The World As I See It

I came across Daphne’s narration of how people clog the bus door so as to be able to alight first, but ending up delaying everyone, including themselves. It immediately reflected me to the issue of distributional struggle and aggregate welfare gain.

The most glaring example is always free trade. Protectionist barriers benefit the inefficient steelmakers in the US, carmaker in Malaysia and farmers in France, Korea, the US and Japan. They remain in job. Their products can be sold at a higher price, or at a lower quality behind the tariff wall. But at what cost? This is made tenable only at the expense of consumers. The special interest group reaps the total benefit while the cost is spread across the country, such that it is still affordable to an average consumer. And we witnessed over the years to what extent these groups (or the people they mobilised) would stage violent protests in obstructing the WTO meetings to protect their turfs. Trade economists and trade negotiators are having tough jobs.

Other than import-competing industries, the special interest groups can be trade unions demanding higher than market-clearing pay, any party lobbying for subsidy, welfare beneficiaries advocating higher taxes on the rich, or the bus door crowders. They seek a larger distributional gain towards themselves, unaware that they are fighting for a larger slice of a smaller pie. Any market distortion necessarily reduces the potential gain at the maximum efficiency. As it turns out, the larger slice can be smaller than what they would get, had they stayed their course and grown a bigger pie.

To be sure, globalisation produces winners and losers. But the way forward is not to coddle the losers but to retrain the people and, if possible, prevent it - probably by education that geared towards improving employability. Here, the governments often help mitigate their short-term risks by redistributing wealth from a bigger pie (as a result of open economy). Moreover, even the benefit of a free trade between countries is often skewed. For example the US-Singapore bilateral agreement is surely more favourable to the latter. It is more of a gesture of amity for the US. For other cases, it invariably involves dispute over uneven gains.

The book "The Logic of Collective Action" by the late Mancur Olson (and his subsequent works) provides a fascinating account of the theory of groups. Also of relevance would be a commentary by Tan Khee Giap "Do the right thing, not what’s popular" (The Straits Times, 16 Jan 2007).

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My Reply to SeKi, on Nash Equilibrium:

The situation here fits, and we can think in terms of, a 2-person Prisoner’s Dilemma, where the Nash equilibrium is defect-defect while the optimal (but unstable) outcome is for both to cooperate. This optimal outcome can be achieved if there is iteration over time and communication between the parties. The tricky part is, iteration is actually sort of taking place, where the people witness for themselves everyday the outcome of their clogging the door. Perhaps the cause is a lack of communication between the passengers.

In free trade, WTO is the arena where countries engage each other in negotiations, so that everyone brings down their tariffs, so that everyone enjoys the fruits of division of labour. However, a problem of WTO is that it is too democratic, as in each country has a veto. A single recalcitrant player can literally hold the progress of the whole world. Frustrated by the slow movers, we see the flourish of bilateral and regional free trade agreements as a second best, to bypass the cumbersome process.