Trade and the Zero-Sum Fallacy


Economics is Fun Series – Part 4 – Trade

Another great video from the Adam Smith Institute. This week Madsen Pirie looks at trade and also dispatches the zero-sum fallacy (the “big cake” argument which says that trade must leave someone worse off). He also recommends a way to make poorer nations richer – “buy their stuff”! Watch and learn.

Want more? Watch the previous episode on specialisation.


Makers of the world, unite!

The world of trade is changing dramatically. Is the WTO keeping up?

G7 DataSource: CEPR Report on WTO 2.0

We’re moving from a world where goods are simply shipped internationally, to one where goods are also made internationally.

In a fascinating article for the Centre for Economic Policy Research (CEPR), Richard Baldwin argues that while the WTO has done a good job in policing the traditional trade world where we ship goods made in one country to another, it is ill equipped to deal with the emerging world dependent on complex global supply chains (“supply-chain trade”). Before we slide further into a world of trade agreements based on mega-bilaterals and mega-regionals – that will also end up side-lining new trade giants such as China, India and Brazil – should we reconsider the role of the WTO and rebuild it for modern times? This CEPR paper calls for the countries and manufacturers of the world to unite under the common umbrella of a reconfigured WTO 2.0

Hat tip to @peraltenberg for spotting this one.

Bankers’ bonuses? The EU should bend it like Beckham

david beckham pegFar reaching policy decisions based on populist politics are rarely a good idea, and the recent call to cap banker’s bonuses by the EU is no exception.

It’s true to say that banking reform needs to be considered: we need a way of trying to prevent contagion when big banks fail in the future (and fail they most certainly will) that does not involve governments stepping in with tax-funded bail-outs. While there are some interesting ideas for reform out there (such as narrow banking), capping pay isn’t one of them. Why? There are four good reasons.

First, on a practical level it simply won’t work. If the bonus is linked to base salaries then base salaries will simply be raised. Not only that, banks will surely find another technical loophole to exploit, which will mean that in order to keep up with them the EU capping regulation will have to get ever more complex and Byzantine in turn. Both of these inevitable responses to the cap will simply add to the present craziness, not reduce it. And that’s before we can add in the fallout of any unintended consequences of this decision that we won’t see until it’s too late.

Second, on an idealogical level, it shouldn’t be the job of governments or the EU to set the salaries of staff in companies, even when the state is a key shareholder. If you think that’s not true, ask yourself this: how would you feel if one day you got a letter from the government telling you what your salary should be? You’d probably think it was none of their business, and you’d be right.

Third, it’s clearly populist. If anything, many professional footballers are paid even more than bankers. It would be interesting to see the fans reaction if the EU started to regulate those salaries too, especially when those footballers decided to take their skills elsewhere. Rather than seek to punish bankers, perhaps we should be encouraging them to act more like footballers instead? In promising to give his six figure PSG salary away, David Beckham has scored a real public relations coup with the fans. Populist? You bet! But the banking sector would do well to listen and learn from the likes of Beckham if it wants to turn its own public relations disaster around.

Fourth, banks and people will simply move. Maybe not in the short term, but when it comes to that next big decision about where a bank might prefer to locate it’s next enterprise, or where to look for that next job, surely the EU, where it will be hard to attract good staff because of the salary caps, will move lower down the list. And with that loss of wealth for the cities that play home to the banking sectors comes a general loss of everything else that helps to support it.

Reforming the banking sector to reduce fallout and contagion from future loses will be both complex and necessary. But in deciding to attack the wrong problem with it’s usual weapons of choice –  interference and bureaucracy – the EU has shown itself once more to be wide of the mark and lacking somewhat in imagination. By going after bankers bonuses it is clearly trying to win back some much needed public goodwill, but in the process it risks further crippling it’s own ailing economy. The last thing we need now are further measures to make the region less competitive on the global stage. That would be like shooting yourself in the foot. Better to be like Beckham and put your best foot forward instead. A little bit of his imagination and flair wouldn’t go amiss either.

Further reading:

A little commerce goes a long way



David Hume thought commerce ‘rather favourable to liberty, and has a natural tendency to preserve, if not produce a free government’ and that ‘nothing is more favourable to the rise of politeness and learning, than a number of neighbouring and independent states, connected together by commerce and policy’.

Matt Ridley, The Rational Optimist