Am I the Only One…

…that finds it shocking that the following was written in the “leading trade theory textbook,”

International Economics (Krugman)When they were first proposed, market failure arguments for protection seemed to undermine much of the case for free trade. After all, who would want to argue that the real economies we live in are free from market failures? In poorer nations, in particular, market imperfections seem to be legion. For example, unemployment and massive differences between rural and urban wage rates are present in may less-developed countries.

— p. 227.

To be clear, this is part of a single paragraph, and by no means represents the entire book. The book is very good, and if you’re looking for a textbook introduction to trade theory and international monetary policy, I definitely recommend it. And, no, it’s not anti-free trade, although not everything would be found in a hypothetical analogous textbook by Mises or Rothbard (e.g. optimal tariff theory, market failure arguments for tariffs, et cetera — and my intention isn’t to disparage the latter two authors, especially since I’d mostly agree with them).

However, in my opinion, that’s a shocking statement. There are market failures. The market often fails to coordinate. But, to blame poverty and mass unemployment in the developing world on market failure seems disingenuous, and I mean that word with all of its implications. Many of these problems are caused by failures of those countries’ political institutions, and this shouldn’t be controversial. Economists have blamed bad policy on poor economic performance since the birth of the discipline. More formal and more recent research on institutions has expanded on our intuitions.  Market failure probably explains very little of poverty in the developing world. What those economies need are freer markets.

6 thoughts on “Am I the Only One…

  1. JCatalan

    Originally, “And, no, it’s not anti-free trade…” read “and, no, it’s anti-free trade…” This was an error on my part. I wasn’t able to look at the post (I had it scheduled) until now. My mistake.

  2. Stadius

    There are more things in heaven and earth, Mr. Finegold, than are dreamt of in your philosophy.

  3. Dave Marsay

    It seems to me that much free market theory is more reasonable if one includes all resource-allocation mechanisms, including political institutions. In this case ‘market imperfections’ would include the factors that you cite, and the freer markets that you call for would imply better politics.
    Or can one separate politics out from the rest of economics? Is free trade between nation-states necessarily a ‘good thing’ where nation-states lack ‘free’ political institutions?

    1. JCatalan

      On the one hand, I agree with you. Can we really separate institutions from markets? I don’t think so. Case in point, there are no specific institutions that go with markets, and there are no “ideal” institutions (as in, “The” institutional framework). On the other hand, there is some basis to separate the two. Maybe the best thing is to distinguish between market failure and poor institutions, where the former is a specific form of discoordination. Institutions are meant to correct market failures, but they can often “overcorrect.”


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