Free Trade

Imagine a conversation on a Sunday morning between a surgeon and her tennis partner. This conversation will have three anecdotes that relate to trade.

  1. The surgeon's tennis partner asks what software she uses to do her taxes. The surgeon replies that she does not do her taxes herself. "Mine are really complicated," she explains. "I figure that my accountant has been trained to understand this stuff, and he can do it much faster than I can, with fewer mistakes. Doing my own taxes would be like him doing his own surgery."

  2. The surgeon talks about needing to give her house a new coat of paint. Her tennis partner suggests that compared with a typical house painter she probably could do this job better herself. "That's true," the surgeon replies. "I have steady hands, and I work more carefully and efficiently than most painters. But I figured that even though it will take the painters 50 hours to do the house and I could do it in 40, it's still a better use of my time to see patients. I can pay the painters with the money I get from seeing patients for two hours, so in a way I can paint my house in just two hours by sticking to medicine."

  3. Finally, the tennis partner says. "My brother-in-law had a kidney stone. I was going to recommend that he come to you, but his doctor said that there is a new pill that dissolves some stones. So he doesn't need surgery."

The first anecdote illustrates the advantage of specialization. Because they can trade with one another, the surgeon can specialize in surgery and her accountant can specialize in tax return preparation. Specialization allows people to be more efficient, and in this case trade helps both specialists.

The second anecdote illustrates comparative advantage. Although she can paint faster than a contractor, the surgeon is even better than the contractor at doing surgery. We say that her comparative advantage is in doing surgery and the contractor's comparative advantage is in painting. By doing the work that is each person's comparative advantage, both the surgeon and the contractor benefit from trade.

The last anecdote illustrates one of the most subtle benefits from trade. Competition and trade lead to innovation, in this case the development of a drug that reduces the cost and risk of removing kidney stones.

Competition and innovation are not necessarily a benefit for the surgeon. The demand for her services falls to the extent that medication can be used in place of surgery.

When people complain about "unfair trade" or "unfair competition," it is usually because of the displacement effect on their own jobs. Most people like the benefits of trade--higher living standards, greater efficiency, etc. But everyone resents competition when it hits them personally.

What happens to jobs that are "lost" to progress, displacement, and trade? New jobs become more important. If we had frozen the economic structure in 1800, America would have many more agricultural jobs than we have today. Had we frozen the economic structure in 1950, we would have more manufacturing jobs. But even though we have "lost" jobs in agriculture and manufacturing, there is enough work to keep the economy pretty close to full employment.

I think that most people prefer the work that they do to the mind-numbing labor of a factory assembly line or the backbreaking labor of a farm. Work today is less dangerous, less unpleasant, and less dreary than it has ever been. Keep that in mind when people complain about "lost" jobs.

The rest of the chapter restates the argument for free trade in different ways. Understanding those arguments is one of the most basic steps in learning economics.