Often times I’ll be listening to a trade seminar and the presenter makes the following argument:
- Here’s an economy with some friction (e.g. trade restrictions)
- Here’s an economy without said friction, see how its best
- The difference between countries that are more like the first and countries more like the second can be attributed to the friction
Here’s my problem with that argument. Its silly.
Oh, you need more detail? Its silly because no country is completely without the friction and there’s no guarantee that going from lots of the friction to a little bit less will move you in the direction of the frictionless world. Maybe some other friction balances out the first friction and when you reduce the first, the second over compensates and you’re in a worse state than you began in.
Well, that was abstract. Example: let’s say I would be the most handsome man in Davis if I just took my girlfriend’s advice about how to dress myself. She has a perfect sense of style and boy would I be cool if I would dress exactly how she tells me. So, here we have two scenarios: me dressed as my usual college casual (read: boring) self or me dressed to the nines. Obviously, it would be best for me to do 100% what my girlfriend tells me.
Does it then follow that if I put the girlfriend-approved power tie over my faded tee-shirt but kept everything else in my attire the same that I’d be better dressed? No. In fact, I’m sure it would reduce my sartorial rating.
This argument doesn’t work in that context and I don’t think it works in economics, either. Why, then, do I see this argument so often? ((See chapter 8, in Prescott and Parente (pdf) for a variation on this argument))