Tuesday, February 28, 2006

Give Trade a Chance

A random walk along the Internet today led me to a disdainful look at Thomas Friedman, which led me to his Wikipedia entry, which led me to a criticism piece entitled, "FLATMAN I'm sorry, but the world's still round."

I have mixed feelings about Friedman: I don't agree with him that America needs to compete to maintain it's hold on high tech sectors nor do I feel that the US needs to maintain a dominance in finance. No one thing is the key to prosperity; that's what globalization is for in the first place.

He has some interesting takes how globalization changes cultural norms, though. And while he might put too much stock in the idea of trade as a universally peaceful solution (a la the Golden Arches Theory of Conflict Prevention) it conveys a powerful point. Take this criticism of the theory, penned by Siddharth Varadarajan: "cross investment and extensive trade relations have never prevented countries from going to war against each other."

That's quite a claim, especially since he's citing historical evidence. Especially since we tend not to study times war almost broke out (and we really don't study potential wars that never had a chance to break out, like the US invading Canada anytime in the past fifty or so years). It's hard to measure trade's impact on peace and while I don't think it prevents all conflict, it's even more absurd to claim it prevents none.


ryan said...

What if you say that, contra Dr. Levy (and, er, Adam Smith), sometimes trade leads to conflict, either through jealousy or spite, or simple power politics (the last of which is, of course, zero sum)? We are not always sympathetic agents, nor are we always wealth-maximizing ones. If sometimes trade prevents war, and sometimes it encourages it, the net effect cannot be known without further information.

Here's a "for instance": is it blindingly obvious that our trade with, say, Saudi Arabia has led to *more* peace?

David said...

That's a promising point, but I'm not yet willing to argue the trade-conflict relation as ambigious. If jealously is the main source of trade causing conflict, then it reasons that it would also be a main source of crime on the micro level (between neighbors). After all, you're far more likely to be envious of Bob with the pool than some country you've never been to with flying cars.

Yet to justify even some of the conflicts between countries as rooted in envy would logically require there be much more crime on the local level than there is. Yes, you could claim institutional differences in the intranational and international change alter the incentive stuctures (and you would be right) but still, that's a lot to account for. Let us not downplay the role of nationalism and general hatred of group X.

I wasn't going to go in this direction but you opened the door so I might as well walk through it: I think a telling agrument for the aggregate effects is to see the number of wars over time, which has drastically decreased as trade increased. 1000 years ago, Europe was in a constant state of conflict; now mere misunderstandings make headline news. Is it trade that created peace? Certainly helped; at the very least it paved the way for institutions that encourage peace.

For something more sophisticated, consider the world 500 years ago and the world today. Back then, the favored economic system was mercantilism, where economics is seen as a zero sum game. Not surprisingly, we saw European countries fighting hot and cold wars with each other all over the planet, unable to understand that just because they didn't domestically make product X doesn't mean they are "losing."

Today, nations see economics as a positive sum game (there are exceptions and angry politicians and so forth, but the population and politics see trade as mutually beneficial more often than not). Not surprising, we don't see many countries trying to take each others' resources; not as much as we are used to. And I bet those that are calling for conflict have a mercantilist mindset.

Agreed, context and viewpoint also matter, but I'd still agrue actually trading teaches the lesson of mutual respect and benefits far better than anything else.

ryan said...

Is jealousy a source of crime on the micro level? Some studies have suggested that crime is procyclical – so, yeah, maybe it is. But, yes, obviously you need to throw in a whole lot about institutions. You also need to throw in something about the absolute levels of growth – I personally think it likely that jealousy and related destructiveness doesn’t kick in if income growth is above a certain level. (Note that this would suggest trade prevents conflict, but only so long as growth remains high – if it dips, you might get greater conflict.) This would explain why Europe has higher levels of redistribution than we do (if you take seriously the libertarian slogan “taxation is theft,” then I guess you really do have to believe that jealousy causes crime). This story would be consistent with the claim that trade with Saudi Arabia has led to less peace – an “oil curse” means low growth and a not-completely-ridiculous association of that lack of growth with trade, which fuels whatever other factors have led to violence. But most of all, you have to consider – let’s face it – the role of the government. Has trade led to less war? First of all, is there less war? There’s less war between European countries, but I would submit that the reason why you don’t see the sort of European conflict that you did in the dark ages has less to do with increased trade as it does with conquest – petty barons were conquered by more powerful kings. Conflict since then has been reined in by (depending on your time period): the 19th century balance of power, the hegemony of the superpowers, and that, since 1945, the real sources of jealousy (in both wealth and power terms) for your average European country have not resided in Europe. An end to violence wasn’t created by the EU – the EU was created by the end of violence, which itself was created by Europe’s domination by the US and the USSR. That a threat of overwhelming force is generally a prerequisite for peace is a lesson I think many libertarians overlook, as is the possibility that, when it comes down to it, people like to dominate, countries want power, and both goals are zero sum.

Not that I’m pessimistic or anything. No, really! I am, however, long-winded -- sorry!

David said...

Oh like I wasn't long-winded earlier.

Well, I at all don't want to downplay the role of institutions and political threat. This is why China's threatening military action to hold on to Taiwan but we don't see the island trying to take the mainland.

Be careful when you cite Saudi Arabia because it's not trade that made oil useful; that's technology. When I talk of trade creating a more peaceful world, I'm talking about peace between trading partners; those that are willing to kill to enter the trading system doesn't address that. That is more of an argument for privatizing SA's oil industry.

You're very right though that we cannot easily (ever?) untangle trade from everything else when it comes to causes of conflicts because the interconnectiveness is so high. So allow me to list reasons to why trade, ceterius paribus, encourages peace.
-You get wealthier, thus the cost of conflict increases (as you risk more).
-Due to law of diminishing marginal returns, your utility of marginal loot decreases.
-You get to know the person you trade with, however briefly. (More costs to conflict.)
-You develop a symbiotic relationship with your trading partner; breaking it incurs, at the least search costs and higher trade costs once you find a replacement.
-Past conflict makes it harder to re-establish the trade after the war is over.
-The war will go on for an undefined amount of time, adding greater risk in regards to the larger amount of additional cost you'll have to bear thanks to the worse trading option you'll be left with.
-As you get to know your trading partner, it becomes harder for the state to convince you they are inherently evil, making it more difficult to justify the war.
-Trade can inspire hard work and commericalism (making the impracticality of war that much harder to pull off) just as easily as it can inspire jealousy as when you learn of others standards of living as one learns of others' living standard. As mentioned earlier, I think the more powerful factor here depends on if the economic model most people are thinking of if growth is largely endogenous or exogenous.

ryan said...

I agree with most of this. But I'm unclear what you mean about Saudi Arabia. I'm not referring to people killing to enter the trading system -- I didn't know that anyone was. I'm referring to the people flying airplanes into buildings. From where I sit, this is completely caught up in matters of trade. We trade with countries that have lots of oil. Oil sometimes brings an "oil curse," so those countries are undeveloped. We are blamed for this undevelopment for reasons that are fundamentally about the fact that we trade. So ... people want to blow us up. If we weren't trading, we wouldn't have cared when Iraq conquered Kuwait. In fact, Iraq wouldn't have invaded. I'm not saying we shouldn't be trading, or that terrorism is somehow our fault. I'm just saying -- trade can bring resentment from those parties that, even though they're trading, aren't doing well for some other reason. Generally this isn't the case, though. On the other hand, I'm not sure that trade has such a powerful effect for peace, so, ultimately, it might be not all that far off from a wash.

David said...

Ok Ryan, I misunderstood; I thought you were talking about those in SA that would like to overthrow the government and place themselves in power. I don't know who these theoretical rebels are, but I'm sure they exist somewhere.

The problem with declaring it's a wash is that we always see when war breaks out because of trade but rarely when trade prevents. This is where my list of reasons trade is good for peace comes in handy.

But let me give you a real-world example: A major source of support of the Taiwanese government maintaining the political status quo comes from the business sector as they are afraid that declaring independence would hurt trade with mainland China.

ryan said...

Is that a major source? So if they weren't worried it would hurt business, Taiwan would be jumping at the chance to start a war with a much larger, more powerful country? While we were pressuring them not to? All right, but on the other hand, some argue that part of the reason we entered WWI was due to business community pressure. I'm not sure if I agree with that position -- seems to me like we might very well have entered either way. But that's my point. Trade may have an effect, but we shouldn't exaggerate the magnitude, or assume that all the effects go in one direction.