Here’s a little model, a kind of cargo cult mimic of something an economist might do. The point of this little exercise is to illustrate a point about free trade and freedom. These two ideas get confounded with each other. The primary benefit of free trade is that it increases total efficiency and that’s presumably a social good. My take: when you let loose the dogs of efficiency it displaces diversity of practice. That forces switching costs born disproportionately by the weaker side. Traditional models emphasis the weaker industries bear the switching costs. That seems ethical. This model suggests that the costs are born by innocent victims of displaced platforms of standards.
Consider two economies North and South divided by a river which precludes trade between them. In a brilliant act of engineering and social enlightenment a bridge is built that links the two. Trade happens, economic growth is unleashed. All is well with the world.
But wait! The economy on the South side of the river drives on the left side of the road; while the economy on the North side drive on the right side of the road. In all other ways the two economies operate using the same standards. Is this situation stable?
I don’t think so. It seems to me that as the two economies grow increasingly linked one side will be forced to switch their driving standard. The cost of that switch will weigh very heavily on one economy. Which one will be forced to switch?
I think it’s clear that barring exceptional facts the smaller of the two will be forced to switch.
What would this switch cost the smaller economy? We have plenty of stories of switches like this – always a smaller or conquered land switching to gain compatibility with the standards of a dominate power. For example the Germans forced the Austrians to switch during the second world war.
Driving side is a good example because it carries no credible argument for one choice being better than another. The switching costs concrete. Other examples, like switching currency or language are rife with subjective subtexts.
We know that much of happiness arises from relative position. If you know the other guy is better off than you are then that makes you sad. Consider some hypothetical numbers. The Southern economy is 80% the size of the Northern one. The bridge raises both economies GDP by 5%. The Southern economy is then forced to take a -4% hit to switch to new driving standards. But after the bridge is build and the dust settles everybody is “better off” but relatively speaking the Southern economy is now even worse off compared to the Northern one.
This is not a scenario likely to make the population of the Southern economy desire that a bridge get built. From their point of view this is a scheme on the part of the Northern economy to force them into a more subordinate position. The bridge makes the southern economy richer, but less more subordinate and less happy.