was likely more efficient than others. If Dr. Yandle and his wife were not consistent in his feeding, it would increase the rent cost and more birds would go back to "nature". If Dr. Yandle was mean spirited he could feed many hummingbird so that none had to wait or spend energy in the rent line, but if the hummingbird population double and he grew to tired to carry on there would be a high risk of drastic consequences for the birds.

I would argue that both are correct on the free cloths arguement. From my perspective the side supporting free cloths as a net benefit are arguing that more resources cannot hurt. From my perspective what Mike is arguing is that the time horizon and reliability is too low to provide benefit. Using a phrase I like when I hear it from Russ. This seems like an imperical question on how free stuff is delivered to the impoverished or how well Dr. Yandle and his wife fill the Hummingbird feeder.

I believe that the "poor" would be at least as smart as the hummingbirds and make reasonable market decisions on the reliability of the market. Free maids that don't show up are not free and they would be a non-factor in the economy if they were so unreliable that they cost more in delay and quality than paying cash. Poorly distributed food would not be relied upon as much as a steady supply. I agree with what I think Mike's most important point is that it is the market mechanism that is of most value to people to live well.

Unit writes:

Schumpeterian,

"Are you sure that trade doesn't cause addiction? It seems like the US is addicted to cheap (low priced) Chinese goods and many families here could not maintain their standard of living without them."

You are observing an emerged order, but you're forgetting how it came about. If Chinese goods were to suddenly go up in price we would easily cut back or find a different venue for them.

LowcountryJoe,

thank you for the explanations

"This, of course assumes that there are property rights and that the aid -- in the form of clothing and surplus food -- is not filtered and distributed through some despotic regimes. If the assumptions are not in place, all bets are off."

It seems that what you are trying to set up is a thought experiment where aid copies all of the characteristics of trade, but even then I would argue that they are still different. The analogy is with the socialist calculation debate (I'm not calling you a socialist). There is a knowledge problem with aid: you cannot know for sure what the real needs are and how they evolve, only prices and trade can effectively do that. For instance, the steadiness of the aid flow doesn't really help, because it's the needs that will surely change.

Russ Roberts writes:

Schumpeterian,

I didn't intend to say anything about taking from the rich and giving to the poor. I said that a one-time gift of food would hurt the poorest members of some nations. That is a strange way to fight poverty, if that is indeed why we're giving the food.

Nicholas,

You wrote "You state that when we give to charity we receive no benefit. Surely this cannot be; the feeling of well-being we receive must be valued greater then the cash value of the cloths and food we donate or else no donation would occur."

I meant "no benefit" in the sense of receiving goods in return. When I give to charity I get the satisfaction of helping others. But the US giving food aid is not analogous to a private individual giving to charity. If the goal of that food aid is to gain a foreign policy advantage by befriending the leader of the country, it's just not the same. A better point is to make the point that there isn't a "we" doing the giving as there is when my wife and I make a charitable decision.

During this discussed we have blurred any distinction between private charitable organizations that give food to poor people in poor countries and US governmental aid. They are not the same although some of the effects may be.

Mike Munger,

The Radford article IS fantastic. Interested readers can find it on the web. Still don't think currency/inflation has anything to do with the effects of trade on making recipients of food aid or used clothing worse off in most (all?) situations. But always happy to admit that I'm wrong about lots of stuff.

Schumpeterian writes:

Russ,

Thanks for the response.

"I didn't intend to say anything about taking from the rich and giving to the poor. I said that a one-time gift of food would hurt the poorest members of some nations. That is a strange way to fight poverty, if that is indeed why we're giving the food."

I would like to ask "and then what" (from the most recent podcast)? If we are restricting the free food and clothing because it hurts the "poor", then that means that the other people have to pay more for their food and clothing than they otherwise would. It is a subsidy to the "poor" at the expense of the other people. So isn't that basically taking from the rich to give to the poor? And if we ask "and then what" again, then we would start to wonder what the other people will do with the money they saved. What demand will they create with those savings that the poor could now profitably fill?

Also, to your point, it may seem a strange way to fight poverty in the short-term, but what I've learned from EconTalk (thanks!!!) is that economics seems to be filled with counter-intuitive solutions to problems that are painful in the short-term, but work best in the long-term. And even more importantly, the solutions that are not painful in the short-term are usually very painful in the long-term.

How do you get more tax revenues as a government? Reduce taxes. The economy will grow and you'll get a smaller percentage of a much bigger pie which leaves the government with more revenue. Seems wrong since the government immediately has less money, but in the long-run they have more. Raising taxes will contract the economy and you'll have a larger percentage of a much smaller pie in the long-run, but more revenue in the short-run.

How do you get better health care for everyone? Stop putting legal requirements to provide healthcare. The market will take over and provide cheaper and better healthcare than the government mandates could do. So the logical idea of requiring healthcare for everyone actually leads to less or worse healthcare, and even rationing.

How do you create more wealth for everyone? Stop restricting free trade which means that in the short run some people might lose their jobs to more efficient producers in other countries and be worse off. But in the long run we are all able get more things by expending fewer resources and produce more wealth over all.

How do you make sure ice is available in a community after a hurricane so that everyone can benefit? Don't make a law that restricts the free pricing. If you have anti-gouging laws to protect consumers, you're really going to hurt them by restricting their options, and discourage other entrepreneurs from bringing in more of the product.

How do you make sure the lowest paid workers get paid more? Get rid of the minimum wage. A minimum wage just means that people who aren't able to produce that amount of value cannot be hired. So a minimum wage leads to these people getting no job and thus getting paid much less, or rather zero.

So my point is that the argument that something looks like a "strange way to fight poverty" very likely might be the right answer to the problem. In this case it's a signal to the "poor" farmers that they need to be looking at producing something else that the rest of the world community will value more than food, which the rest of the world has a large cheap supply of.

I would appreciate your thoughts on this point of view as it's what I've gleaned from listening to EconTalk. My fear is that by using the word “poor” we’re making an emotional argument instead of a logical one.

Thanks.

Russ Roberts writes:

Schumpeterian,

Great job summarizing some of the counterintuitive insights of economics that you've learned from previous podcasts.

My only disagreement is with this paragraph:

"I would like to ask "and then what" (from the most recent podcast)? If we are restricting the free food and clothing because it hurts the "poor", then that means that the other people have to pay more for their food and clothing than they otherwise would. It is a subsidy to the "poor" at the expense of the other people. So isn't that basically taking from the rich to give to the poor? And if we ask "and then what" again, then we would start to wonder what the other people will do with the money they saved. What demand will they create with those savings that the poor could now profitably fill?"

When it's a one-time gift, there isn't much a "then what." It's over. And what you've done with that one-time gift is hurt people who grow food in the receiving country and helped the others there. Yes, even with a one-time gift, and certainly with an on-going gift, the benefits to the non-poor will spill over to the poor. I think what Mike was saying (and what I agree with) is that in some countries, the jobs that ex-farmers can "profitably fill" may not be very easy to come by. That is, lousy markets may make it hard for those ex-farmers to find decent alternatives. But you're right, making a poor country richer is not the worst thing in the world. The point of my comments is that if we're giving the food for the purpose of helping the poor in those countries, it may prove counterproductive at least in the short-run and maybe the long-run.

In my book The Choice, I argue that even Americans hurt today by a particular import can take solace in knowing that their children and grandchildren are likely to profit from the expanded opportunities that will come from not having to pay so much for imports.

The question is whether American gifts of food (or food prices that are subsidized by US farm programs) will create similar opportunities to benefit the children and grandchildren of African farmers if the gifts are occasional or erratic. Maybe, but I think there are better ways to improve the lives of poor people around the world if that is indeed the goal of our policy.

These are issues we'll be talking about in future podcasts.

Will writes:

I guess I'm a bit late in this discussion, but I just found this podcast on itunes the other day, and find it quite thought provoking.

Concerning free trade, it seems a bit hypocritical to me to be for complete free trade with every country regardless of the countries working conditions when our own country has spent years fighting for workplace safety after such disasters such as the triangle shirt factory burning down, killing all the women workers. This practice of trading with other countries, such as China, that provide their goods at extremely cheap rates because there is little concern for worker well being, brings to mind the practice of Not In My BackYard. As long as we arent directly harming workers in our own factories, it is ok to trade with other countries who do. You can say the workers in the other countries have a choice to work or not, but when it comes down to it, they need to provide food, and if a country is built around cheap labor, there really arent any alternatives. It is a bit wishful to believe that if a worker doesnt want to harm him/herself, then they could just find a different job. By arguing for open borders with such countries, it is akin to arguing against all of the worker safety laws in our own country.

Concerning providing food for free to impoverished countries, I am still a bit skeptical of the argument it makes the country worse off. I dont think I am quite understanding all of the argument, but it seems to me that when people are starving in a country, it can only help to provide food and clothes. They are not working or buying food because they are starving and thus are not part of the market. So most of the free food doesnt affect much of the market anyways. Even if you argue it does, it seems a simple waiting line would be a good way to distribute the food. Those who have the lowest opportunity cost, those who are either not working or barely working, would be most inclined to wait in line for food. Since these are the people the food aims to help, it seems to be effective. Those who have high opportunity costs, those who could earn more money in the time they would spend in line than the food costs, would not be beneficiaries of this food, and thus would not be as affected.

crasshopper writes:

Receiving free food and clothing is Pareto superior to not receiving it.

For Munger to say aid makes countries worse off is tantamount to saying that we should break windows and then repair them, which argument he railed against minutes before saying US food aid harms poor countries. Which does he favor--Say or Keynes?

Russ Roberts writes:

crasshopper,

You might want to read through the earlier comments where your point is discussed in some detail. And stay tuned. It's a topic we'll be revisiting in the near future.

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