Trade and Trust” addresses the misconception amongsome libertarians that the institutional infrastructure neededto support specialization and trade is minimal.
Stanford focuses on class divisions, while Kling focuses on specialization and trust. Both look at the big structures that make economies work, just in differently.
iscovering new patterns of sustainablespecialization and trade is more complex and subtle and lessmechanical than what is assumed by the Keynesian and mon-etarist traditions.
Finance is basically extended trust. Crises happen when that trust disappears Stanford focuses on class and inequality, but Kling focuses on trust and specialization. Both show important parts of how the economy works, just from different angles.
If trade entails trust among strangers, then financial inter-mediation entails trust over time. If people lose trust infinancial intermediaries, then financial intermediation candecline precipitously. That sharp decline can have a broadeffect on the structure of production in the economy
Trust is key. Without it, people can’t rely on each other’s work. What happens to economies when trust breaks down, like during financial crises...?
Unfortunately, once they have taught the simple exam-ple of comparative advantage, with two producers and twotasks, most economists are done with the issue of specializa-tion. Instead, textbooks want to focus on scarcity and choice.Often, the student will read that economics is about the allo-cation of scarce resources given our unlimited wants. Or heor she may be told that economics is the study of how peoplemake rational choices among competing priorities.Scarcity and choice are certainly important concepts, butmaking them the central focus can lead to economic analysisthat is simplistic and mechanistic. In fact, the approach to eco-nomics that took hold after World War II treats the economyas a machine governed by equations.
Kling says specialization and cooperation are more important than just scarcity for understanding how economies grow.
Look at the list of ingredients in the cereal. Those ingre-dients had to be refined and shipped to the cereal manu-facturer. Again, those processes required many machines,which in turn had to be manufactured. The cereal grainsand other ingredients had to be grown, harvested, and pro-cessed. Machines were involved in those processes, and thosemachines had to be manufactured.
Even simple things depend on lots of people working together. Does this mean understanding how we all rely on each other could change how we see value in the economy?
hat econo-mists have lost the art of critical thinking.
Kling thinks economists focus too much on models and not enough on real-world problems. Makes me wonder what ways of thinking could make economics more useful for regular people.
onomists who ignore the key features of capitalism will be less able tounderstand and explain how capitalism actually works. So purely from a scientificperspective, it’s important to be frank about what we are dealing with
Stanford says economists are biased; Kling says they rely too much on models. Both agree economists can be out of touch with real life.
Of course, capitalism can change its “look” a lot, while still preserving its core,underlying features. Indeed, one of the most impressive features of capitalism is itsflexibility: its capacity to change and adapt. Many economists and commentatorshave argued that capitalism today is not at all like capitalism in its early days (backin the soot and grime of the Industrial Revolution). Here are some of the terms usedto describe modern capitalism, implying (falsely) that it’s a whole “new” system:
Capitalism can change how it looks over time, but its core hasn’t really changed. Even though services are bigger than goods now, information moves faster, private companies still dominate, most workers don’t own the businesses they work for, and inequality is still huge. So while the system adapts and evolves, the basic rules of capitalism stay the same.
land and driven into cities, where they suffered horrendous exploitation andconditions that would be considered intolerable today: seven-day working weeks,twelve-hour working days, child labour, frequent injury, early death. Vast profitswere earned by the new class of capitalists, most of which they ploughed backinto new investment, technology, and growth – but some of which they used tofinance their own luxurious consumption. The early capitalist societies were not atall democratic: the right to vote was limited to property owners, and basic rights tospeak out and organize (including to organize unions) were routinely (and oftenviolently) trampled.
The start of capitalism during the Industrial Revolution was harsh and unfair. Workers were forced into cities and faced terrible conditions while capitalists made huge profits. Do you think capitalism could have grown the same way if workers had better protections back then...;?
Instead, economists refer simply to “the economy” – as if there is only one kindof economy, and hence no need to name or define it. This is wrong. As we havealready seen, “the economy” is simply where people work to produce the things weneed and want. There are different ways to organize that work. Capitalism is justone of them
Stanford is saying that capitalism hasn’t always been here and might not stick around forever. It makes me think if something new takes its place, what would it look like, and would it deal with inequality any better?
Conventionally trained economists take it as a proven fact that free tradebetween two countries always makes both sides better off. People who questionor oppose free trade – trade unionists, social activists, nationalists – must eitherbe acting from ignorance, or else are pursuing some narrow vested interest thatconflicts with the broader good. These troublesome people should be lectured to(and economists love nothing better than expounding their beautiful theory ofcomparative advantage*), or simply ignored. And that’s exactly what mostgovernments do. (Ironically, even some conventional economists now recognizethat traditional free trade theory is wrong, for many reasons – some of whichwe’ll discuss in Chapter 22 of this book. But that hasn’t affected the profession’snear-religious devotion to free trade policies.)
He’s pointing out that economists act like free trade is more of a belief than a fact. I take this to mean that economics sometimes feels more like an ideology than an actual science. If free trade ends up hurting workers, shouldn’t economists question the ideas they’re basing it on?
Nothing better exemplifies economists’ know-it-all attitude than debates overfree trade. Conventionally trained economists take it as a proven fact that free tradebetween two countries always makes both sides better off. People who questionor oppose free trade – trade unionists, social activists, nationalists – must eitherbe acting from ignorance, or else are pursuing some narrow vested interest thatconflicts with the broader good. These troublesome people should be lectured to(and economists love nothing better than expounding their beautiful theory ofcomparative advantage*), or simply ignored
Stanford is saying economists defend free trade almost like a faith... I think he’s pointing out that their belief doesn’t always match real-life outcomes.
If they see it as fact, how do they respond when workers get hurt by free trade?
This is thestuff economics should be made of.Unfortunately, most professional economists don’t think about economics inthis common-sense, grass-roots context. To the contrary, they tend to adopt arather superior attitude in their dealings with the untrained masses. They invokecomplicated technical mumbo-jumbo – usually utterly unnecessary to theirarguments – to make their case. They claim to know what’s good for the people
Stanford says we shouldn’t trust economists because they’re too disconnected from everyday life. Since professional economists are also human, they subconsciously think about their own interests first, so their ideas usually reflect their own priorities instead of what regular people need and they'll add unnecessary information into the mix to make it sounds beneficial to everyone.