Relying on models

Don Bordeaux in Cafe Hayek blogs about a letter he sent to the Financial times about an article penned by Clyde Prestowitz.

Clyde Prestowitz makes his case for higher tariffs by slaying a strawman (”Obama can help free trade with tariffs,” Sept. 10).  According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”

Bordeaux is hinting at a larger point here, I think. Neo-classical models of free trade do indeed rely on these assumption, but even though these assumptions are demonstratively inaccurate doesn’t mean that free trade doesn’t work and that slapping on high tariffs are a good idea.

This is a sort of composition fallacy. He concludes that an economic principle is incorrect based on some of assumptions being incorrect. Just because a common model is flawed, doesn’t mean the principle doesn’t work it practice – it may just mean we don’t yet understand why it works.

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