More than a century after his death, Karl Marx remains one of the most controversial figures in the Western world. His relentless criticism of capitalism and his corresponding promise of an inevitable, harmonious socialist future inspired a revolution of global proportions. It seemed that—with the Bolshevik revolution in Russia and the spread of communism throughout Eastern Europe—the Marxist dream had firmly taken root during the first half of the twentieth century. That dream collapsed before the century had ended. The people of Poland, Hungary, Czechoslovakia, East Germany, Romania, Yugoslavia, Bulgaria, Albania, and the USSR rejected Marxist ideology and entered a remarkable transition toward private property rights and the market-exchange system, one that is still occurring. Which aspects of Marxism created such a powerful revolutionary force? And what explains its eventual demise? The answers lie in some general characteristics of Marxism—its economics, social theory, and overall vision. Labor Theory of Value The labor theory of value is a major pillar of traditional Marxian economics, which is evident in Marx’s masterpiece, Capital (1867). The theory’s basic claim is simple: the value of a commodity can be objectively measured by the average number of labor hours required to produce that commodity. If a pair of shoes usually takes twice as long to produce as a pair of pants, for example, then shoes are twice as valuable as pants. In the long run, the competitive price of shoes will be twice the price of pants, regardless of the value of the physical inputs. Although the labor theory of value is demonstrably false,

Many people believe that employers do not care about workplace safety. If the government were not regulating job safety, they contend, workplaces would be unsafe. In fact, employers have many incentives to make workplaces safe. Since the time of Adam Smith, economists have observed that workers demand “compensating differentials” (i.e., wage premiums) for the risks they face. The extra pay for job hazards, in effect, establishes the price employers must pay for an unsafe workplace. Wage premiums paid to U.S. workers for risking injury are huge; they amount to about $245 billion annually (in 2004 dollars), more than 2 percent of the gross domestic product and 5 percent of total wages paid. These wage premiums give firms an incentive to invest in job safety because an employer who makes the workplace safer can reduce the wages he pays. Employers have a second incentive because they must pay higher premiums for workers’ compensation if accident rates are high. And the threat of lawsuits over products used in the workplace gives sellers of these products another reason to reduce risks. Of course, the threat of lawsuits gives employers an incentive to care about safety only if they anticipate the lawsuits. In the case of asbestos litigation, for example, liability was deferred by several decades after the initial exposure to asbestos. Even if firms had been cognizant of the extent of the health risk—and many were not—none of them could have anticipated the shift in legal doctrine that, in effect, imposed liability retroactively. Thus, it is for acute accidents rather than unanticipated diseases that the tort liability system bolsters the safety incentives generated by the market for safety. How well does the safety market work? For it to work well, workers must have some knowledge of the risks they face. And they do. One study of how 496 workers perceived job hazards found that the greater the risk of injury in an industry, the higher the proportion of workers in that industry who saw their job as dangerous. In industries with five or fewer disabling injuries per million hours worked, such as women’s outerwear manufacturing and the communication equipment industry, only 24 percent of surveyed workers considered their jobs dangerous. But in industries with forty or more disabling injuries per million hours, such as the logging and meat products industries, 100 percent of the workers knew that their jobs were

Junk bonds, also known less pejoratively as high-yield bonds, are bonds that are rated as “speculative” or “below investment” grade issues: below BBB for bonds rated by Moody’s and below Baa for bonds rated by Standard and Poor’s (the two main debt-rating agencies). Bond ratings measure the perceived risk that the bonds’ issuer will not make interest payments or repay the principal at maturity. The riskier a bond is, other things being equal, the lower its rating. The highest-rated nondefaulted bonds are rated AAA or Aaa, and the lowest are rated C, with defaulted bonds rated D; thus, junk bonds can be rated anywhere between Baa (BB) and D. As junk bonds are perceived to be riskier than other types of debt, they typically trade at higher yields—that is, higher rates of return—than investment-grade bonds. Over the past twenty years, this difference, or spread, between junk bonds and U.S. Treasury bonds has varied between three and nine percentage points, averaging six percentage points. The debt of 95 percent of U.S. companies with revenues over $35 million (and of 100 percent of companies with revenues less than that) is rated noninvestment grade, or junk. Today, junk bond issuers that are household names include U.S. Steel, Delta, and Dole Foods. Moreover, the use of high-yield securities for corporate financing greatly expanded after the mid-1990s in Latin America, Asia, and Europe (both in transition markets in Central and Eastern Europe and in the European Union). Many high-yield bonds issued in the United States are now placed by foreign corporations spurred by privatizations, mergers and restructurings, and new technology expansions. The history of high-yield bonds is nearly as long as the history of public capital markets, with early issuers including General Motors, IBM, J. P. Morgan’s U.S. Steel in the first few decades of the twentieth century, and the United States of America soon after the nation’s founding in the 1780s. The public market for new-issue junk bonds gradually atrophied, and for most of the twentieth century—up to the 1970s—all new publicly issued bonds were investment grade. The only publicly traded junk bonds were ones that had once been investment grade but had become “fallen angels,” having been downgraded to junk as the financial condition of the issuer deteriorated. The interest payments on these bonds were not high, but with the bonds selling at pennies on the dollar, their yields were quite high. Companies deemed speculative grade were effectively shut out of the public capital market and had to rely on more expensive and restrictive bank loans and private placements (where bonds are sold directly to investors such as insurance companies). Interestingly, even though these private placements were riskier than the public high-yield bonds of the 1980s, they were never labeled “junk.” Indeed, the label “junk” and the decision about what level of risk it applies to, though now well established, is essentially arbitrary.

Following the end of the Allied occupation of Japan, real increases in GNP averaged 9.6 percent from 1952 to 1971. From 1972 to 1991, growth remained strong but less dramatic, averaging 4 percent per year. The rest of the 1990s and early 2000s have been a different story. From 1991 to 2003, real economic growth averaged just 1.2 percent per year. Why was Japan able to grow so fast for so long, and why has the subsequent slowdown lasted more than a decade? A number of factors contributed to Japan’s rapid economic growth, including its starting point. World War II ruined Japan’s economy, killing millions of its people and destroying about 40 percent of its capital stock. With so much of Japan’s capital stock gone, the rate of return on capital was high, and so people had a strong incentive to invest and accumulate more capital. Naturally, this increased growth rates. But this, by itself, cannot explain why Japan’s growth rate was high for so long; other countries with even less capital failed to attract more and grow. Low levels of privilege seeking also helped Japan grow. Privilege seeking occurs when a special interest group tries to obtain special privileges from the government. Because the interest group’s gains are much less than the overall losses to society, lower economic growth rates occur. Mancur Olson’s book The Rise and Decline of Nations describes how a major conflict such as World War II breaks up entrenched interest groups in losing countries and how this improves growth rates. Groups need time to reorganize and begin to seek privileges, and meanwhile, the economy grows faster. As more and more groups successfully get their special privileges, growth rates slow. Olson attributes much of the postwar performance of Japan and other Axis powers to the breakup of interest groups. Japan funded its investment and capital accumulation through high rates of domestic savings. Gross private savings rose from 16.5 percent of GNP between 1952 and 1954 to 31.9 percent in 1970 and 1971. Average domestic savings from 1960 through 1971 averaged 36.1 percent of national income. The United States, by comparison, averaged only 15.8 percent from 1961 to 1971. The Japanese government encouraged saving by not taxing away the incentive to save. The tax code allowed for a portion of savings to earn interest income tax free when in an employer-run savings plan. In addition, interest on the first thirteen thousand dollars in each postal savings account was tax free, and many people had multiple accounts. But special tax treatment was not the only cause of high levels of savings and investment. The overall environment of universally low taxes and economic freedom created much of the incentive to invest. Taxes as a percentage of national income fell from 22.4 in 1951 to 18.9 in 1970. During the same period, that percentage in the United States rose from 28.5 to 31.3. Lower tax rates in Japan fueled investment because citizens had more money to invest and businesses had a greater incentive to exploit opportunities since they would reap the rewards. Tax rates, regulations, inflation, and other measures must be examined collectively to determine the extent of government intervention in an economy. The best compilation of these measures can be found in the Economic Freedom of the World Annual Report (see economic freedom). In 1970, the earliest year for which a ranking is available, Japan was concluding its period of rapid growth and was the seventh-freest economy in the world. Various observers, including Chalmers Johnson, Robert Wade, and economist Joseph Stiglitz, have attributed Japan’s growth to the policies of the Ministry of International Trade and Industry (MITI). All claim that MITI helped Japan achieve a high growth rate by selectively pursuing tariffs and other industrial policies to favor particular industries. The idea that MITI’s industrial policy was a cause of Japan’s growth does not bear close scrutiny. Any industrial policy that promotes one industry is necessarily a policy against other industries. For industrial planning to succeed, it must identify, better than markets do, which industries should be favored. In a free market, competitive bidding dictates how capital and labor are allocated, and profits and losses reveal what adjustments should be made. Information about which industries should exist is revealed only through the market’s process (see information and prices). Industrial policy rigs the market to enlarge some industries at the expense

Investment is one of the most important variables in economics. On its back, humans have ridden from caves to skyscrapers. Its surges and collapses are still a primary cause of recessions. Indeed, as can be seen in Figure 1, investment has dropped sharply during almost every postwar U.S. recession. As the graph suggests, one cannot begin to project where the economy is going in the near term or the long term without having a firm grasp of the future path of investment. Because it is so important, economists have studied investment intensely and understand it relatively well. What Is Investment? By investment, economists mean the production of goods that will be used to produce other goods. This definition differs from the popular usage, wherein decisions to purchase stocks (see stock market) or bonds are thought of as investment. Investment is usually the result of forgoing consumption. In a purely agrarian society, early humans had to choose how much grain to eat after the harvest and how much to save for future planting. The latter was investment. In a more modern society, we allocate our productive capacity to

The Internet and Economics “The Internet changes everything”—or so we were told at the height of the Internet craze. According to a prominent Wall Street Journal article titled “Goodbye Supply and Demand,” one of the changes it was claimed to have brought about was a transformation of the basic economic forces at work in the economy. After the fact, we know that the Internet did not change everything, and it certainly did not change the fundamental economic forces that underlie the workings of markets. Many economists did not believe that the Internet, or any mere change in technology, could alter the fundamental laws of markets that have been established over the last three centuries. The Internet’s main function is to reduce the cost of transmitting information (see information and prices), and that is really all it does. Since the Internet only moves electrical pulses from one location to another, it is capable only of transmitting products that can be digitized—and that comes down to various forms of information (including digitized entertainment). The fact that we can describe what the Internet does in such a brief sentence does not undercut its value as a technology. Not only does it allow the economy to benefit directly from the decreased costs of information transmittal, but also it allows markets to function more efficiently. Information in the hands of consumers allows them to better choose their products. Anyone who has tried to purchase a car and has consulted the Edmunds or Autobytel Web sites can testify to the wealth of free information available. Stock trackers can do research more easily and collect real-time quotes, something inconceivable for a typical investor before the Internet. Anyone interested in product or market information can quickly find it with search engines such as Google, although this information has not prevented consumers from sometimes overbidding for items on eBay. In addition, many Web sites allow consumers to help other prospective consumers by providing feedback on products. By reducing the cost of transmitting information, the Internet has also revolutionized some markets, making some local markets into national markets (as with used car parts from scrap yards) and national markets into international markets. It has also allowed people to stay in almost constant contact with friends using instant messaging, has fostered the creation of virtual communities interested in particular topics, and has allowed people with enough energy and interest to become “broadcasters” of information via Web sites and blogs (Web logs). But despite these changes in marketplace information, the Internet does not change the underlying market forces. The bursting of the bubble—the deflating of the lofty market capitalizations of firms related in any way to the Internet—was itself the most pedestrian case of time-honored economic forces coming to the fore. The law of demand states that the price the marginal consumer is willing to pay declines as the output increases, holding other things constant. This means that price falls as supply increases. Applied to investment, it means that returns fall as the level of investment increases. Because expectations for the Internet were so high and so widely held, firms promising to use the Internet in their business plans drew a tremendous amount of investment. Some of these business plans were just so much thin air with no potential for any profit. But even companies whose business plans made sense were unable to translate them into profits when a dozen other firms were investing in the same idea. So much investment money was thrown at “Internet” firms that the rate of return was negative. Of course, consumers benefit from these new investments even if the investors do not. This is also consistent with simple microeconomics, which teaches that although the price falls as supply increases, the benefit to consumers increases. Some relatively new economic concepts predating the Internet were often used in discussions of the Internet. These concepts—network effects, winner take all, lock-in, first mover wins—are often misunderstood. The last two

Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works. 1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policies, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below). 2. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in phillips curves that show inflation rising only slowly when unemployment falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run. They often quote Keynes’s famous statement, “In the long run, we are all dead,” to make the point. Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally. But Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero. 3. Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor. Even Milton Friedman acknowledged that “under any conceivable institutional arrangements, and certainly under those that

Ever since Adam Smith published The Wealth of Nations in 1776, the vast majority of economists have accepted the proposition that free trade among nations improves overall economic welfare. Free trade, usually defined as the absence of tariffs, quotas, or other governmental impediments to international trade, allows each country to specialize in the goods it can produce cheaply and efficiently relative to other countries. Such specialization enables all countries to achieve higher real incomes. Although free trade provides overall benefits, removing a trade barrier on a particular good hurts the shareholders and employees of the domestic industry that produces that good. Some of the groups that are hurt by foreign competition wield enough political power to obtain protection against imports. Consequently, barriers to trade continue to exist despite their sizable economic costs. According to the U.S. International Trade Commission, for example, the U.S. gain from removing trade restrictions on textiles and apparel would have been almost twelve billion dollars in 2002 alone. This is a net economic gain after deducting the losses to firms and workers in the domestic industry. Yet, domestic textile producers have been able to persuade Congress to maintain tight restrictions on imports. While virtually all economists think free trade is desirable, they differ on how best to make the transition from tariffs and quotas to free trade. The three basic approaches to trade reform are unilateral, multilateral, and bilateral. Some countries, such as Britain in the nineteenth century and Chile and China in recent decades, have undertaken unilateral tariff reductions—reductions made independently and without reciprocal action by other countries. The advantage of unilateral free trade is that a country can reap the benefits of free trade immediately. Countries that lower trade barriers by themselves do not have to postpone reform while they try to persuade other nations to follow suit. The gains from such trade liberalization are substantial: several studies have shown that income grows more rapidly in countries open to international trade than in those more closed to trade. Dramatic illustrations of this phenomenon include China’s rapid growth after 1978 and India’s after 1991, those dates indicating when major trade reforms took place. For many countries, unilateral reforms are the only effective way to reduce domestic trade barriers. However, multilateral and bilateral approaches—dismantling trade barriers in concert with other countries—have two advantages over unilateral approaches. First, the economic gains from international trade are reinforced and enhanced when many countries or regions agree to a mutual reduction in trade barriers. By broadening markets, concerted liberalization of trade increases competition and specialization among countries, thus giving a bigger boost to efficiency and consumer incomes. Second, multilateral reductions in trade barriers may reduce political opposition to free trade in each of the countries involved. That is because groups that otherwise would oppose or be indifferent to trade reform might join the campaign for free trade if they see opportunities for exporting to the other countries in the trade agreement. Consequently, free trade agreements between countries or regions are a useful strategy for liberalizing world trade. The best possible outcome of trade negotiations is a multilateral agreement that includes all major trading countries. Then, free trade is widened to allow many participants to achieve the greatest possible gains from trade. After World War II, the United States helped found the General Agreement on Tariffs and Trade (GATT), which quickly became the world’s most important multilateral trade arrangement. The major countries of the world set up the GATT in reaction to the waves of protectionism that crippled world trade during—and helped extend—the Great Depression of the 1930s. In successive negotiating “rounds,” the GATT substantially reduced the tariff barriers on manufactured goods in the industrial countries. Since the GATT began in 1947, average tariffs set by industrial countries have fallen from about 40 percent to about 5 percent today. These tariff reductions helped promote the tremendous expansion of world trade after World War II and the concomitant rise in real per capita incomes among developed and developing nations alike. The annual gain from removal of tariff and nontariff barriers to trade as a result of the Uruguay Round Agreement (negotiated under the auspices of the GATT between 1986 and 1993) has been put at about $96 billion, or 0.4 percent of world GDP. In 1995, the GATT became the World Trade Organization (WTO), which now has more than 140 member countries. The WTO oversees four international trade agreements: the GATT, the General Agreement on Trade in Services (GATS), and agreements on trade-related intellectual property rights and trade-related investment (TRIPS and TRIMS, respectively). The WTO is now the forum for members to negotiate reductions in trade barriers; the most recent forum is the Doha Development Round, launched in 2001. The WTO also mediates disputes between member countries over trade matters. If one country’s government accuses another country’s government of violating world trade rules, a WTO panel rules on the dispute. (The panel’s ruling can be appealed to an appellate body.) If the WTO finds that a member country’s government has not complied with the agreements it signed, the member is obligated to change its policy and bring it into conformity with the rules. If the member finds it politically impossible to change its policy, it can offer compensation to other countries in the form of lower trade barriers on other goods. If it chooses not to do this, then other countries can receive authorization from the WTO to impose higher duties (i.e., to “retaliate”) on goods coming from the offending member country for its failure to comply. As a multilateral trade agreement, the GATT requires its signatories to extend most-favored-nation (MFN) status to other trading partners participating in the WTO. MFN status means that each WTO member receives the same tariff treatment for its goods in foreign markets as that extended to the “most-favored” country competing in the same market, thereby ruling out preferences for, or discrimination against, any member country. Although the WTO embodies the principle of nondiscrimination in international trade, article 24 of the GATT permits the formation of free-trade areas and “customs unions” among WTO members. A free-trade area is a group of countries that eliminate all tariffs on trade with each other but retain autonomy in determining their tariffs with nonmembers. A customs union is a group of countries that eliminate all tariffs on trade among themselves but maintain a common external tariff on trade with countries outside the union (thus technically violating MFN). The customs union exception was designed, in part, to accommodate the formation of the European Economic Community (EC) in 1958. The EC, originally formed by six European countries, is now known as the european union (EU) and includes twenty-seven European countries. The EU has gone beyond simply reducing barriers to trade among member states and forming a customs union. It has moved toward even greater economic integration by becoming a common market—an arrangement that eliminates impediments to the mobility of factors of production, such as capital and labor, between participating countries. As a common market, the EU also coordinates and harmonizes each country’s tax, industrial, and agricultural policies. In addition, many members of the EU have formed a single currency area by replacing their domestic currencies with the euro. The GATT also permits free-trade areas (FTAs), such as the European Free Trade Area, which is composed primarily of Scandinavian countries. Members of FTAs eliminate tariffs on trade with each other but retain autonomy in determining their tariffs with nonmembers. One difficulty with the WTO system has been the problem of maintaining and extending the liberal world trading system in recent years. Multilateral negotiations over trade liberalization move very slowly, and the requirement for consensus among the WTO’s many members limits how far agreements on trade reform can go. As Mike Moore, a recent director-general of the WTO, put it, the organization is like a car with one accelerator and 140 hand brakes. While multilateral efforts have successfully reduced tariffs on industrial goods, it has had much less success in liberalizing trade in agriculture, textiles, and apparel, and in other areas of international commerce. Recent negotiations, such as the Doha Development Round, have run into problems, and their ultimate success is uncertain. As a result, many countries have turned away from the multilateral process toward bilateral or regional trade agreements. One such agreement is the North American Free Trade Agreement (NAFTA), which went into effect in January 1994. Under the terms of NAFTA, the United States, Canada, and Mexico agreed to phase out all tariffs on merchandise trade and to reduce restrictions on trade in services and foreign investment over a decade. The United States also has bilateral agreements with Israel, Jordan, Singapore, and Australia and is negotiating bilateral or regional trade agreements with countries in Latin America, Asia, and the Pacific. The European Union also has free-trade agreements with other countries around the world. The advantage of such bilateral or regional arrangements is that they promote greater trade among the parties to the agreement. They may also hasten global trade liberalization if multilateral negotiations run into difficulties. Recalcitrant countries excluded from bilateral agreements, and hence not sharing in the increased trade these bring, may then be induced to join and reduce their own barriers to trade. Proponents of these agreements have called this process “competitive liberalization,” wherein countries are challenged to reduce trade barriers to keep up with other countries. For example, shortly after NAFTA was implemented, the EU sought and eventually signed a free-trade agreement with Mexico to ensure that European goods would not be at a competitive disadvantage in the Mexican market as a result of NAFTA. But these advantages must be offset against a disadvantage: by excluding certain countries, these agreements may shift the composition of trade from low-cost countries that are not party to the agreement to high-cost countries that are. Suppose, for example, that Japan sells bicycles for fifty dollars, Mexico sells them for sixty dollars, and both face a twenty-dollar U.S. tariff. If tariffs are eliminated on Mexican goods, U.S. consumers will shift their purchases from Japanese to Mexican bicycles. The result is that Americans will purchase from a higher-cost source, and the U.S. government receives no tariff revenue. Consumers save ten dollars per bicycle, but the government loses twenty dollars. Economists have shown that if a country enters such a “trade-diverting” customs union, the cost of this trade diversion may exceed the benefits of increased trade with the other members of the customs union. The net result is that the customs union could make the country worse off. Critics of bilateral and regional approaches to trade liberalization have many additional arguments. They suggest that these approaches may undermine and supplant, instead of support and complement, the multilateral WTO approach, which is to be preferred for operating globally on a nondiscriminatory basis. Hence, the long-term result of bilateralism could be a deterioration of the world trading system into competing, discriminatory regional trading blocs, resulting in added complexity that complicates the smooth flow of goods between countries. Furthermore, the reform of such issues as agricultural export subsidies cannot be dealt with effectively at the bilateral or regional level. Despite possible tensions between the two approaches, it appears that both multilateral and bilateral/regional trade agreements will remain features of the world economy. Both the WTO and agreements such as NAFTA, however, have become controversial among groups such as antiglobalization protesters, who argue that such agreements serve the interests of multinational corporations and not workers, even though freer trade has been a time-proven method of improving economic performance and raising overall incomes. To accommodate this opposition, there has been pressure to include labor and environmental standards in these trade agreements. Labor standards include provisions for minimum wages and working conditions, while environmental standards would prevent trade if environmental damage was feared. One motivation for such standards is the fear that unrestricted trade will lead to a “race to the bottom” in labor and environmental standards as multinationals search the globe for low wages and lax environmental regulations in order to cut costs. Yet there is no empirical evidence of any such race. Indeed, trade usually involves the transfer of technology to developing countries, which allows wage rates to rise, as Korea’s economy—among many others—has demonstrated since the 1960s. In addition, rising incomes allow cleaner production technologies to become affordable. The replacement of pollution-belching domestically produced scooters in India with imported scooters from Japan, for example, would improve air quality in India. Labor unions and environmentalists in rich countries have most actively sought labor and environmental standards. The danger is that enforcing such standards may simply become an excuse for rich-country protectionism, which would harm workers in poor countries. Indeed, people in poor countries, whether capitalists or laborers, have been extremely hostile to the imposition of such standards. For example, the 1999 WTO meeting in Seattle collapsed in part because developing countries objected to the Clinton administration’s attempt to include labor standards in multilateral agreements. A safe prediction is that international trade agreements will continue to generate controversy. About the Author Douglas A. Irwin is a professor of economics at Dartmouth College. He formerly served on the staff of the President’s Council of Economic Advisers and on the Federal Reserve Board. Further Reading   Bhagwati, Jagdish, ed. Going Alone: The Case for Relaxed Reciprocity in Freeing Trade. Cambridge: MIT Press, 2002. Bhagwati, Jagdish, and Arvind Panagariya eds. The Economics of Preferential Trade Agreements. Washington, D.C.: AEI Press, 1996. Irwin, Douglas A. Against the Tide: An Intellectual History of Free Trade. Princeton: Princeton University Press, 1996. Irwin, Douglas A. Free Trade Under Fire. 2d ed. Princeton: Princeton University Press, 2005. U.S. International Trade Commission. The Economic Effects of Significant U.S. Import Restraints. Fourth update. USITC Publication no. 3701. June 2004. Wacziarg, Romain, and Karen H. Welch. “Trade Liberalization and Growth: New Evidence.” NBER Working Paper no. 10152. National Bureau of Economic Research, Cambridge, Mass., 2003.   (0 COMMENTS)

On the topic of international trade, the views of economists tend to differ from those of the general public. There are three principal differences. First, many noneconomists believe that it is more advantageous to trade with other members of one’s nation or ethnic group than with outsiders. Economists see all forms of trade as equally advantageous. Second, many noneconomists believe that exports are better than imports for the economy. Economists believe that all trade is good for the economy. Third, many noneconomists believe that a country’s balance of trade is governed by the “competitiveness” of its wage rates, tariffs, and other factors. Economists believe that the balance of trade is governed by many factors, including the above, but also including differences in national saving and investment. The noneconomic views of trade all seem to stem from a common root: the tendency for human beings to emphasize tribal rivalries. For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball. To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology. International trade enhances efficiency by allocating resources to increase the amount produced for a given level of effort. Classical liberals, such as Richard Cobden, believed that free trade could bring about world peace by substituting commercial relationships among individuals for competitive relationships between states.1 History of Trade Theory David Ricardo developed and published one of the first theories of international trade in 1817. “England,” he wrote,

“Insider trading” refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information. Famous examples of insider trading include transacting on the advance knowledge of a company’s discovery of a rich mineral ore (Securities and Exchange Commission v. Texas Gulf Sulphur Co.), on a forthcoming cut in dividends by the board of directors (Cady, Roberts & Co.), and on an unanticipated increase in corporate expenses (Diamond v. Oreamuno). Although insider trading typically yields significant profits, these transactions are still risky. Much trading by insiders, though, is due to their need for cash or to balance their portfolios. The above definition of insider trading excludes transactions in a company’s securities made on nonpublic “outside” information, such as the knowledge of forthcoming market-wide or industry developments or of competitors’ strategies and products. Such trading on information originating outside the company is generally not covered by insider trading regulation.