Wednesday, February 20, 2008

Economic history is so clean   posted by Razib @ 2/20/2008 06:48:00 PM

I've been reading a fair amount of economic history and political economy recent (e.g., A Concise Economic History of the World, The Moral Consequences of Economic Growth and Angus Maddison's substantial body of work). I've read a few micro & macro texts so I come into this with some vague theoretical understanding of the framework which economists are marinated in, and of course I know about comparative advantage and am broadly sympathetic to globalization. The analytic sharpness that economics brings to broad historical questions is illuminating. That being said, on occasion there are comments which make me wonder about the excessive simplicity of the economic narrative.

Consider the case of two nations which trade with each other. One nation starts out far wealthier. Businesses in the wealthier nation relocate some factories to the poorer nation. This increases aggregate utility, consumers in the wealthy nation can now purchase cheaper products, while a substantial number of workers in the poorer nation are more well off than they otherwise would be. But, there's an issue here, inequality is likely to increase within the nations. Overall inequality in the aggregate has decreased, the poorer nation is now far wealthier and so the income gap is not as stark across national boundaries. But a minority of those who had factory jobs in the wealthy nation now might have to shift to lower paying service sector employment. Additionally, income inequality might initially also increase in the poorer nation as some are left behind (though as economic development proceeds one might suppose that the lower orders would catch up).

As someone who lives in a relatively wealthy nation let's just consider that case. I'm not sure if I'm particularly reassured that aggregate utility has increased across the world while a bunch of factory workers now go unemployed or are marginally employed. It's not that I'm a particularly empathetic person, I'm not, but perhaps I'll run into these people in the subway or at the shopping mall. It's great that people in a far off country are now wealthier and also increase my own access to more baskets of goods; but I can't but help be a little worried about idle hands and potential riots in the streets from the "victims" of the redistribution of economic activity. More immediately, what's the point in my being able to purchase more bling if it only invites a mugging at hands of the victims of globalization?

I have Joseph Stiglitz's Making Globalization Work on my "to read" list, so perhaps my qualms will be addressed at some point. So far I'm not reassured that economists truly internalize the structural biases in human psychology when talking about these macro-level issues. It seems that in universal suffrage democracies the political class always has to pretend as if comparative advantage doesn't exist and mouth populist slogans, but they always favor globalization when it comes to implementing policy (at least over the long term). At this point most humans understand that the the earth is not at the center of the solar system; but it seems to me that that is an easier concept to grasp than the logic of economics, in part because human intuitions about social facts and dynamics are very strong and persistent in the face of intellectual persuasion.

Note: Feel free to recommend books on economic history in the comments. Douglass North is also on my "to read."