In a recent podcast episode of EconTalk, economist Scott Sumner joined Russ Roberts to discuss the topic of government intervention versus free markets, specifically focusing on industrial policy. Sumner, known for his Substack “The Pursuit of Happiness,” delves into the complexities of industrial policy and its potential drawbacks.
Sumner defines industrial policy as government policies aimed at reshaping the economy to achieve certain national goals, such as changing international trade flows, addressing national security concerns, or tackling environmental issues like global warming. He emphasizes that these policies often deviate from the outcomes that a free market would naturally produce.
One term that Sumner introduces in the discussion is ‘vulgar mercantilism,’ which refers to protectionist trade policies advocated by individuals who lack a fundamental understanding of trade theory. These advocates often believe that protectionist measures can solve issues like trade deficits, despite evidence showing otherwise. Sumner highlights the importance of debunking these misconceptions rooted in a misunderstanding of trade theory to make informed policy decisions.
Roberts chimes in, adding historical context to the debate by mentioning the roots of mercantilism dating back to the 13th or 14th century. He contrasts the antiquated notion of wealth measured by gold accumulation with Adam Smith’s modern view that true wealth comes from the ability to consume goods and services. Despite economists’ efforts to debunk mercantilist ideas, the appeal of protectionist policies persists due to their simplicity and common-sense appeal.
The conversation delves into why the economist’s case for free trade often falls on deaf ears among the general public. Sumner attributes this disconnect to the counterintuitive nature of trade theory, highlighting the public’s tendency to focus on the immediate job losses resulting from imports without considering the broader benefits of international trade. He also points out the role of xenophobia in shaping public opinion, noting a tendency to view foreign trade partners with suspicion compared to domestic counterparts.
In a world where common sense has at times been validated by recent events, Sumner and Roberts navigate the complexities of industrial policy and free markets, urging listeners to consider the broader implications of trade policies beyond their immediate effects on job markets. As the conversation unfolds, it becomes clear that understanding the nuances of trade theory is essential for making informed decisions that benefit the economy as a whole. Many people have a natural inclination to trust their common sense when it comes to making decisions or forming opinions. It’s human nature to rely on what seems obvious or intuitive. However, when it comes to complex issues like economics, common sense can often lead us astray. As economist Scott Sumner points out, using common sense to understand economic principles is like trying to determine if the world is flat by looking out the window. While it may seem flat at first glance, a deeper examination reveals the curvature of the earth.
One of the key points that Sumner emphasizes is the importance of trade in the global economy. He notes that it is easy to overlook the role that exports play in driving economic growth. Without imports, there can be no exports, and trade flows in goods, assets, and capital are essential for a balanced economy. While terms like “surplus” and “deficit” may carry emotional connotations, they do not accurately reflect the complexities of international trade.
Sumner also highlights the benefits of allowing imports and competition from abroad. While protectionist policies may seem appealing in the short term, they can ultimately harm domestic industries and drive up the cost of living. By embracing free trade, countries can benefit from increased efficiency, lower prices, and the creation of new businesses.
When examining the empirical evidence for economic theories, Sumner points out that cherry-picking examples can be misleading. Countries may engage in various forms of protectionism or industrial policy, making it challenging to isolate the effects of trade on their economies. It is essential to look beyond surface-level observations and consider the broader context when evaluating the impact of trade policies.
Sumner provides several examples to illustrate his points, such as South Korea’s trade deficit during its high-growth years and the role of technology and regional shifts in job losses in industries like coal mining and auto manufacturing. These examples underscore the complexity of economic issues and highlight the need for a nuanced understanding of the data.
In conclusion, while common sense can be a useful tool in many aspects of life, it is important to approach complex issues like economics with an open mind and a willingness to challenge conventional wisdom. By critically evaluating economic theories and considering the broader context, we can gain a deeper understanding of the forces shaping the global economy. Manufacturing jobs are being lost all around the world, and automation is largely to blame. The rise of technology has led to increased productivity and efficiency in manufacturing processes, but it has also resulted in a decrease in the need for human labor. This trend is not unique to any one country, as automation is a global phenomenon that is reshaping industries worldwide.
Economists like Russ Roberts and Scott Sumner argue that the loss of manufacturing jobs due to automation is similar to the impact of international trade on job displacement. Both trade and automation are ways to increase productivity and reduce costs, ultimately leading to greater prosperity for a country. However, the adjustment period for workers affected by these changes can be challenging, especially if labor markets are slow to respond to the shifting demands of the economy.
Roberts emphasizes the importance of a well-functioning labor market in facilitating the transition for workers displaced by technological advancements. Historically, as seen in the shift from agricultural to industrial jobs in the United States, people have been able to find new opportunities as the economy evolves. However, this process can be more difficult for certain segments of the population or regions that are slower to adapt to change.
While some Americans may be more accepting of technological progress compared to international trade, they fail to recognize that both are mechanisms for driving economic growth and innovation. The abundance of goods and services made possible by technological advancements is often celebrated, while the impact of trade on job displacement is met with skepticism. It is essential for policymakers and stakeholders to understand the interconnected nature of trade and automation in shaping the future of work and the economy.
In conclusion, the loss of manufacturing jobs due to automation is a complex issue that requires thoughtful consideration and proactive measures to support workers through the transition. As technology continues to advance, it is crucial for countries to invest in education and training programs that equip individuals with the skills needed for the jobs of the future. By embracing change and fostering a dynamic labor market, nations can harness the benefits of automation while minimizing the negative impact on workers and communities. In recent discussions about trade and its impact on local economies, the state of West Virginia has been highlighted as a prime example of the challenges faced by regions affected by changes in trade and technological innovation. While some may argue that West Virginia has not been punished by the import of coal, but rather by the coal that came from the west and the improvements in technology that made coal cheaper, it is clear that there is a distributive, regional, and sectoral cost to trade changes and technological advancements.
Economists like Scott Sumner emphasize that not every case is like West Virginia, where trade is not the primary factor causing economic challenges. However, there are instances where trade does have a negative impact on local communities. For example, a paper by David Autor and others examined the impact of trade with China on certain regions of the United States. While the overall net effect of trade with China was positive, some local communities did experience adverse effects on their labor markets.
Russ Roberts points out that it is important to distinguish between problems of unemployment due to the business cycle and those caused by trade. He notes that during the period examined in the Autor paper, the United States had a strong labor market overall, with only some regions experiencing difficulties. However, after the 2008 recession, which was severe and led to high unemployment rates, some people began to conflate trade issues with unemployment problems.
Despite the challenges faced by regions impacted by trade, it is important to consider the long-term benefits of economic changes. For example, while Massachusetts may have experienced difficulties when its textile and shoe-making factories moved to the South, the state ultimately transitioned to new industries like biotech, which have proven to be beneficial in the long run.
Overall, the debate over trade and its impact on local economies is complex and multifaceted. While trade can bring about challenges for certain regions, it also has the potential to drive economic growth and innovation in the long term. It is crucial for policymakers to carefully consider the implications of trade agreements and technological advancements to ensure that they benefit all sectors of society. The potential confrontation in foreign policy between China and the United States has raised questions about how trade with China should be approached. Some argue that the tensions between the two countries should influence trade policies, while others believe that historical examples of exaggerated foreign threats should be considered before making any changes.
Scott Sumner, a prominent economist, points out that throughout history, there have been numerous instances where foreign threats were exaggerated and turned out to be unfounded. He mentions the missile gap with Russia in the 1950s, the fear of the Soviet Union surpassing the United States economically, and concerns about Japan overtaking the US in the 1980s. In each case, the perceived threats did not materialize, leading to skepticism about the implications of current tensions with China on trade policy.
Sumner and Russ Roberts discuss how fears of foreign competition often lead to calls for protectionist measures and government intervention in the economy. They reference past instances where such fears were proven wrong, such as Japan’s economic stagnation after being seen as a major threat in the 1980s. They also highlight how biases and stereotypes can influence attitudes towards trade partners, as seen in the treatment of Japanese Americans during World War II and current actions targeting Chinese individuals.
Sumner argues that the rise of neoliberalism in the 1990s was fueled by the failure of interventionist policies and the success of countries that embraced open economies and international trade. He points to the significant reduction in global poverty during this period as evidence of the benefits of free market principles. However, he expresses concern that recent shifts towards nationalism and protectionism threaten to undo the progress made under the neoliberal model.
In conclusion, Sumner’s perspective suggests that caution should be exercised when considering the implications of foreign policy tensions on trade with China. While it is important to address legitimate concerns about national security and economic competition, history has shown that exaggerated fears can lead to misguided policies that harm both countries involved. It is essential to learn from past mistakes and approach trade with China in a balanced and rational manner that prioritizes mutual benefit and global economic growth. The conversation between Russ Roberts and Scott Sumner delves into the topic of neoliberalism, globalization, and the impact of government policies on the economy. The term ‘neoliberalism’ has become a controversial topic, often used as a slander to explain the issues in America and other parts of the world. However, Roberts emphasizes that the world became more market-oriented between 1980 and 2010, with globalization playing a significant role in driving economic growth.
Globalization, particularly the entry of China into the world economy, led to a reduction in the prices of various goods, making them more affordable for consumers. This resulted in an overall improvement in living standards as people could access a wider range of products and services. Additionally, advancements in healthcare technology and other sectors were attributed to globalization and increased trade with foreign nations.
Despite the rhetoric surrounding neoliberalism and free market policies, Roberts argues that government intervention and regulations increased during the period in question. While certain pockets of deregulation occurred, overall, the government expanded its role in the economy. He refutes the notion that free market ideologies, advocated by figures like Milton Friedman and Hayek, were fully implemented, pointing out that many of their ideas were rejected by the political process.
Sumner adds that while the United States may not have fully embraced free market principles, other countries, such as China, India, and Eastern European nations, made significant strides towards neoliberal reforms. He highlights the success of countries like Israel, which saw economic growth after moving away from socialist policies.
The conversation also touches on national security risks, particularly in the context of the Ukraine war. Sumner expresses skepticism about the effectiveness of Western sanctions on Russia and the impact of the Russian gas cutoff on the European economy. He notes that expert predictions about the outcomes of these events were ultimately proven wrong.
Overall, the discussion underscores the complexities of economic policies, the impact of globalization on trade and living standards, and the need for a nuanced understanding of neoliberalism and government intervention in the economy. By examining historical trends and real-world outcomes, Roberts and Sumner shed light on the realities of economic policies and their implications for society. The global economy is a complex web of interconnected relationships and dependencies, with each country playing a unique role in the larger picture. The recent geopolitical tensions between Russia and the West have raised concerns about the potential impact on the global economy, particularly in terms of energy and essential resources.
However, a closer examination of the situation reveals that the Russian economy has managed to weather the storm, while European countries have found alternative sources for natural gas. This resilience highlights the importance of diversification and adaptability in the face of geopolitical risks.
One key example is the trade relationship between Russia and Germany, where German exports to Russia have been rerouted through Central Asian countries like Kazakhstan and Kyrgyzstan. This creative solution has allowed both parties to continue their trade relations despite international sanctions.
Similarly, reports of advanced computer chips being readily available in Chinese wholesale markets challenge the notion of supply chain vulnerabilities. The abundance of these chips at affordable prices in China suggests that concerns about shortages may be overstated.
In the United States, the strong position in terms of foreign policy risks is often overlooked. Self-sufficiency in essential resources like energy and food, as well as strong alliances with key industrial countries, provide a solid foundation for navigating international conflicts. The dominance of the global financial system further enhances the country’s leverage in geopolitical matters.
While some argue for increased industrial policies to protect domestic industries, caution is advised in adopting overly interventionist measures. The ability of industries to find substitutes and adapt to changing circumstances should not be underestimated. The United States’ inherent strengths in geopolitical competition should be recognized and leveraged to maintain a balanced approach to economic policies.
Ultimately, the narrative of manufacturing jobs as the sole source of economic growth and prosperity is a misconception. Innovation, trade, and diversification are equally vital components of a dynamic and resilient economy. By embracing these principles and recognizing the inherent strengths of the United States in the global arena, policymakers can navigate geopolitical challenges with confidence and foresight. In a recent discussion, the topic of foreign competition and its impact on the American economy was brought up. The argument that foreigners are stealing American jobs and hollowing out the economy was challenged with data that showed the U.S. economy has thrived despite shifts in manufacturing and employment trends.
The conversation delved into the idea that having a diverse economy, with a mix of industries, is actually beneficial for overall economic growth. While some individuals may have been negatively affected by changes in technology or trade, the economy as a whole has seen significant growth over the years.
One interesting point that was raised was the argument that certain industries, like automobile manufacturing, are crucial for national security. The fear is that if the U.S. were to lose the know-how of industrial processes, it could impact the production of military products like fighter planes and tanks.
However, the validity of this argument was questioned. With the rapid advancements in technology and the ability to adapt and innovate, it was suggested that the U.S. could easily regain any lost industrial know-how if necessary. The country is home to a highly-educated population of engineers who are capable of restarting industrial processes if needed.
Additionally, the discussion touched on the evolving nature of foreign policy threats. While conventional military conflicts are still a concern, the rise of high-tech futuristic threats, such as those associated with artificial intelligence, are becoming more prominent. The U.S.’s dominance in high-tech industries, particularly in areas like AI and computer technology, was highlighted as a significant advantage in addressing these futuristic threats.
Overall, the conversation emphasized the importance of embracing economic changes and technological advancements to ensure continued prosperity and security. Rather than fearing foreign competition, the U.S. should leverage its strengths in innovation and technology to stay ahead in an ever-evolving global landscape. As the world advances in technology, the debate over the potential threats posed by countries like China and Russia in areas such as artificial intelligence continues to grow. In a recent discussion between Scott Sumner and Russ Roberts, the topic of AI dominance and the role of different nations in the global landscape was explored.
Sumner raised concerns about the possibility of China using AI not just for day-to-day tasks, but to dominate the world. He emphasized the need for the United States to take a systematic approach to AI development in order to compete with China. However, Roberts pointed out that historical fears of technological dominance have often been exaggerated, citing examples of past scares that did not materialize.
Roberts highlighted the importance of not succumbing to paranoia and fearmongering when analyzing potential threats from countries like China. While acknowledging the foreign policy risks posed by China, particularly in relation to Taiwan, Roberts argued that China’s historical track record does not indicate a strong desire for expansion.
Sumner added that while China may be perceived as a threat, there is little evidence to support the notion that China is seeking global dominance. He pointed out that China’s economy, while large, still lags behind in terms of per capita GDP compared to other countries. The discussion highlighted the importance of critically examining the narrative surrounding China’s intentions and capabilities in the realm of AI and global dominance.
Overall, the conversation between Sumner and Roberts underscored the need for a balanced and nuanced approach to assessing the potential threats posed by emerging technologies and rival nations. While it is crucial to remain vigilant and prepared for potential risks, it is equally important to avoid sensationalism and baseless fear when evaluating geopolitical challenges in the digital age. China, with its growing economy and large population, is undoubtedly a major player on the global stage. However, despite its potential military power, it is important to note that its economy is currently comparable to that of Mexico. While it is expected to continue growing, it is unlikely to reach the same level as the United States on a per capita basis.
One significant factor to consider is China’s declining population. It is projected to decrease by more than half during the 21st century, potentially leading to countries like Pakistan and Nigeria surpassing China in terms of population size. This demographic shift could have far-reaching implications for China’s future influence on the world stage.
In terms of military threats, China is often seen as a foreign policy threat, particularly when it comes to Taiwan. However, expansionist aims beyond Taiwan are not as clear. Despite this, China’s sensitivity to criticism and tendency to impose trade sanctions on countries that speak out against its government can create a perception of a greater threat than may actually exist.
While it is important for the United States to maintain a strong defense capability to deter potential threats from countries like China and Russia, it is also crucial to avoid excessive fear-driven industrial policies. Claims of China potentially attacking Japan or South Korea may be exaggerated, and it is essential to approach these scenarios with a level-headed perspective.
Preparing for worst-case scenarios is prudent, but it is equally important to consider the broader implications of allowing security concerns to drive all decision-making processes. For example, Japan’s response to the Ukraine war by increasing defense spending highlights the need for a balanced approach that takes into account the evolving global landscape.
In conclusion, while China’s military potential and global influence are significant factors to consider, it is essential to maintain a nuanced understanding of the situation and avoid overreacting to perceived threats. By approaching international relations with a level-headed perspective and prioritizing diplomacy and dialogue, countries can work towards a more stable and peaceful future. The world of technology is constantly evolving, with new innovations and advancements being made every day. One of the most exciting developments in recent years is the rise of artificial intelligence (AI). AI has the potential to revolutionize industries, improve efficiency, and change the way we live and work.
AI is a branch of computer science that aims to create machines that can perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and language translation. These machines are programmed to learn from data, adapt to new inputs, and perform tasks autonomously.
One area where AI has already made a significant impact is in healthcare. AI-powered systems can analyze vast amounts of medical data to help doctors diagnose diseases, create personalized treatment plans, and predict patient outcomes. This has the potential to improve patient care, reduce medical errors, and save lives.
In the business world, AI is being used to streamline operations, improve customer service, and increase productivity. Chatbots powered by AI can handle customer inquiries and provide assistance 24/7, freeing up human employees to focus on more complex tasks. AI-powered analytics tools can also help businesses make better decisions by analyzing data and identifying trends and patterns.
AI is also being used in the transportation industry to improve safety and efficiency. Self-driving cars use AI algorithms to navigate roads, avoid obstacles, and make split-second decisions to prevent accidents. AI-powered traffic management systems can also optimize traffic flow and reduce congestion in cities.
While the potential benefits of AI are vast, there are also concerns about its impact on jobs and privacy. Some fear that AI will lead to job losses as machines take over tasks that were previously performed by humans. There are also concerns about the ethical implications of AI, such as bias in algorithms and the potential for misuse of personal data.
Despite these challenges, the potential of AI to transform industries and improve our lives is undeniable. As researchers continue to push the boundaries of what is possible with AI, we can expect to see even more exciting developments in the years to come. Whether it’s in healthcare, business, transportation, or any other industry, AI has the power to revolutionize the way we live and work.
