In his recent essay at American Compass, Michael Lind attempts to challenge certain aspects of economists’ arguments for free trade. While others have already addressed the factual and theoretical issues with his essay, I will focus on one specific claim he makes.
Lind criticizes the idea that deregulating trade and immigration to lower wages for workers and reduce prices for consumers is the most efficient policy. He argues that this belief stems from neoliberal dogmas, claiming that the winners of free trade should compensate the losers through redistribution in the tax code. However, he provides no evidence to support this claim, making it difficult to pinpoint the source of his argument.
It seems that Lind may be referring to the Factor Equalization Theorem, initially proposed by Wolfgang Stolper & Paul Samuelson in 1941 and later by Abba Lerner in 1952. This theorem suggests that in certain conditions, when two countries engage in trade, wages and returns to capital will equalize across trading partners. However, empirical evidence has shown that this theorem is not always accurate, as it relies on the assumption that labor and capital are identical across trading partners.
In reality, the productivity of workers varies significantly between countries. For example, the average American worker is much more productive than the average Chinese worker, leading to wage discrepancies between the two. This disproves the notion that wages will automatically equalize through trade, as Lind suggests.
To illustrate this point, consider the example of a football team looking for a quarterback. While a 35-year-old man may be willing to play for the league minimum wage, the team opts to offer a significantly higher salary to a talented rookie. This disparity in wages reflects the differences in skill and productivity between individuals, highlighting the flaws in the Factor Equalization Theorem.
While factor price equalization may occur between similar trading partners like the US and Canada, it is not a guaranteed outcome of trade. In fact, trade can just as easily lead to the opposite result. Factor price equalization is a special case rather than a general rule in international trade.
In conclusion, Lind’s critique of free trade policies based on the Factor Equalization Theorem is flawed, as it fails to consider the real-world differences in productivity and skill levels between trading partners. Trade does not automatically lead to wage equalization, and the assumptions of the theorem do not always hold true in practice. It is essential to recognize the complexities of international trade and avoid oversimplifying the impact of deregulation on wages and prices.
