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October 16, 2007

Nobelists on trade, globalization

Leonid Hurwicz, Roger Myerson, and Eric Maskin were awarded the Nobel in Economics yesterday for their work in mechanism design theory. Alex Tabarrok at Marginal Revolution has a pretty good explanation of this work, and Maskin told the Times:

Mechanism design, Professor Maskin explained, can be thought of as the “reverse engineering part of economics.” The starting point, he said, is an outcome that is being sought, like a cleaner environment, a more equitable distribution of income or more technical innovation. Then, he added, one works to design a system that aligns private incentives with public goals.

One recent subject of Professor Maskin’s wide-ranging research has been on the value of software patents. He determined that software was a market where innovations tended to be sequential, in that they were built closely on the work of predecessors, and innovators could take many different paths to the same goal. In such markets, he said, patents might serve as a wall that inhibited innovation rather than stimulating progress.

What Maskin is writing about is the textbook theory of the value of free trade. It also complements work in the development economics literature about how "late developers" can adopt the technological advancements of rich countries, thus "leapfrogging" a stage of development. It should be noted that this is something that our current WTO- and NAFTA-enforced intellectual property protectionism regime sharply limits.

Maskin has also written recently on inequality and globalization:

Supporters of the anti-globalization movement argue that “globalization has dramatically increased inequality between and within nations” (Mazur, 2000), and in particular that it has marginalized the poor in developing countries and left behind the poorest countries. Meanwhile, more moderate mainstream politicians argue that the poor must invest in education to take advantage of globalization (Clinton, 2000). Such views are difficult to reconcile with a standard Heckscher-Ohlin trade model with two countries, two goods, and two factors (skilled and unskilled labor, or alternatively capital and labor) [which predicts that] inequality will rise in the rich country and fall in the poor country...

There are, however, at least two empirical problems with the Heckscher-Ohlin story. First, it predicts that bilateral trade will be greatest when factor endowments are most different, ceteris paribus (Vanek, 1968). There is little trade between advanced countries such as the U.S. and very poor countries such as Chad. A second problem with the Heckscher-Ohlin model is that evidence from examination of specific developing countries following trade liberalization and from cross-country studies does not suggest that trade liberalization generally reduces inequality in poor countries and in fact frequently suggests that trade liberalization can increase inequality...

We propose a model of production by workers of different skill-levels (Kremer and Maskin, 1997) that is consistent with 1) the small scale of trade between countries with very different factor endowments and 2) the possibility that globalization may increase inequality in both rich and poor countries.

Their model shows that it's possible that the least-skilled masses in poor countries will be totally marginalized under globalization, and that inequality can thus rise in both rich and poor countries. Maskin and co-author Michael Kremer conclude, "if people measure their status relative to others in their own society, then they will perceive inequality increasing. This analysis corresponds to the view of many anti-globalization protestors that globalization benefits elites in both rich and poor countries."

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