Paul Samuelson: A Titan for Trade

One of the subjects of focus for Americans this past year was international trade. The United States trades with many countries around the world, and trade deals with those countries solidify the terms under which the two nations agree to trade. However, these trade agreements have come under fire from numerous opponents.

Donald Trump was and still is a serious critic of the North American Free Trade Agreement (NAFTA). He has referred to it as “the worst trade deal in history” and promised to renegotiate this free trade agreement. He is also highly critical of the Trans-Pacific Partnership (TPP), a trade deal involving 12 countries in the Asia-Pacific, and would replace it with his “America First” plan.

Hillary Clinton, despite calling it “the gold standard of trade deals,” came out against the TPP. She questioned its ability to crack down on currency manipulation and extending pharmaceutical patents into poorer countries.

Even the Democratic Socialist, Bernie Sanders was outspoken against these trade deals as well. He felt these deals were protecting large corporate interests at the expense of the other 98 percent. What’s more are the claims that big, international, corporations are exploiting the poor in other countries by extracting all their natural resources, and building sweatshops with cheap workers.

Unsurprisingly, politicians do not come to these conclusions about trade and the economy on their own. These ideas are brought to them by trusted, expert economists whom, through the rigorous work of Paul Samuelson, are able to more clearly see the costs and benefits of global trade.

Paul Samuelson won the Nobel Prize in Economics in 1970. The formal reason for him winning is: “the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science”. So, essentially, for making the science of economics what it is today… No big deal.

“I can claim that in talking about modern economics I am talking about me. My finger has been in every pie.” -Paul Samuelson. Photo was taken from Paul Krugman’s Blog

Samuelson was regarded as one of the most influential economists of the late 20th century. His impact was so significant that he was awarded the National Medal of Science by former President Bill Clinton for his “fundamental contributions to economic science”. Additionally, he served as an advisor to both John F. Kennedy and Lyndon B. Johnson. He also authored the best selling economics textbook of all time, Economics: An Introductory Analysis, published in 1948, selling more than 4 million copies in 40 different languages!

If Samuelson were alive today, he would be rolling in his grave with all the trash talk on trade. As a pioneer in the development of trade theory and international economics, he would refute the claim that trade is hurting Americans. His theory of “revealed preferences” says that people will trade with each other if it’s good for everyone involved in the trade. The shoemaker won’t sell the shoes if the cost of making them is higher than the sale of the shoe. Conversely, the buyer of the shoes won’t purchase the shoes unless the benefits of having the shoes outweigh the cost of buying them. So, when both sides see that the benefits outweigh the costs, the trade is made! This illustration works with global trade as well. If Americans are losing out from trading with other countries, why do they do it? On the surface, it may seem as if we are losing out, but countries (well, people) accommodate in order to make the trades a win-win situation.

Perception of Free Trade. Photo taken from Adam Elliot’s Research Portfolio

Samuelson would not only have a response to Trump and Hillary’s criticisms of international trade, but he also could refute Sanders and others who feel that international trade is exploitative of those living in poorer countries.

The Balassa-Samuelson effect, for example, states that countries that are more productive have higher levels of wage growth. In turn, the increase in wages of those employed in the tradable-goods sector of a developing economy will have a domino effect that increases wages in other sectors. This economic model is undoubtedly at the core of modern economics and international trade theory. It helps us understand the vital role of trade in helping Americans and people from other nations become prosperous.

What this means for the argument against Sanders is that sweatshops being built in poorer countries is a good thing for the citizens there. It raises the wages of the people working in the sweatshops compared to the alternative. It also raises the prices of jobs in other areas of that country’s economy. The saying, “A rising tide lifts all boats,” certainly works in this case as well. With sweatshops increasing the wages and productivity, the benefits are felt throughout the country.

Samuelson believed that David Ricardo’s “theory of comparative advantage” was, in fact, the one thing in economics that was simultaneously true and not obvious. So, naturally, he also developed a Ricardian model for looking at international trade. Just to refresh, having a comparative advantage means that you can produce something at a lower opportunity cost someone else. You may not be the best or have the absolute advantage, but having the lowest opportunity cost makes you relatively better. Samuelson’s model more clearly explains how countries have one common factor of production, labor. It’s the different technologies between countries that incentivize them to engage in trade.

President Trump’s condemnation of trading with China combined with the rhetoric that Americans are “losing badly” when trading with other countries is a huge reason he was able to win the election. However, Samuelson would counter those claims with a condescending reminder, (condescending, because we’d like to think his head got pretty big), that comparative advantage holds true even in international trade. China will not end up producing everything, even if it has an absolute advantage in doing so, it will produce only what it is relatively good at producing.

The best way to close a discussion about Samuelson is to have him impart a few words of wisdom on us. Firstly, Samuelson said, “Economics is a choice between alternatives all the time”. This means that we need to revisit the foundations of the economic way of thinking and realize that all of our choices come with opportunity cost. Samuelson would remind us that “good questions outrank easy answers” and push us to pursue research, driven by solid questions.

Lastly, Samuelson said “Economics is not an exact science. It’s a combination of an art and elements of science.” This means we do not always have the answers, but trade does seem to leave most people better off. What is most important is that we are able to have an open conversation about the impact of international trade. To paraphrase Samuelson, our goal as economists is not to discover the perfect answer. Rather, we should improve upon the data we already have and ways to interpret it.

Photo of Paul Samuelson taken from the Earths Rights Institute

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