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October 17, 2004

Planned Economies and Free Trade

In response to an April post arguing that welfare states should not mind free trade, J. N. suggested to me that intrusive states would dislike free trade because it creates unpredictability. That is an interesting idea.

Which kinds of states need predictability? Ones with lots of planning and rigid regulations, I guess. Intrusiveness per se is not it-- I don't think a moralistic theocracy would be especially concerned about an unpredictable economy. But a state with a 5-year-plan, that uses Authority rather than Prices for coordination, would be disrupted by uncertain trade flows. Similarly, a state that uses price controls would find things not working out as planned.

This would also extend to economic growth. If economic growth involves unpredictability-- say, in which sectors are gaining in employment-- it would mean that having a price-based, flexible system is more important. A non-price system would be more willing to give up some growth if it could thereby get rid of some uncertainty.

I've forgotten how it works in Weitzman's old RES "Prices Vs. Quantities"article works, but that might be relevant.

Posted by erasmuse at October 17, 2004 04:34 PM

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