Download Evolution and Protectionism

Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
Evolution and Protectionism
Introduction
In this paper I am trying to analyze possible drawbacks and advantages of the
protectionism policy. Despite the fact that neoclassical school of economics claims
protectionism to be bad, there is evolutionary view on this problem, which raise
certain objections to that. Namely, protectionism is appraised as the only way to
induce evolution among organizational species. However, this approach is not perfect
as well.
The structure of the paper is as follows. 1st part describes the neoclassical view
on the problem, particularly optimal trade policy and political market for
protectionism. In the 2nd part some elements of Darwin’s evolutionary theory are
described, including the explanation of why the evolution may justify the protection
from natural selection. The 3rd part is about the analogies between evolution in nature
and evolution in social institutions, which naturally lead us to the positive conclusion
about protection from competition. In “Conclusions” I shortly discuss drawbacks and
advantages of both approaches.
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
Neoclassical view
Trade Policy
An important conclusion of neoclassical trade policy theory is that protection
and subsidization of domestic industry, on general, lowers average real income in the
country, therefore should be abandoned. Indeed, it can be easily seen on the model
with perfect competition:
One can see from the picture that any subsidy t brings more loss to the state than gain.
Heavy taxation of import also leads to the loss of welfare. Though the producer’s
surplus is not accounted there (since they all are foreigners), the dead weight loss
increases more rapidly than the revenue.
Unfortunately, the perfect competition appears only in the dreams of the most
optimistic economists. Allowing for market power makes the theory much spicier, as
well as more relevant to the reality. Here we can see different opinions. Brander &
Spencer’s model of Strategic Trade Policy represents subsidization as the competition
of states for the market of the third side, therefore approves it. However, their model
depends crucially on the type of oligopolistic competition among countries. Besides,
subsidization of one particular industry may cause negative general equilibrium
effects on other industries. Industrial organization’s explorers also sometimes support
protection. Their arguments, like “narrow moving band”, extracting rents from
foreign monopolies, etc, however, are quite ambiguous concerning the welfare of the
state. For instance, Baldwin & Krugman showed in 1988 that if the Japan had
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
abandoned in 70-s its policy of RAM industry protection it would have been net
importer by then. However, effect of protection on welfare was showed to be
negative.
Looking at the neoclassical theory it is surprising that the world is, actually,
antagonistic to it. Every country imposes taxes and quotas on imports, every country
fosters its own “national champion”… The answer of neoclassic economics is
described shortly in the next part. However, deeper, though inapplicable to real life,
explanations might be inferred from the theory of evolution.
Political Market for Protection
Why is protection so frequently mat in this world if the theory predicts it to be
harmful for economy? Is that because some groups in society are more politically
powerful and can influence policymaker’s decision in their favor? Or is that the
reflection of the society’s preference to help to “week” industries, therefore unequally
distribute the welfare of the state?
For clarifying the situation it is useful to construct the market for protection in
a given country. Demand side on this market consists of different home industries,
and the government is supplier. Import-competing producers would like government
to increase protection by imposing tariffs or quotas on importers, because this should
increase profits of the domestic industry. As a result, producers not only push on
politicians through the ballot box, but also are ready to give up some part of their
expected additional profits. Those might come for persuading other voters to support
protectionist actions, bribing the politicians or, at least, sponsoring their electoral
campaigns.
From the other side, politicians are motivated ultimately by the desire to stay
in their office as long as possible. Therefore their decisions are made so that to
increase voter’s support. Alternatively, present value of the life-long benefits of
having authority may be outweighed by the bribe. Those, who oppose to
protectionism, are consumers of a given industry’s production, firms that use
imported goods as intermediate, and exporters of taxed production. They claim to vote
against the policymaker in case he or she increases protection. However, even though
producer-surplus gains may be lower than consumer-surplus losses, large number of
consumers and, therefore, small losses per capita may make consumer lobbying very
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
hard. The foreign firms are also not likely to have much influence on domestic
policymaking.
Consequently, home producers may try to persuade opposing voters using
non-economic reasons, or provide politicians with the costs for such persuasion. Such
activities are effective because information about the economy is imperfect and costly
to acquire. In other words, there exists some certain level of lobbying expenditures,
which is enough to induce the politicians to increase protection. Therefore industry
will invest in politics until the difference between profits from increased protection
and lobbying expenditures is maximized.
What factors inhibit or, on a contrary, promote protection? Theory of public
good tells us, that the problem of free riding is less severe when the number of players
is small. Therefore the protection is likely to happen in the monopolized industries.
From the other side, the increase of the firm’s export share negatively affects its
lobbying initiative, since protection in home country is usually mat by the same
sanctions from the foreign governments. Now, if we look at the suppliers’ side, we
may find situations, when the cost of protecting an industry is very low and even
negative. Indeed, sometimes consumers are even willing to assist the industry due to
some non-economic reason and do not realize that there are more efficient than
protection ways of the help. I will argue on such reasons in the following paragraphs.
Darwin’s Natural Selection, Adjusted
Published in 1859, Origin of the Species of Charles Darwin received instant
and massive attention of scientific world. In a decade evolutionism became a
mainstream in biology. After while it spread to other disciplines including social
sciences. However, at the time when scientific elite was getting used to the fact that
the species had evolved, the very Darwin’s evolutionary mechanism, with the “natural
selection” and “survival of the fittest” in the heart, seemed to be quite controversial.
First of all, Darwin in his work changed the very definition of the species. His
“phenetic species concept” defined two creatures to be of the same species based on
some measure of resemblance between these creatures. Accepting this it was very
hard to draw the line between variety and species. In addition to its vagueness, this
definition also completely differs from the “biological concept”, which defines
species as the population of interbreeding organisms. As Mayr argues, it is relatively
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
easy to explain evolution with the help of “natural selection” having reduced species
to varieties. However, it is not clear how new, “biological”, species appear.
Darwinists try to solve this puzzle using the notion of reinforcement. It is the
way to separate old and new populations, when the hybrids between them are
eliminated by the nature as those, who have lower fitness. After some time of
elimination members of the populations get used to mate only with representatives of
their own population. This is how new species come into life. And reinforcement is
the only way to keep two populations neighboring (in sympatry). However, sympatric
speciation is possible only when different populations are better adapted to different
niches and developed a stable polymorphism (evolutionary stable strategy, when
fitnesses of both populations are equal). Once this step is done “natural selection” will
favor sympatric speciation and formation of new species in “biological” definition.
But the main question is how this step is achieved?
Other problem of Darwin’s theory is “imperfection of the geological record”.
Indeed, the fossils found in the earth testify usually about the relatively long period of
stable development of the species (stasis) and, finally, sudden jump in development –
“punctuated equilibria”. The stasis can be explained with the help of epistatic
interactions between genes of the given genotype. This is synergistic, general
equilibrium effect, when the cumulative effect of the change of several genes differs
from the sum of effects of changed genes taken separately. These interactions imply
that genotype has built in inertia. When some organism is in stasis, which means
being on local fitness “peak”, “natural selection” is eliminating any single mutation,
which firstly leads him to fitness “valley”, even though certain combination of such
mutations can bring the organism to new, higher fitness “peak”. Now, what about
sudden jump in development? How can these single mutations run away from “natural
selection” sometimes?
The answers on questions from two last paragraphs are given by the theory of
allopatric speciation. Two populations evolve in isolated (say, geographically) areas
until they reach partial reproductive isolation, which can be completed then by
reinforcement in sympatry (populations will evolve stable polymorphism and will be
better adapted to two different niches). Analogously, organisms, which deviate from
stasis equilibrium, but still have lower fitness, can “hide” from “natural selection” in
allopatric conditions until they acquire higher fitness by further mutations. That is
why we usually observe discontinuous fossil record in a given area.
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
All these assertions and considerations testify, that the nature has some built in
mechanisms for “protection” from “natural competition” when it is needed for
creation of new, fitter species. The question is if these results can be extended from
biology to other sciences, particularly economics?
Evolution of Social Institutions
Game Theory
Economic and social institutions are the systems, where human agents act
maximizing their pay-off, though obeying certain rules, forms, traditions, customs,
etc. Markets coordinate the exchange of particular goods, language allows
communication, and law system defines the boundaries of acceptable behavior… All
these and many other institutions are the result of evolutionary forces. They are
shaped by the numerous interactions of many individuals with one another over long
period of time. It is easy to notice the similarity of “biological” and “social”
evolutions: agents play the role of genes and institutions – the role of genotypes.
Indeed, under certain plausible assumptions and abstractions the same laws and trends
can be derived for both systems. Darwin grasped the understanding of evolution in
nature reading economic literature; then Veblen, the father of institutional economics,
impressed by the works of Darwin and Spencer, extended the notion of evolution on
social sciences.
The general process of evolution can be described as follows. There is
population of agents, genes if we look at nature itself, human beings in the “social”
world. At any point of time two randomly drawn agents meet each other, playing
some certain game and receiving some payoffs. The character of the game and the
magnitude of the payoffs are exogenous parameters, forces acting on population. Of
course, these parameters are also subject to evolution, but slower character of their
development allows us to consider them as fixed in short term. Playing numerous
games each agent works out his or her strategy, which combined with the strategies of
other agents, finally leads to evolutionary stable strategy inside the population (which
was previously called stable polymorphism). Therefore, the process leads to some
stable state. However, there is no room for evolution itself in this model.
There are two basic differences between “classic models” (consider
economics, for example) and “evolutionary models”. One is the status accorded to
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
equilibrium, the other is the status accorded to rationality. Equilibrium in neoclassical
economics is the stable intersection of optimal strategies of all agents in economy
given their expectations, and expectations are assumed to be justified given evidence.
Evolutionary economics (I use economics for better exemplification) considers
equilibrium in dynamics. “ Neoclassical economics describes the way the world looks
once the dust has settled; we are interested in how the dust goes about settling. This is
not an idle issue, since the business of settling may have considerable bearing on how
things look afterwards. More important, we need to recognize that the dust never
really does settle – it keeps moving about, buffered by random currents of air. This
persistent buffering by random forces turns out to be an essential ingredient in
describing how things look on average over long periods of time” (Young, [4], p.4-5).
The second peculiarity of evolutionary process is the degree of rationality
attributed to the agents. Classic game theory concept assumes agents to be hyperrational, so that they are fully aware of the process they are in, they know the utilities
of the other agents, they act assuming that all other agents have chosen their optimal
long-run paths. This is kind of implausible assumption about human beings when they
face complex dynamic systems of nowadays economies. In addition, the very concept
of “rationality” can be confusing when it comes to genes or other types of agents. In
the moments of confusion I would suggest to look at physics, the ray of light “going
from point A to point B by the shortest distance”. Well, it does not mean that before
going this ray optimizes, which distance is the shortest. If we look deeper, our brain is
also a bunch of specific cells, nothing more, but somehow we are not surprised of our
rationality1.
The assumption of bounded rationality is quite relevant to our life. Indeed, if
we were hyper-rational, than why didn’t we construct the hyper-general equilibrium
model of our world, which would explain every process? Why do we use only partial
equilibrium models, extending them to grasp more and more features of our world,
but still failing to understand everything? The reasons for bounded rationality are
numerous: costs of maximization, processing information, bounded emotional skills,
bounded preference formation, etc. Eventually, the formation of mathematical
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Actually, the brain can also be considered as the “institution” of rational cells. In general,
evolutionary game theory explains how the “institution”, formed of irrational agents can act rationally
as the agent in “higher-level” institution.
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
concepts was induced by the purpose of making analysis of the world less costly.
Although spoken language is much more flexible than the formal logic (recall just
Godel’s theorem of incompleteness), math tools allow us to draw conclusions, which
would have taken too much resources of our brain provided we had used only verbal
considerations. Finally, even nature itself is full stochastic processes, which influence
our decision. As an example, imagine two cones, one standing on another, peak to
peak. This system remains stable, when there are no factors acting on it. But
whenever any force, smaller than the smallest epsilon, enters the system, the cone
falls. Now guess the direction…
Let us come back to other agents, which are rational, but not hyper-rational.
They base their decisions on fragmentary information, they have incomplete
information about the process they are engaged in, and they are not especially
forward-looking. They base their decisions on the expectations of what other agents
will do, and these expectations are formed using what the agents did in the past.
Therefore, the action taken by the agent in a given moment becomes a precedent for
future actions: …  Precedents  Expectations  Actions  Precedents  …
Such behavior can be identified with the reinforcement in Darwin’s theory, when the
agents preferable strategy is being formed by habits.
Finally, we assume that the whole process is subject to exogenous
perturbations, including unpredictability of people’s behavior. These shocks in
economics play the role, similar to mutations in biology, testing the fitness of the
current state. They also imply that the evolutionary dynamics never settles down
completely.
Epistatic Relations in our Lives
Imagine population, where each moment of time one agent have to choose
from two options, considering the fact that he or she will receive some pay-off only if
both agents in the micro-game have similar options. Therefore, the initial choice of
the agent should be based on how many agents have chosen the option before (or at
least, on how much the agent knows about this number). After initial shakeout the
system will converge pretty rapidly to the state, where majority will choose the most
popular option. However, we should not forget about shocks in human behavior.
Eventually, their accumulation will lead the process to the dominance of other option.
These “stochastic” incidents are less typical than the “normal” option. Actually, it is
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
dependent on the magnitude of irrationality of agents. If it is quite small we will have
long periods of stasis and sudden change of the regime – punctuated equilibria from
Darwin’s theory!
The sad part of the theory is that the dominance of “normal” option from the
previous paragraph in the population should not be Pareto-efficient outcome. Agents
can find themselves engaged in coordination failure, when the system is in the local,
not global, fitness peak As an example, consider the following micro-game of
working and shirking:
Agent 2
Work
Shirk
Work
(15,15)
(10,0)
Agent 1
Shirk
(0,10)
(10,10)
Two agents receive pay-off both when they work together and when they shirk
together. As empirical research shows majority tries to shirk in such framework. The
similar situation may happen in oligopoly economy, when the firms stuck in
underemployment equilibrium just because they believe that everybody else will act
similarly (coordination-failure models). Finally, even the study in CEU, as in any
other university, is partly a subject to coordination failure. Indeed, the agents in the
class choose from two options: either they study hard or they party for the whole
semester. Basing on the fact that exams are graded by the relative performance the
students’ micro-game has the similar payoffs as “working-shirking”, with the only
difference in the cells “Work-Shirk” and “Shirk-Work”. In these combinations only
those who studied are awarded.
The single shock (i.e. choice of the less popular option), as the single mutation
in biology, generally lowers the fitness of the whole system. Therefore, natural (or
social?) selection tries to eliminate it, even though the further accumulation of such
shocks may eventually lead out the system from Pareto-inefficient fitness “trap”.
Again, we receive the analogue of Darwin’s epistatic relations between genes in
genotype.
One can notice examples of epistatic relations, which actually maintain stasis,
everywhere in our lives. For instance, consider the competition between computer
technologies, say Linux and Windows. Despite its free distribution, openness of
program codes and similar convenience, Linux is still much less popular than
Windows. One can argue that Windows also has its advantages, but if we have an
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
agent choosing what OS to install on PC, his or her decision is strongly biased
towards Windows, because of the large amount of users, software, literature and even
hardware compatible only with this OS.
We can take even more dramatic examples. When Copernicus declared his
theory of heliocentrism it was too big departure from the religious-scientific paradigm
of those days. Although his conclusions could drove (and eventually did) the science
onto new qualitative level, centuries needed for his theory to become dominant in the
scientific world. And how much of the smaller scientific “shockers” were burned by
inquisition without leaving a trace in the history? Looking in the past, we must notice
that the situation has not changed too much nowadays. It is still very hard to push
new, often much fitter, theory through the present beliefs of the big, the fittest,
scientists. Take, for instance, Einstein and his relativity theory.
Finally, we should touch the epistemic relations in organizational species.
Pagano in his work [5] claims that organization of production can be defined by two
factors: technological characteristics of resources used in production and set of rights
on the resources. Factors intervene with each other in the sense that given technology
there is optimal structure of rights for it, and on a contrary, given the set of rights
optimal employment of resources may be chosen. “… in a world of positive agency
costs there is an optimal technology for given rights on the organization and an
optimal set of ownership rights for a given technology that is employed by the
organization” (Pagano, [5], p.34). Therefore each organization species is
characterized by epistemic interactions between these two factors. Whenever some
shock occurs in one of the factors, it generally drives organization’s fitness down and
the natural selection (this time in the face of market competition) tries to eliminate
this mutation giving no possibility and time to climb up on the higher fitness peak.
How can we get then new, fitter organizational species?
Conclusion: No Answer?
The answer on the question from the previous paragraph is the same as on the
question about emergence of new species in biology. Allopatric speciation is essential
tool for completing the theory of evolution. The protection from natural selection in
biological speciation is as important and necessary as the protection from market
competition in organizational speciation. This is the only way the epistatic
interactions may be overcame and new fitter peaks may be found. Therefore the
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
evolutionary economics theory undermines neoclassical conclusions about negative
welfare effect of protectionism.
However, the situation is far from being clear. Yes, suppose we agree that the
allopatric speciation is needed in some cases to induce evolution. But how and when
should it be maintained? In nature this is done by certain exogenous factors, i.e.
geographic separation. In economy protection is maintained by the government, so it
includes conscious plans and intentions of human individuals. Politically powerful
industry lobbying groups may have nothing to do with evolution of organizations.
They may want only to grab more profits by avoiding the competition at the cost of
consumers. At the same time, they insinuate discontented population by nationalistic
propaganda and evolutionary theory in particular. “History is not a product of the
past, but a response to the requirement of the present” (McCrone, [3], p.44).
To conclude, I should say that making decision about the protection of the
national “infant industry” is, softly speaking, very hard. From the one side governor
has mostly US neoclassical economics school claiming that protectionism is bad and
simultaneously protecting its own economy2. There are also greedy lobbyists, willing
to earn more profits being protected from competition. From the other side, decisionmaker has the nation, which is willing to have its industries competitive on the world
market; population of agents, whose nationalistic feelings enter utility the same way
as food or clothes. Apparently, decision to be made is also the subject to evolve in the
species, called Earth, and the agents, called nations.
Literature
[1] Anderson K., Baldwin R. The political market for protection in industrial
countries. In “Protection, Cooperation, Integration and Development”, MacMillan,
London, 1987.
[2] Hodgson G. The Evolution of Institutional Economics. Routledge, London, 2004.
[3] McCrone D. The Sociology of Nationalism. Routledge, London, 1998.
[4] Peyton Young H. Individual Strategy and Social Structure. Princeton, 1998.
[5] Pagano U. The origin of organizational species. In NicitaA, Pagano U. “The
Evolution of Economic Diversity”. Routledge, London, 2001.
2
Yes, protection is maintained not by those who write the “science”. But politicians in US are
influenced by US economists.
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Maksym Ivanyna,
Summer School on Philosophy and Economics
CEU, March 2006
[6] Pagano U. Bounded rationality, institutionalism and the diversity of economic
institutions. In F.Louca nad M.Perlman “Is Economics an Evolutionary Science”.
Cheltenham, U.K., 2000.
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