How trade protection can increase labor wages (the Stolper-Samuelson theorem)

by Sebastian Benthall

I’m continuing a look into trade policy 8/08/30/trade-policy-and-income-distribution-effects/”>using Corden’s (1997) book on the topic.

Picking up where the last post left off, I’m operating on the assumption that any reader is familiar with the arguments for free trade that are an extension of those arguments of laissez-faire markets. I will assume that these arguments are true as far as they go: that the economy grows with free trade, that tariffs create a dead weight loss, that subsidies are expensive, but that both tariffs and subsidies do shift the market towards imports.

The question raised by Corden is why, despite its deleterious effects on the economy as a whole, protectionism enjoys political support by some sectors of the economy. He hints, earlier in Chapter 5, that this may be due to income distribution effects. He clarifies this with reference to an answer to this question that was given as early as 1941 by Stolper and Samuelson; their result is now celebrated as the Stolper-Samuelson theorem.

The mathematics of the theorem can be read in many places. Like any economic model, it depends on some assumptions that may or may not be the case. Its main advantage is that it articulates how it is possible for protectionism to benefit a class of the population, and not just in relative but in absolute terms. It does this by modeling the returns to different factors of production, which classically have been labor, land, and capital.

Roughly, the argument goes like this. Suppose and economy has two commodities, one for import and one for export. Suppose that the imported good is produced with a higher labor to land ratio than the export good. Suppose a protectionist policy increases the amount of the import good produced relative to the export good. Then the return on labor will increase (because more labor is used in supply), and the return on land will decrease (because less land is used in supply). Wages will increase and rent on land will decrease.

These breakdowns of the economy into “factors of production” feels very old school. You rarely read economists discuss the economy in these terms now, which is itself interesting. One reason why (and I am only speculating here) is that these models clarify how laborers, land-owners, and capital-owners have different political interests in economic intervention, and that can lead to the kind of thinking that was flushed out of the American academy during the McCarthy era. Another reason may be that “capital” has changed meaning from being about ownership of machine goods into being about having liquid funds available for financial investment.

I’m interested in these kinds of models today partly because I’m interested in the political interests in various policies, and also because I’m interested in particular in the economics of supply chain logistics. The “factors of production” approach is a crude way to model the ‘supply chain’ in a broad sense, but one that has proven to be an effective source of insights in the past.

References

Corden, W. Max. “Trade policy and economic welfare.” OUP Catalogue (1997).

Stolper, Wolfgang F., and Paul A. Samuelson. “Protection and real wages.” The Review of Economic Studies 9.1 (1941): 58-73.

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