Distorted or irrelevant data

 This best explained using the following example. In their zeal to convince us that we’re better of with free trade a metric commonly used is the country’s mean or average income. The claim is that we’re better off today than in the past because our mean income is actually increasing. A clearly bogus claim even ignoring inflation because it ignores the distribution of that income.

For example, suppose originally ten people each had an income of $30,000. per year. The mean income for this group of people is then given by (10 people) times ($30,000.) divided by (10 people) or
.
Seems straightforward enough. Now suppose that one of the people has an epiphany. This clever entrepreneur (e.g., think Walmart) realizes that (s)he can make a lot of money using free trade to import cheaper manufactured products and sell them at a discounted price. In fact, this scheme works and our entrepreneur makes a lot of money, perhaps increasing his income ten fold to say, $300,000./year.

What’s the effect of this entrepreneur’s reasonable business decision. Well, initially his income increases dramatically and inevitably other entrepreneurs take note. In order to compete they too have to move their manufacturing facilities abroad and import their products as well. If they don’t respond they go out of business. And the ultimate effect? Local employees have to be laid off (i.e., fired). Thus the non-entrepreneurs (the other nine people in our example) lose their income. If they are lucky they find lower paying jobs in non-manufacturing industries (more on this effect later). This, in itself, is tragic but we’ll leave that discussion to another day and simply concentrate on the economic consequences here.

Unfortunately not everyone laid off will be able to find another job even though they are able and willing to work. However, let’s be generous and assume that the laid off workers all find work but at a lower salary of say $15,000. What is the mean income now for this group of ten people? Using the standard mean value formula the answer is

an increase of 45% over the previous example.

The question is, are we now better off? The laissez-faire free trade lobby would have you believe we are. After all peoples average income has increased by some 45%. As a result of this increase in mean income we must, they argue, be better off. I hope this example illustrates just how silly this type of argument is and just how deceiving the uncritical use of an aggregate economic statistic can be for clearly 90% of society is worse off than they were before laissez-faire free trade was implemented.

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Tags: Economics, free trade, politics

This entry was posted on Sunday, May 24th, 2009 at 6:43 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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