A Pitiful Mind: Naomi Klein "Explains" Trade

♠ Posted by Emmanuel in , at 9/10/2009 09:44:00 AM
It bothers me that debate in political-economic matters is often dominated by those who blabber the loudest without necessarily having anything meaningful to say. Sometime ago, our friends at IPE@UNC rightly took exception to those who wrote about such things without any formal social science training. Although journalists would generally fall into this camp, some are clearly better informed than others about matters as to defy blanket categorization. On one hand, you have top-drawer commentators like Paul Blustein (formerly of the Washington Post and now of the Brookings Institution) who add behind-the-scenes color to the headlines. On the other hand, you have tabloid-ready reporters who by default adopt a hyperventilating tone--think of the Daily Telegraph's Ambrose Evans-Pritchard or our favorite whipping girl, Naomi Klein.

Like in real life, tabloid fare generally outsells respectable material. Unfortunately with Naomi Klein, you get a heavy dose of false analogies, outright misrepresentation, and--in this case--economic fallacies. Again using the case of journalists, the better ones bother to understand what they are writing about--it's that simple. As an educator, I like using Naomi Klein as Exhibit A in willful ignorance. It should not bother me if students adopt a critical anti-globalization stance. What I am paid to make sure of, though, is that they make good arguments in doing so, and there are quite a number of plausible ones as I'm sure you're all aware.

Today, however, we feature yet another tragicomic mental lapse in typical Kleinite fashion. In a recent gathering, Jagdish Bhagwati came across Naomi Klein and was astounded to hear the following as a reason for a decline in trade:
One fallacy must be dismissed, however. In an exchange with Naomi Klein, who is a fount of many economic fallacies (underlining how economics is a difficult subject with excessive free entry by the ignorant), she was celebrating the growing demise of “globalization” because higher energy costs had become a tax on transportation and hence on trade. I pointed out that higher fuel costs would affect production costs of traded goods as well; and if the differential in production costs of traded goods between the exporting and the importing countries widened, that could offset the increased transportation costs and serve to increase, not diminish, trade.
This episode once again demonstrates that ideological blinders tend to distort reasoning and hinder one's ability to seek better information. It probably never occurred to Klein that an increasing amount of trade happens without incurring shipping costs--it's called "outsourcing" or the cross-border supply of services in formal terms. Moreover, many high value-added products are not bulky and do not incur considerable shipping expense. Historically low shipping rates aside, it is mostly bulky, low value-added products that would be affected during energy price rises.

Returning to Bhagwati versus Klein, it is very easy to see what Professor Jagdish means. Take a gander at this table:

During the first time period before fuel prices soared, let's say making 1 widget domestically cost $140: $40 was made up of a unit of energy and $100 of other costs like labor. If the same widget were bought from abroad, it would cost the same $140 as the foreign producer's more efficient production processes meant it only consumed half as much energy ($20), offsetting higher production costs for other inputs ($110) and the shipping expense ($10 or a quarter of an energy unit here). During the first time period, we are indifferent to making the widget at home or buying it from abroad since either would cost the same.

However, let's move to the second time period in our exercise. A unit of energy has increased from costing $40 to $140. Producing at home has gone up to $240 to reflect the $100 increase for an energy unit. Buying from abroad has become more expensive as well: energy costs have gone up by 250% to $70 while shipping expenses have similarly increased to $35 for a total of $215. So, did increases in shipping costs kill off trade Naomi Klein style? The answer should be plain enough for everyone to see: instead of reducing trade, trade is now more likely to occur since it is relatively less costly to buy from abroad than to make at home ($215 vs. $240) whereas either option cost the same before.

You should be able to use your own numbers to explain what Bhagwati is saying. You can elaborate and improve its realism by adding price elasticities of demand, etc. The point remains that this simple explanation is beyond the grasp of someone like Klein who would benefit more from keeping you deliberately uninformed. At the end of the day, this is what education is about: to give students the tools to understand the world around them and not to reinforce the ignorance propounded by so many. Rest assured that there are those who prefer the latter and even enjoy peddling it at your expense. A mind is a terrible thing to waste, indeed.