Economics - General

The Benefits and Perils of Free Trade

Russ Roberts has a great example demonstrating the benefits and perils of free trade with a health care example.

Suppose a scientist invents a pill that once you take it lets you live until 120 with no health issues whatsoever. Once you turn 120, you die a peaceful death on your birthday. Suppose the scientist, in a gesture of good will, charges $10 for the pill.

Should we let the scientist sell the pill? Is it good for the country? It’s good for almost everyone. But it’s going to be very hard on a very large group of people immediately:
Doctors. Nurses. Health Care administrators. People who build hospitals. People in medical school. People who teach in medical schools. People in health insurance companies. Pharmaceutical companies. Researchers. You get the idea. It’s millions of people. This is a very disruptive technology.

What’s going to happen to all those people?  Mass unemployment. All of the skills of all of those people are no longer valued. The past investments made in those skills are now wasted. Incomes of those workers will inevitably plummet overnight.

True, they also get to live until 120. But their incomes are very low and may stay low for a while. They will have to find new things to do. What will they do? They face a very depressing future. Not much else they can do with the skills they have acquired…

But that’s not the whole story. We’re missing a huge part of the story.

The other important part of the story is that everyone is suddenly a lot wealthier. All the money we once poured into health care will now be able to be spent on other things. What are those other things?

We can’t know. No one can. But a whole bunch of areas are going to expand and some of those are going to soak up the time, talents and energy of former doctors, health care administrators and so on.

Roberts makes the convincing argument that trade and innovation are similar in that they both improve the quality of people’s life on average, but can have huge, devastating impacts for a subset of the population. He also makes the case that protectionism is a form of charity. Do read the whole article.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *