Understanding Methodological Cosmopolitanism in Economics
Cosmopolitanism posits that humanity forms a single global community, advocating for universal principles that transcend local affiliations. When we talk about âmethodological cosmopolitanism,â weâre dialing down this broad philosophy into a more focused lensâa way of analyzing economic scenarios that takes into account the interests of all affected parties. This means that distinctions based on race, nationality, gender, or socioeconomic status should not influence whose welfare is deemed important in economic evaluations.
To grasp the significance of methodological cosmopolitanism, consider the concept of the optimal tariff. In specific circumstances, a modest tariff might yield a net benefit for societyâwhere the losses in consumer surplus and the deadweight loss from the tariff are outweighed by the gains for producers and government revenue. This is a rare exception among taxes, which usually indicate a net loss in welfare unless they are levied on goods causing externalities. So, how do tariffs flip this script? Through a clever trick of accounting. The notion of an optimal tariff only appears beneficial because it conveniently overlooks the surplus losses incurred by foreign producers. If these losses were factored in, the supposed net welfare gain would vanish.
Now, hold onâhere comes the inevitable pushback from economic nationalists. When I present this analysis, responses often include sentiments like, âWhy should we care about the welfare of foreigners? Our focus should be on our own nation!â While the moral implications of foreign welfare may be up for debate, the economic ramifications are clear and significant. Trade is inherently reciprocal. In each trade transaction, both parties benefitâthe buyer receives value exceeding their monetary expenditure, while the seller gains something more valuable than the goods exchanged. But the story doesnât end there. After selling, the seller possesses dollars, which they can invest back into our economy or purchase goods from us. When trade between two nations dwindles due to tariffs, the negative impact reverberates twice: once when the initial exchange is curtailed and again when the foreign seller, now disadvantaged, finds themselves with less purchasing power.
As economist Abba Lerner noted back in 1936, tariffs on imports can similarly depress exports. This effect is well-known among economists, which is why optimal tariffs must be kept small to avoid significant losses for domestic producers and consumers tied to the export market. Yet, this understanding appears to elude many nationalists who resist the principles of methodological cosmopolitanism. Even if one believes foreign welfare is irrelevant, embracing a methodological cosmopolitan approach is essential for comprehensively assessing policy impactsâmoving beyond simplistic analyses that ignore broader economic realities.
