Monday, February 19, 2018

Greg Mankiw Slams Trump's Asinine Mercantilist Position on Trade

Greg Mankiw
Greg Mankiw, the Robert M. Beren professor of economics at Harvard University and multi-millionaire economic textbook salesman, writes in The New York Times:
When President Trump imposed tariffs on imported solar panels and washing machines, I was reminded of a line from George Orwell: “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.”

While Orwell’s comment was focused on military and political issues of the late 1930s, my subject is economics, and to most people in my field, the benefits of an unfettered system of world trade are obvious. Any good student of Econ 101 can explain the logic.

But in light of the growing evidence of the Trump administration’s apparent disdain for free trade, from the recent tariffs, to a report recommending fresh quotas or tariffs on steel and aluminum, to its earlier rejection of the Trans-Pacific Partnership, it may be worth reviewing the theory, as well as the evidence that convinces economists that the theory is right.

The place to start is 18th-century Scotland. Adam Smith’s book “An Inquiry Into the Nature and Causes of the Wealth of Nations” is often credited as the beginning of economics. The case for free trade is one of its major themes.

Smith argued that trade among nations is like trade among people. No one feels compelled to sew his own clothes and grow his own food simply to keep busy. Instead, we find employment doing what we do best and rely on other people for most goods and services. Similarly, nations should specialize in producing what they do best and freely trade with other nations to satisfy their consumption needs.

.This argument was expanded by David Ricardo in the 19th century. Ricardo addressed the question: What if one nation does everything better than another? His answer was that trade depends on comparative advantage — how good a nation is at producing one thing relative to how good it is at producing another.

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

By the way, Ricardo was not merely a theorist. He was also a successful stock trader and a member of Parliament. During his political career, he fought for free trade, notably, by opposing the Corn Laws, which imposed tariffs on grain imports.


  1. " Similarly, nations should specialize in producing what they do best and freely trade with other nations to satisfy their consumption needs".

    Exactly, just let the US keep on counterfeiting money to satisfy its needs. That's what the US does best!

    1. That and war. As Hoppe has noted, the problem with the state is that it specializes in the production of "bads," not "goods."