by Spencer P Morrison, NEE
Domain Specificity, or How Isaac Newton Lost a Fortune
Isaac Newton was a genius—perhaps the most intelligent man to ever walk this earth. It was he who uncovered the laws of motion, he who unravelled light’s mysteries, and he who first invented calculus. His work underpins modern mathematics, physics, and engineering.
And yet Newton lost his entire fortune in the South Sea Bubble—the Eighteenth Century’s great stock market crash. Newton was dreadfully over-confident, he thought his genius in mathematics would make him a genius investor. He was wrong. He had no idea what he was doing, and he paid the price.
That Newton made this mistake is unsurprising: expertise, knowledge, and even intelligence is often domain-specific. It is compartmentalized. In his book Moonwalking with Einstein, the former American memory champion Joshua Foer notes that chess masters can often recall every competitive game of chess they’ve ever played—piece positions and all. And yet, their memories are no better than average when it comes to memorizing poems or phone numbers. Their memory skills are domain-specific. Importantly, domain-specificity applies to all manner of expertise.
Sometimes the epistemic divisions are obvious: no one would take medical advice from a banker, nor would they take financial advice from their surgeon. But it’s not always so clear-cut. For example, where do we draw the line between politics and economics? Can we even make a valid distinction between the two? In these circumstances, we tacitly assume that someone knowledgeable in politics is likewise knowledgeable in economics, and vice versa. This is often false.
Consider Ben Shapiro. In addition to being one of America’s most popular Republican commentators, Shapiro is a well-educated, articulate, and intelligent man. Likewise, Shapiro is an expert in a number of subjects including political science and law. And because of his obvious competence in these fields, his audience assumes his competence in others—particularly economics.
This assumption is wrong. Ben Shapiro has a fairly shallow understanding of economics, and lacks the historical knowledge to contextualize what he does know. Because of this, his economic commentary is only as good as the source he parrots. Nowhere is this more obvious than in his opposition to President Trump’s tariff agenda.
Never Joust Scarecrows, or Why Ben Shapiro is Wrong on Free Trade
Ben Shapiro released a viral video in which he “debunked tariffs” in three minutes. I suggest watching the video before proceeding.
Shapiro begins by saying that President Trump does not support tariffs on economic grounds because it is impossible to do so. Instead, he thinks Trump wants tariffs for cultural reasons—tariffs are just a part of the political narrative. This is nonsense.
Donald Trump has called for tariffs on economic grounds since the 1980s, and to claim Trump is lying is unnecessarily dismissive, patronizing, and profoundly unhelpful. Rather than straw-man the President and proceed to joust his effigy, Shapiro should address the arguments head-on. He needs to tackle the economic case for tariffs.
Eventually he does do this, noting that richer countries often run trade deficits—therefore trade deficits are good (or at least not bad). Shapiro states that Iran has a very large trade surplus, but it is fairly poor. Conversely, the US, UK, and Canada have the world’s largest trade deficits, and yet these nations are among the world’s richest nations. “Where would you rather live?” he asks. Also, developing countries like India often run large trade deficits—clearly surpluses aren’t needed for economic growth.
The problem is that Shapiro cherry-picked his examples to prove his point—the totality of the data shows quite the opposite, that countries with trade surpluses are both richer and grow faster than those with deficits.
According to data from the International Monetary Fund, the average per person Gross Domestic Product (GDP) at Purchasing Power Parity (PPP) for those 20 countries with the largest trade surpluses is 48 percent larger than those 20 countries with the largest trade deficits. That is, the average GDP per person in the countries with the biggest trade surpluses is $49,941, while the average GDP per person in the countries with the biggest trade deficits is only $25,787. Countries with big surpluses are richer than those with big deficits. This is the opposite of what Ben Shapiro claimed.
Furthermore, according to data from the World Bank, those same countries with large trade surpluses grew faster than those with large deficits. The average annual rate of GDP at PPP per person growth between 1980 and 2014 for the above trade surplus nations was 5.46 percent. Meanwhile, the trade deficit nations grew by an average of just 3.99 percent. Essentially, nations with trade surpluses grew 27 percent faster than those with deficits over a 25 year period. Most importantly, this data accounts for changes in population—we’re talking about real growth here.
When Ben Shapiro picks Iran as his representative trade surplus nation, you must remember that he did not pick Germany, Japan, the Netherlands, Singapore, Israel, Ireland, Switzerland, Sweden or China. Likewise, when he picks Canada as a representative of a trade deficit nation, remember that he did not pick Egypt, Indonesia, Pakistan, Oman, or Brazil.
On balance, nations with trade surpluses are richer and more technologically advanced than deficit nations—but you wouldn’t get this impression from Shapiro’s video. His argument is nothing but sophistry.
Banana Republics Export Bananas, and Other (Obvious) Truths About Trade
Ben Shapiro bases his understanding of international free trade on David Ricardo’s theory of comparative advantage, which states that countries get richer when they specialize their production in stuff they are relative good at making, and trade the surplus for stuff they are relatively bad at making. Essentially, trade makes all parties richer because it ensures that labor is used more efficiently.
Comparative advantage is an elegant theory, but it too is domain-specific—it only works when certain preconditions are met. For example, capital must be immobile for the theory to apply. Yet Shapiro ignores this crucial limiting factor, and applies comparative advantage to just about everything. This is his root error.
Just as bad branches bear bad fruit, so too do incorrect presumptions lead to incorrect conclusions. For example, comparative advantage suggests that the key to getting rich is to specialize production, regardless of what you produce. That is, a country with a comparative advantage in growing soybeans should focus on growing more soybeans, while a country with a comparative advantage in manufacturing semiconductors should focus on manufacturing more semiconductors. In either case, their relative wealth will correlate with the degree of specialization, as opposed to the complexity of their production.
This is objectively wrong.
In a 2006 paper titled “What You Export Matters”, economists Ricardo Hausmann, Jason Hwang, and Dani Rodrik found that that sophistication of a nation’s exports is highly correlated with that nation’s wealth and growth potential. Essentially, countries exporting things like cars and computers were richer, and grew faster than countries exporting things like bananas and iron ore. Not only is this perfectly consistent with the above findings, but it makes logical sense when you understand how economic growth really works.
Contrary to what the theory of comparative advantage suggests, not all industries are created equal: some have high growth potential, others have very little. A 2002 paper by Stephen Redding of the London School of Economicsfound that economic growth is contingent upon technological innovation, and is therefore path-dependent. In other words, the majority of economic growth occurred in those industries most likely to (i) generate or (ii) benefit from new technology, and that these industries build on those which came before. They are predicate industries which could not exist without their respective anchor industries.
A Tale of Two Cities, Understanding Path-Dependence
This is complex stuff, but an example should clear it up.
There are two states, Athens and Sparta. Both are equal in every way. One day, an Athenian invents the pottery wheel, which allows potters to make amphorae 10-times faster than they could before. The Athenian pottery industry grows by a multiple of 10 over the next year. Likewise, the rest of Athens’ economy benefits due to the plentiful supply of cheaper pottery.
Meanwhile, something similar happens in Sparta. A Spartan mechanic invents the bellows, which allows Sparta to smelt iron as opposed to bronze. Thereafter Spartan tools are made of iron, and thus stay sharper longer. Sparta’s entire economy benefits from the better tools.
In both cases, economic growth was driven by technological innovation. Here’s where it gets interesting. The next year an Athenian invents the flywheel, which allows potters to power the wheel by pumping it with their feet, rather than spin it by hand. Likewise, the Spartans invent the blast furnace, which allows them to smelt steel. This makes their tools even more efficient. Again, economic growth in Athens and Sparta was caused by technological innovation—innovation that was path-dependent.
Path-dependence recognizes that innovation builds on what came before, and that later innovations are impossible without the necessary foundation. In our example, Athens could not have invented the blast furnace without first being familiar with the bellows. Likewise, with Sparta and the flywheel. The lesson: technological innovation, and thus economic growth, is path-dependant.
Although this point is somewhat tautological in nature—of course there would be no Boeing 747 without the Wright brothers—it is nevertheless ignored by political pundits and economists alike.
Buying the Future We Should be Building
Ben Shapiro thinks that international free trade is in America’s best interests, because it lets us maximize our comparative advantage, and therefore use our labor most effectively. The problem is that our comparative advantage is in agriculture and resource extraction, by virtue of our relatively low population density and plentiful natural resource deposits.
Likewise, what comparative advantage America does have in high-tech industries is diminished by the fact that foreign governments (i) heavily subsidize their advanced industries, (ii) steal our intellectual property, and (iii) benefit from nominally cheaper markets. Under these conditions, many otherwise competitive American industries are outcompeted or bought by foreign (often government-backed) rivals, or are forced to move abroad to reap the cost-savings.
As a result, America’s advanced industries—those most likely to generate new technologies, and drive long-run economic growth—are dying out. Detroit is moving to Mexico City, Boston is moving to Bangalore. This is confirmed by data from the Brookings Institute, which notes that some 36 percent of America’s advanced industries have already moved abroad, and that the number of “innovation capitals” located in America has dropped by two-thirds since 1980. What this means is that more and more key technological advances will be made abroad, rather than here at home.
Without high tariffs to level the playing field and reverse this process, America will soon be on the outside-looking-in, buying the future we should have been building. Ben Shapiro would be wise to revisit his presumptions, before advocating for the intellectually bankrupt political ideology that is global free trade.