the choice, a novel of free trade and protectionism - russell roberts

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  • The Choice

    A Fable of Free Trade and Protectionism

  • The Choice

    A Fable of Free Trade and Protectionism

    Third Edition

    Russell Roberts George Mason University

    Upper Saddle River, N e w J e r s e y 0 7 4 5 8

  • To my parents, Ted and Shirley Roberts, who taught me to love worth, life, and the world

    Library of Congress Cataloging-in-Publication Data

    Rober ts . Russell D. The choice : a fable of free t rade and protect ionism / Russell D. Roberts .3rd ed.

    p. cm. Includes index. ISBN 0-13-143354-7 1. Free trade. 2. Protectionism. 3. Free t radeUni ted States. 4. Protect ionism

    Uni ted States. 5. Ricardo, David . 1772-1823. I. Title. HF1713.R615 2007 330.12'2dc22

    2006025248

    Editor: Jon Axelrod VP/Editorial Director: Jeff Shelstad Editorial Assistant: Michael Di t t amo Assistant Editor: Mary Kate Murray AVP/ Executive Marketing Manager: Sharon Koch Marketing Assistant: Patrick Barbera Managing Editor (Production): Cynthia Zonneveld Production Editor: Melissa Feimer Permissions Supervisor: Charles Morris Manufacturing Buyer: Michelle Klein Cover Photo: Hul ton Archive/Taxi/Getty Images Composition/Full-Service Project Management: Stratford Publishing Services

    Copyright 2007, 2001 by Pearson Education, Inc., Upper Saddle River, New Jersey, 07458. Pearson Prentice Hall . All rights reserved. Printed in the United States of America . This publication is protected by Copyright and permission should be obta ined from the pub-lisher prior to any prohibi ted reproduct ion, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical , photocopying, recording, or likewise. For information regarding permission(s) , write to: Rights and Permissions Depar tmen t .

    Pearson Prentice Hall is a t rademark of Pearson Educat ion . Inc. Pearson is a registered t rademark of Pearson pic Prentice Hall is a registered t rademark of Pearson Educat ion, Inc.

    Pearson Educat ion LTD. Pearson Educat ion Australia PTY, Limited Pearson Educat ion Singapore, Pte. Ltd Pearson Educat ion North Asia Ltd Pearson Educat ion. Canada . Ltd Pearson Educacion de Mexico, S.A. de C.V. Pearson Education- Japan Pearson Educat ion Malaysia, Pte. Ltd

    1 0 9 8 7 6 5 4 3 ISBN 0-13-143354-7

    Preface to the Third Edition

    The first edition of this book was written in the early 1990s, when Americans were worried about the threat of Japan to our standard of living. The second edition was written after the passage of NAFTA, when Americans were worried that Mexico was a threat to our standard of living. Both of those threats and the fears they created turned out to be short lived. I believe that current fears about China and India's threat to our standard of living will turn out the same way.

    I have updated this edition to discuss the growing economic strength of China and India. Just as worries about trade with Japan and Mexico turned out to be grossly inaccurate, I do not believe that China and India pose any economic threat to America. In fact, the opposite is true. Trade with China and India is good for most Americans. Trade with China and India makes America a richer country in both the financial sense and in the sense of expanded opportunity to live a meaningful life.

    In addition to updating the numbers to 2005 where possible, this new edition adds chapters on the role of manufacturing jobs in our economy, the economic effects of outsourcing, and the role of the World Bank and the International Monetary Fund in fighting global poverty. I have also tried to improve the discussion of comparative advantage and moved material to where I thought it made the most sense.

    Russell Roberts (roberts@gmu.edu) George Mason University

    Fairfax, Virginia May 2006

    V

  • Acknowledgment**

    he Talmud says. ' i have learned much from my teachers, more from my colleagues, and most of all from my students" (Taanis 7a). My

    * general interest in trade began with Milton Friedman's Capitalism and Freedom and continued during my undergraduate years at the Uni-versity of North Carolina with a course from James Ingram. His book International Economic Problems uses a metaphor of an import/export business as a factory that helped inspire my approach here.

    In graduate school at the University of Chicago, I was fortunate to learn about trade issues in my microeconomics class from D. McCloskey. The diagrams and intuition from that class greatly influenced my teach-ing and thinking. 1 have taught that analysis to thousands of students while teaching at the University of Rochester, Stanford University, UCLA, Washington University in St. Louis, and George Mason Univer-sity. Many of the questions asked by those students have found their way to the mouth of Ed Johnson. I am grateful to my students for their pas-sion, questions, and interest.

    George Stigler gave me an enormous dose of skepticism about indus-try statements on their motives for supporting government legislation. I am sorry he did not live to see this book. I would have loved to chat with him about David Ricardo.

    I'm grateful to Jon Axelrod of Prentice Hall for pushing me to do a third edition. I wish to thank Howard Swaine and Dan Stastny for finding mistakes or sources of confusion in the previous edition. Michael Cardwell did a superb job on the research to bring the numbers up to date for this new edition. Any errors are my own. I want to thank Virginia Postrel for the insight that not all jobs in America end up in Mississippi or Arkansas just because wages are low there.

    I particularly want to thank my colleague Don Boudreaux for hours of conversation on comparative advantage, outsourcing, and the trade deficit. I have learned an immense amount from Don, and much of that knowledge is in these pages.

    I thank Menlo Smith for guidance and support. I wish to thank Dan Gressel, Kent Kimbrough, John Lott Jr., and

    Richard McKenzie for many helpful conversations about trade issues.

    vii

  • DAVID RICARDO

    English economist, widely regarded as one of the greatest practitioners of the deductive method of analysis in economics. He was born in London on April 18,1772, to orthodox Jewish parents and studied from the age of 11 to 13 at the Talmud Torah attached to the Portuguese Synagogue in Ams-terdam. Ricardo became estranged from his family when he became a Unitarian and married a Quaker in 1793. He was first employed by his father in the London Stock Exchange in 1786 and operated there inde-pendently from 1793 to 1816. By 1813, he had amassed a large fortune and retired from business. He served in the House of Commons as the mem-ber from Portarlington from 1819 until his death in Gloucestershire on September 11, 1823. Ricardo's most famous work, On the Principles of Political Economy and Taxation, first appeared in 1817.

    from the Encyclopedia Americana

    E D JOHNSON

    Ed Johnson was born in 1917 in Star, Illinois. He received a degree in engineering from the University of Illinois in 1939. Johnson served in the U.S. Army during World War II, achieving the rank of major. He earned a Silver Star for gallantry in action at Omaha Beach in the D-Day opera-tion. After the war, he returned to Star to work in the Stellar Television Company. He was named president of the company in 1955. He married Martha Hellman in 1948. The Johnsons had two children, Steven and Susan.

    x xi

  • Author'** Note

    The Stellar Television Company; Star, Illinois, and its citizens; and Congressman Frank Bates are products of the author 's imagina-tion. Any resemblance of these characters to any persons, living or dead, is purely coincidental. All of the other companies and people are real. I have tried to portray them and the American economy as accu-rately as possible. Sources are found at the conclusion of the story, in Chapter 17.

    xii

    C H A P T E R

    Minutes of the Heavenly Court : Soul of Dav id Ricardo

    INITIAL TRIAL

    DATE: September 11,1823

    MAGISTRATE: Please state pertinent biographical detail. DEFENDANT: I was born in 1772 and given the name David Ricardo.

    My mother, peace be upon her, named me after King David, writer of psalms, sweet singer of Israel. She

    MAGISTRATE: Mr. Ricardo. Less lyricism. More facts. Occupation? DEFENDANT: I was chiefly a financier, then later a politician. MAGISTRATE: Speak up, Mr. Ricardo. Your occupation will not be

    held against you. What do you consider your most important achievement while you were alive?

    DEFENDANT: My theory of comparative advantage. Outlined in my 1817 book, On the Principles of Political Economy and Taxation, the theory showed how nations benefit from free trade. In addition, as a member of the British Par-liament, I spoke numerous times on the dangers of pro-tectionism and the benefits of free trade.

    MAGISTRATE: Were your views heeded? DEFENDANT: Not yet, but in time I believe MAGISTRATE: That will be all, Mr. Ricardo. You are sentenced to a

    period of wandering until further evidence is brought to the attention of this court.

    REQUEST FOR RETRIAL DATE: December 18,1846

    MAGISTRATE: Mr. Ricardo. You have requested this hearing to put forward additional evidence you believe relevant to your case.

    DEFENDANT: Yes. I am happy to report that down below, my native country of England has abolished the Corn Laws that protected British farmers from foreign competition. I request that the court consider reopening my case.

    MAGISTRATE: Request dismissed. It is too early to tell if this change is temporary or permanent . In addition, do not virtually

    1

  • CHAPTER 1 Minutes of the Heavenly Court: Soul of David Ricardo

    all nations outside of Brita

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