Sunday, December 14, 2008

Cargo cult economics

This essay is a defence of protectionism (emphasis added):

Once upon a time, the leading car-maker of a developing country exported its first passenger cars to the US. Until then, the company had only made poor copies of cars made by richer countries. The car was just a cheap subcompact ("four wheels and an ashtray") but it was a big moment for the country and its exporters felt proud.

Unfortunately, the car failed. Most people thought it looked lousy, and were reluctant to spend serious money on a family car that came from a place where only second-rate products were made. The car had to be withdrawn from the US.
The year was 1958 and the country was Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery and moved into car production in 1933. The Japanese government kicked out General Motors and Ford in 1939, and bailed out Toyota with money from the central bank in 1949.
... had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would at best be a junior partner to a western car manufacturer and Japan would have remained the third-rate industrial power it was in the 1960s—on the same level as Chile, Argentina and South Africa.
In chronological sequence, then, with some information added that was excluded from the protectionist argument:

1933 - Toyota begins car production
1939 - Japan kick out foreign car manufacturers
1958 - Toyota's first exported car is a failure in a competitive market
1960s - Policy of trade liberalisation begins
1960s to 1980s - Japan's economic miracle happens
2007 - The above essay is published, and there is a Lexus

Note particularly that while the article states that the Japanese government did not follow the "free-trade economists" in the 1960s, this is the opposite of the truth. There was no abrupt switch to entirely free trade, but liberalisation was accompanied by unprecedented growth and increasing competence in, among other things, car manufacture. Yes, there were other factors and yes there were still restrictions on trade, but the movement was towards freer trade than before.

Richard Feynman coined the term "cargo-cult science" to describe work that looks like science but is not, because it lacks "a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty".

That principle of thought is completeness - not leaving out inconvenient facts that do not seem to accord with your argument, even pointing out yourself the main problems with your own work. Climate science has become cargo cult science.

The argument for protectionism quoted above is cargo cult economics.


dearieme said...

"Japan would have remained the third-rate industrial power it was in the 1960s": bah, that's pretty incomplete too. Japan had started industrialising in the 19th century - by the early 20th it was industrialised enough to beat Tsarist Russia in a war - and that was the Russia that was itself industrialising successfully enough that the Germans were determined to pick a fight with it so that they could knock it out before it was too strong for them. The case for protectionism is easily made - just tell us why introducing trade barriers between, say, California and New York will make them both richer. Easy peasy.

Pat said...

If the American automotive industry wants to stop foreign auto sales then just build a better product for a better price? Let's face it, Toyota and Honda are much more reliable cars than anything the big 3, (2 and 1/2 now?), are creating.

Andreas Paterson said...

I'm guessing that I was likely the source of the original link since I posted a link to it a few days before this post.

I afraid I disagree with your criticism. Firstly, I would suggest that any "liberalisation = route to prosperity" arguments are as guilty of cargo cult economics as you accuse the author of being. Second, I would point out that Ha-Joon Chang has produced a considerable body of work studying the economic policies of East Asia, it's safe to say he knows his stuff and is not some ignorant cargo cultist. Finally, I believe that you misrepresent much of his argument.

The point here is about pragmatic application of economic policy including that which is generally considered "protectionist". Liberalisation has negative and positive consequences for a developing economy and it's important that a nation recognises those consequences and considers the impact of such policies on it's economies. The point about Japan is that it largely liberalised at it's own pace and on it's own terms because it could see clear benefits from liberalisation. To answer dearieme, there would be no point in putting up a trade barrier between New York and California because there is no obvious advantage to it.

The point is that the governments in many developing countries are restricted in their economic policy actions by international agreements and that this has often caused serious harm to their economies.

Peter Risdon said...

Andreas, you weren't the source of this. I had googled looking for the source of the, as I see it, myth after realising that Japanese protectionism had become totemic for those who support protectionism. I might even have found your post as a consequence, but I'm not sure whether I did or not because I was ignoring blog posts, looking for the origin.

I was kicked off by a CiF post at the Guardian, then saw the idea spouted on by a right-wing protectionist. I've seen the idea that Japan is an example of successful protectionism mention since I posted this piece. I think the Prospect piece I quoted is the source of these repetitions of this idea.

In short, if you were the source, I'd have linked back to you.

The rest of your comment is whataboutery. Whatabout a Liberal argument that also failed to present all the information available? Well, yes. That would be cargo-cult economics too. It's just that we don't have an example of this to hand.

On the more complete evidence I presented, after twenty years of protectionism Japan could not make a competitive car. Immediately after liberalisation began, Japanese competitiveness began to improve.

I do not think it's reasonable to conclude from that that protectionism helped Japan.