Kash Mansori has resumed his economist blogging – something that makes all economist bloggers better off. Welcome back and thanks for making me laugh at the Uwe Reinhardt story about the boxer and the economist , which reminds us that not everyone necessarily gains from a movement towards free trade. But let me humbly suggests that this story needs something – a third player.
The usual economist parable as to why there are both winners and losers from free trade might go something like this. As we removed the trade restrictions from importing apparel from China, American households were able to buy quality clothing at lower prices. Chinese apparel workers also benefited from higher wages. But American apparel workers suffered reductions in their real income from the increase in competition from Chinese workers. While aggregate American income rises, some Americans suffer losses. The compensation principle suggests that it ispossible for the winners from free trade to compensate the losers in such a way that everyone is left better off. Of course in the real world this compensation is rarely executed.
Let me recast Kash’s and Uwe’s story by noting that one of my friends is indeed a former professional boxer and not is a personal trainer who I sometimes work out with (we’ll call him Jay). Jay is still in incredible shape and if he were to punch someone in the nose, it will really hurt. Let me be the economist and let’s pretend that I just start dating a very sexy lass (we’ll call this hypothetical hottie Kay). Kay decided to come watch one of my training sessions with Jay and afterwards Jay had an intense desire to punch me in the nose. So he asked Kay how much he would have to pay her to get permission to punch her new boyfriend out. Kay pulls me aside and say “honey, I really need $3000”. When I told her that Jay’s punches are devastating, she promised that she would more than make up for the pain later that evening. So I told her to go negotiate with Jay. She was elated that he actually offered her $5000 to let him punch me in the nose. The deal was consummated when he hit me so hard in the nose that it broke and I bled a lot. But he did give her the $5000. The only problem is that when she saw how awful my face looked, she said: “oh dear, you are now so ugly that I can’t go home with you. And we certainly are not having sex”.
So let’s recap on this notion that free trade supposedly makes everyone better off. Jay got want he wanted and Kay is now $5000 richer. But all I got was a broken nose. Compensation principle – FEH!