Freedom and Free trade

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.

8 thoughts on “Freedom and Free trade

  1. Steve Loughran

    Or you let everyone drive on the side relevant to their country and provide some integration feature, call it a “router” or “enterprise integration bus” which handles the difference.

    For example, in Eurotunnel you change sides of the road while on the train, but you dont notice till the far end when you drive off and are directed into the appropriate lane.

  2. Ben Hyde

    England is the last hold out in Europe everybody else has paid the cost and switched. The story is pretty much the same in each case, as you suggest, there is a long period with some kind of coupling around the edges and then finally the subordinate side of the relationship pays the switching cost.

    But my point isn’t so much about which side of the road the driving happens on, but rather that breaking down the barrier creates switching costs that are born disproportionately by the subordinate side. Costs that have nothing to do with merit. Most of the examples people give of this side fall into the trap of arguing that the winning standards were ‘better’ in some sense. The delightful thing about the driving standard is that it’s totally arbitrary.

  3. Santiago Gala

    For a similar example, Spain had special Talgo trains that could change rail width just driving slowly through a special joint. Those trains have been covering the Madrid-Paris journey for like 40 years, and now they also switch from the high speed network (built on “European” standard) to the old network (built on “Spanish” standard). Take this as a business model, toll/gate based. 😉

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  6. Mike

    In some cases, the smaller country may be able to hold out politically until they are compensated by the large country by enough to equalize the benefits.

    I find these arguments for keep-to-the-left British (and Roman) style plausible, though short of convincing:

    It is harder to find arguments like those above for the opposite. Lock-in by convention is likely to be the dominant factor.

    So the question I really want answered: Why can’t we as a people dump Daylight Savings Time already?

  7. bhyde Post author

    Mike – “Why can’t we as a people dump Daylight Savings Time already?”

    I’ve never though much about it. My insta-theory has always been that it’s an industrial standard and some industries find it advantagous. My only evidence for that was that it was expanded the last time the right controlled the US federal government.

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