The Homo economicus fallacy

After 20 years of NAFTA, protectionism, once pronounced dead in the water, seems to be raising its damp head despite powerful economic arguments that back up free trade.  As Mark Twain said, “rumors of my death have been greatly exaggerated.”

1. Free Trade and the Loss of U.S. Jobs  the Washington Post

2. Trade policy and job loss Economic Policy

3. Fast Track to Lost Jobs: Free Trade Agreements Are

4. NAFTA Cost U.S. 700k Jobs, Report Says  The Huffington Post

5. Free Trade Costs American Jobs  Newsweek

Granted, this is not your Smoot-Hawley protectionism but rather a look before you leap criticism of slap-happy free trade.

This editorial in the New York Times by the distinguished economist Craig Roberts, who was president Reagan’s principle adviser in dealing with stagflation, indicates how the free trade ship of state may be headed for a wreck on the shoals of the new outsourcing realities emerging on the horizon.

Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000. Second, within five years the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.

We are concerned that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level -- from the machinist to the software engineer to the Wall Street analyst.

Losing 800 jobs with salaries of 150K?  Do companies have the right to harm the communities that support them so that executives get bonuses?  And yes, that is a (shudder) moral rather than purely economic argument.

As Craig Roberts concludes in the aforementioned New York Times article: 

In this situation, there are no longer shared gains – some countries win and others lose.

What is clear is that NAFTA destroyed manufacturing communities across the Midwest and utterly destroyed the family farm communities that formed the very basis of Mexico’s culture.  It caused terrible disruption of lives and communities.  Yet the net benefit debate continues. 

Underlying the purely economic arguments demonstrating the benefits of free trade is the theoretical construct of Homo economicus.  The posit of economic man is fine for theoretical purposes, just like perfectly frictionless surfaces in physics.  For Homo economicus, more, better, and cheaper goods all around is the be-all and end-all.  But for constructing or guiding national policy, Homo productus is a much more fitting model.

More and cheaper goods consumption is not the sole nature of man.  Homo productus is a better model: man/woman the creator, maker, nurturer, builder.  Meaningful work and shared community benefit man more than cheaper strawberries and shoes.  And what does that entail in terms of socioeconomic policy?  Well, at least it means not blindly worshiping Homo economicus.

But the really naïve and dangerous assumption underlying the Homo economicus paradigm is that free trade will be fair.  This naïve assumption has proven to be disastrous.  We have become dependent on other countries for our most basic needs, and these countries may not always have our best interest at heart.

Chinese hackers recently gained access to secret plans for many important U.S. weapons systems, including missile defense systems and our most high tech fighter jets. Our leaders always attempt to approach China as an economic partner, but it is clear that from China’s point of view we are a partner only insomuch as it benefits their economy. As countries like China gain more and more influence over our economy we will see our ability to protect ourselves, both economically and militarily, decline.

This is a self-sufficiency argument based on an analysis of human nature and not a purely economic argument.  Why should other countries have our best interest at heart?  Being self-sufficient is a Realpolitik assessment of the nature of foreign competition.  Unlike home-grown industries, foreign countries may seek to weaken and undermine U.S. strength.  And there is also the fall-out benefit of protecting our domestic industries in that domestic industries keep more of our money in U.S. communities (including taxes!).  But more importantly, protecting vital industries provides independence and self-sufficiency.  Is it really wise, for example, to move shipbuilding to Korea and lose our own capabilities?  Manufacturing farm equipment?  Computer components?  Steel industry?  Aluminum industry?  One website concluded that, on the basis of comparative advantage, we should let Japan build computers while we stick to farming.

Homo economicus is a stupid model for framing national policy.

After 20 years of NAFTA, protectionism, once pronounced dead in the water, seems to be raising its damp head despite powerful economic arguments that back up free trade.  As Mark Twain said, “rumors of my death have been greatly exaggerated.”

1. Free Trade and the Loss of U.S. Jobs  the Washington Post

2. Trade policy and job loss Economic Policy

3. Fast Track to Lost Jobs: Free Trade Agreements Are

4. NAFTA Cost U.S. 700k Jobs, Report Says  The Huffington Post

5. Free Trade Costs American Jobs  Newsweek

Granted, this is not your Smoot-Hawley protectionism but rather a look before you leap criticism of slap-happy free trade.

This editorial in the New York Times by the distinguished economist Craig Roberts, who was president Reagan’s principle adviser in dealing with stagflation, indicates how the free trade ship of state may be headed for a wreck on the shoals of the new outsourcing realities emerging on the horizon.

Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000. Second, within five years the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.

We are concerned that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level -- from the machinist to the software engineer to the Wall Street analyst.

Losing 800 jobs with salaries of 150K?  Do companies have the right to harm the communities that support them so that executives get bonuses?  And yes, that is a (shudder) moral rather than purely economic argument.

As Craig Roberts concludes in the aforementioned New York Times article: 

In this situation, there are no longer shared gains – some countries win and others lose.

What is clear is that NAFTA destroyed manufacturing communities across the Midwest and utterly destroyed the family farm communities that formed the very basis of Mexico’s culture.  It caused terrible disruption of lives and communities.  Yet the net benefit debate continues. 

Underlying the purely economic arguments demonstrating the benefits of free trade is the theoretical construct of Homo economicus.  The posit of economic man is fine for theoretical purposes, just like perfectly frictionless surfaces in physics.  For Homo economicus, more, better, and cheaper goods all around is the be-all and end-all.  But for constructing or guiding national policy, Homo productus is a much more fitting model.

More and cheaper goods consumption is not the sole nature of man.  Homo productus is a better model: man/woman the creator, maker, nurturer, builder.  Meaningful work and shared community benefit man more than cheaper strawberries and shoes.  And what does that entail in terms of socioeconomic policy?  Well, at least it means not blindly worshiping Homo economicus.

But the really naïve and dangerous assumption underlying the Homo economicus paradigm is that free trade will be fair.  This naïve assumption has proven to be disastrous.  We have become dependent on other countries for our most basic needs, and these countries may not always have our best interest at heart.

Chinese hackers recently gained access to secret plans for many important U.S. weapons systems, including missile defense systems and our most high tech fighter jets. Our leaders always attempt to approach China as an economic partner, but it is clear that from China’s point of view we are a partner only insomuch as it benefits their economy. As countries like China gain more and more influence over our economy we will see our ability to protect ourselves, both economically and militarily, decline.

This is a self-sufficiency argument based on an analysis of human nature and not a purely economic argument.  Why should other countries have our best interest at heart?  Being self-sufficient is a Realpolitik assessment of the nature of foreign competition.  Unlike home-grown industries, foreign countries may seek to weaken and undermine U.S. strength.  And there is also the fall-out benefit of protecting our domestic industries in that domestic industries keep more of our money in U.S. communities (including taxes!).  But more importantly, protecting vital industries provides independence and self-sufficiency.  Is it really wise, for example, to move shipbuilding to Korea and lose our own capabilities?  Manufacturing farm equipment?  Computer components?  Steel industry?  Aluminum industry?  One website concluded that, on the basis of comparative advantage, we should let Japan build computers while we stick to farming.

Homo economicus is a stupid model for framing national policy.