Free Trade Doesn't Work: What Should Replace It and Why, 2011 Edition by Ian Fletcher & Edward Luttwak

Author:Ian Fletcher & Edward Luttwak [Fletcher, Ian & Luttwak, Edward]
Language: eng
Format: epub
Amazon: 0578082667
Publisher: USBIC
Published: 2010-01-22T10:00:00+00:00

It doesn’t matter whether America exports computer chips, potato chips, or poker chips! They’re all just chips!657

Why would Boskin make a statement so brazenly contrary to common sense with such confidence? Because free-trade economics holds that markets are so efficient that no industry can be special. In its view, there can be no ladder externalities because there can be no industry externalities at all—certainly none that are big enough and evident enough to understand and manipulate. Every industry’s profits today must accurately reflect its value in both the short and the long term. Why? Because if any industry did have superior value for future growth, its expected profitability today would reflect this, that superior profitability would draw new firms into the industry, and the superior profits would be competed away.

If every industry’s short-term profitability were indeed a correct measure of its long-term value, this would indeed be the case. But when long-term returns may well accrue to another company, even another industry, and someone else may capture them, short-term profitability is not a reliable metric of long-term value. So any strategy that relies on short-term profitability alone to steer an economy will necessarily underperform. (As noted in Chapter Two, short-termism is a crucial hidden part of America’s trade and industrial problems.)

“Just chips” economics is wrong because industries are very much not alike in their long term consequences. In the words of Laura D’Andrea Tyson, Bill Clinton’s chairperson of the Council of Economic Advisors (who never got to apply her valuable theoretical insights in office):

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