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Monday, June 25, 2012

Chaos and Trade

I'm not a very strong advocate for unfettered free trade.

The main reason is that more is not always better.  While people trading with each other enables efficiencies of specialization, economies of scale, etc., and there's little doubt that 10 people trading with each other are  better off than if each did everything for himself, and 100 is better than 10, and 1,000 is better than 100, it seems that increasing the size of a free trade area beyond a certain point is going to have minimal additional benefits.


There are lots of examples of this: eating more is good up to a point, then you get fat; increasing pressure when pumping fluid in a pipe increases flow until the flow becomes turbulent - then additional pressure has little effect other than possibly rupturing the pipe; entities get too big to fail (see Wall Street, GM, etc.); etc.  In general, complex systems with chaotic interactions can't be scaled without limitation.

An economy is such a system.

Would going from a free trade area of 500,000,000 (roughly the size of NAFTA) to 7,000,000,000 really enable significantly more wealth creation?  I doubt it (though I admit that there is no empirical evidence that supports my doubt).

As a result, I support across the board tariffs on all goods and services coming into NAFTA.  I think that NAFTA is a pretty ideal free trade area with first and third world countries with more than adequate resources.  If having free trade worldwide is in fact better, it won't be all that much better. The tariffs serve as "baffles" to help reduce chaotic interactions that could increase the risk of catastrophic failure.  Lastly, revenues for the government have to come from somewhere and tariffs are no worse of a source than anything else.

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