Wednesday, May 6, 2009

Win-win vs. positive-sum

I really shouldn't have to go through this again, but a panel discussion on Charlie Rose last night makes it clear that we have a long way to go. The discussion concerned free trade; unfortunately the panel was severely skewed, offering a former U.S. trade representative, two economists, and the hapless Senator Sherrod Brown (D-OH), who was the only one trying to provide any dissent from pro-free trade orthodoxy. He offered very little that was coherent, especially in light of the relentlessly sunny views expressed by Susan Schwab, Jagdish Bhagwati, and Alan Blinder.

Let me take up one point that came up a lot in the testifying by former Bush trade representative Schwab. She tried several times to conflate "positive-sum game" with "win-win," and everyone just sat there and let her get away with it. I have no doubt that Bhagwati and Blinder get the distinction, but calling her out would have undercut an argument that they fully supported.

As I went through in some detail last month, the two concepts are not at all identical. Win-win does imply positive-sum, but the opposite is most definitely not true, particularly (but not absolutely) when there are more than two parties to a transaction. It is quite possible to posit that trade is a positive-sum game, yet still find that there are winners and losers, that large numbers of people will not net any benefit.

Let me try another example. Let's say I ask Charlie Rose to give me $10, and also ask him to get 99 of his friends to give me $10. I take this $1000 and, through a magical process (oh, let's call it free trade), I turn it into $1500. I then give Charlie back $800, tell him that returns weren't guaranteed, and walk away with $700. The system as a whole is wealthier by $500 (positive-sum, oh yeah!), but we have a win-lose-lose-(98 more lose's) proposition; Charlie and all of his friends are worse off than they were before.

It is popular to try to identify these two principles as equivalent. "Positive-sum" sounds kind of wonky, while "win-win" is clear and positive and cool. But all we can absolutely say about free trade is that it's positive-sum; we cannot, using classical economics, determine the distribution of those positive returns.

To be fair, there was a little discussion of the fact that some people do lose from free trade, and Sen. Brown tried to make the point that those people are almost invariably Americans. But the rest pooh-poohed the idea that the number of losers was significant, and Blinder in particular threw out the standard canard that all we need to fix the problem is enhanced benefits, retraining, trade adjustment assistance - you know, all those programs that aren't really working all that well now.

In general, I'm for free trade. It gives me access to goods I would not otherwise have, probably at somewhat lower prices than a purely domestic market would offer me. It makes me feel good to know that we're giving the rest of the world's people the opportunity to improve themselves through some means other than direct aid.

But that doesn't mean we should use specious arguments to get there. One of the more uncomfortable moments in the discussion was when Blinder contended that it was a failure of the economics profession that it hasn't "persuaded the general public of the virtues of comparative advantage and trade across nations," as if the problems presented by free trade could be washed away with the right marketing campaign. Americans may not be as well-informed on such matters as we would like, but they can see what's happening right in front of them.

I will point out, yet again, that our systems are human constructs, made for the benefit of actual people - if they don't work right, we need to fix them so they achieve the goals of our society.

Confusing "positive-sum" with "win-win" is misleading. Lumping free trade in labor together with free trade in goods is misleading; the markets are very different, and have differing objectives. Vague hand-waving as to how we might redistribute some of the gains from free trade doesn't accomplish anything. There's a tendency to inflate the gains from trade to make the orthodox view more acceptable. And the "fair trade" people have a point, should we really allow corporations to make huge returns off of environmental and labor law arbitrage?

My basic point is that this issue is far more complicated than drawing a two-country, two-good graph and pointing to the gains (which is about as far as most economists seem to want to take it). There are real costs to real people when we allow their careers to be offshored; they are, in effect, subsidizing the people who are taking advantage of that opportunity. Maybe that's OK, but I'd sure like to see economists and politicians and businessmen have to express it in just that way, rather than shouting down the people who point it out.


Red Oak said...

If Blinder is still standing up, in May of this year of grace 2009, and prating about "enhanced benefits", "retraining", and "trade adjustment assistance", as well as willfully maintaining a blind malapprehension of comparative advantage, then he is utterly contemptible.

In a just world, people who insist on believing in (or just pushing) obviously buggered-up views of reality would suffer the consequences. Unfortunately, we don't live in a just world, and the Blinders and Schwabs of the world do handsomely by their tall tales. I just find it harder and harder to believe that these sorts can really be as stupid and cocooned as they appear to be. But that seems more plausible than the venality and maliciousness I would otherwise have to attribute to them.

Nice analogy with the ten bucks - except to make it more accurate you wouldn't *ask* the 99 friends to give you $10.00, you'd take it, make no bones about their being unfortunate losers in the transaction, but then make up some "trickle down" guff about how they were all really indirectly benefitting from your profit.

Androcass said...


I had to laugh at your last paragraph, because my longer version of that story (which a few too many friends have had to sit through) involves my telling Charlie that his loss is OK, because I'll be spending my ill-gotten gains and, in so doing, improving the overall welfare. He and the 99 can derive psychic satisfaction from the many who will benefit from my spending, and eventually, through the magic of velocity, they will get back far more than they have ostensibly lost.

Laura said...

Thanks for your terrific comments-i hadn't discovered you blog until today.

I am a US citizen living in Chile and nowhere is it more clear than here. The country GDP improves but many don't benefit. The export market means that much is actually more expensive here than in the US. I know this from contact with friends there. Walnuts(actually all nuts) are extremely pricey and you can hardly get raspberries-if you do, they are about $4 usd for the 6 oz package(while you are paying 10 for $1 for the imported fruit). As you said, the country GDP improves but the people here are paying a high price for goods that should be cheaper here.

Great explanation. I could go on about the "free market" experiment put into place under a dictatorship. I wish more people would discuss the privatization issues. It's no miracle.

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