Tyler thinks Douglas Irwin has just released the best history of American trade policy ever written. So for this conversation Tyler went easy on Doug, asking softball questions like: Have tariffs ever driven growth? What trade exceptions should there be for national security, or cultural reasons? In an era of low tariffs, what margins matter most for trade liberalization? Do investor arbitration panels override national sovereignty? And, what’s the connection between free trade and world peace?

They also discuss the revolution as America’s Brexit, why NAFTA is an ‘effing great’ trade agreement, Jagdish Bhagwati’s key influence on Doug, the protectionist bent of the Boston Tea Party, the future of the WTO, Trump, China, the Chicago School, and what’s rotten in the state of New Hampshire.

Watch the full conversation

Recorded October 5th, 2017

Read the full transcript

TYLER COWEN: I’m here today with Douglas A. Irwin of Dartmouth College. Doug has just published a book, Clashing over Commerce: A History of US Trade Policy, that is in fact the greatest book on trade policy ever written, and Doug is one of my favorite economists.

Today, Doug, we’re going to start in on trade. What I’m going to do is toss out a bunch of arguments used against free trade, and you either give me what you think is the best rebuttal or, if you want to accept the argument, that’s fine. You ready for that?

DOUGLAS IRWIN: Sure.

COWEN: Here goes. The claim that 19th century American growth was driven by high tariffs. What’s your take?

IRWIN: Not really true. If you look at why the US economy performed very well, particularly relative to Britain or Germany or other countries, Steve Broadberry’s shown that a lot of the overtaking of Britain in terms of per capita income was in terms of the service sector.

The service sector was expanding rapidly. It had very high productivity growth rates. We usually don’t think as that being affected by the tariff per se. That’s one reason.

We had also very high productivity growth rates in agriculture. I’ve done some counterfactual simulations. If you remove the tariff, how much resources would we take out of manufacturing and put into services or agriculture is actually pretty small. It just doesn’t account for the success we had during this period.

COWEN: Is there any country where you would say, “Their late 19th century economic growth was driven by tariffs?” Argentina, Canada, Germany, anything, anywhere?

IRWIN: No. If you look at all those, once again, in late 19th century, they were major exporters, largely of commodities, but they did very well that way. You know that Argentina was one of the richest countries in the world in the late 19th century. It really wasn’t until they adopted more import substitution policies after World War I that they began to fall behind.

Yes, you can build up your manufacturing sector, but if it’s a low-productivity sector or it’s not going to be very dynamic, it’s not going to enhance national income.

COWEN: Take tariffs on agriculture today, arguably the single biggest exception to free trade principles in the world. What if I were to argue that the national security argument actually makes sense?

We live in this funny bubble of a world where there has not been a major war anytime lately. If you were, say, Japan, you’re a vulnerable island. You actually can’t grow a lot of your own food. You’re easily blockaded.

If the Japanese have some tariffs on, say, rice, beef, and other items, it may in most years look like it makes no sense whatsoever. But the long-term payoff of keeping some autonomy in their own production of foodstuffs will make it worthwhile sooner or later and give them more leverage in foreign policy. True or false?

IRWIN: I go back to Adam Smith, the master, who said that defense is more important than opulence. Certainly, economies have always recognized that there might be an exception to the doctrine of free trade in the case of helping out domestic industries that are essential for national defense.

Then the question becomes, if that’s really a security worry, what’s the best way of promoting agriculture? First of all, is rice protection really going to help them out if there’s some sort of major conflagration? Probably not.

COWEN: Why not? You can always eat rice, correct? There’s fish from the sea. Fish plus rice equals some version of Japanese food. It’s delicious. It’s good for you. It won’t ever go away. Maybe they have a major war once in a century. Isn’t it worth it as a form of insurance? Yes, no?

IRWIN: You could do the calculation and actually see whether it might possibly pay off. They’ve used very tight import quotas, raised the price to consumers. They’re holding back the overall economy because they’re devoting a lot of labor and land to this relatively unproductive sector of the economy.

It’s a societal choice in some sense. If they want to sacrifice x percent of national income for 50 or 100 years for this — what I would think would be a relatively low-probability event — who’s to say that they’ve made a wrong choice?

COWEN: The cultural exception to free trade, a common argument at UNESCO. If you go back some number of years, South Korea has significant quotas keeping out a lot of Hollywood movies. South Korean moviemaking then, according to some accounts, appears to blossom. You have wonderful South Korean movies like Mother. South Korea becomes a moviemaking power. Years later, South Korea is still a leading movie and otherwise entertainment and cultural exporter to the rest of Asia.

Therefore for cultural reasons, it’s often a good thing to allow more tariffs and quotas on, say, movies, television programs, linguistically designated products, possibly national heritage items that a lot of our free trade agreements allow. What’s your view?

IRWIN: That’s not just an argument there. Canada, too, has cultural exceptions built into the US-Canada Free Trade Agreement and NAFTA and things of that sort.

Actually, I’m surprised you’re asking me that because you’ve written about the cultural diversity that you get with openness in free trade and that if you limit the ability of domestic consumers to watch foreign movies, and taste foreign food, and import foreign art, you’re losing something as a result of that.

So I’m not sure many countries could become this sort of net exporter of cultural products the way South Korea has.

COWEN: A fairly new argument against one kind of free trade, and that is the claim that in some parts of the world, there’s too much tourism. If you live in Venice, on one hand, tourists probably account for the living you’re able to make, but arguably Venice as we know it is not sustainable. There are too many tourists. Works get damaged. Everything becomes “chained” in Venice. Venetian culture now, for the most part, seems to be gone. There’s barely a Venice left. It’s like being in a large airport surrounded by a lot of monuments.

The population of Iceland, I think it’s about 400,000. So many tourists are coming, Iceland is wondering if its own culture isn’t being overwhelmed by tourists. They fear the Icelandic language will go away and that somehow the natural heritage of Iceland, or even some of the cultural aspects, are being ruined.

In your view, can there be too much tourism? And is there an appropriate policy response?

IRWIN: The appropriate policy response would be taxation. You want to tax the foreign visitors. You wouldn’t want to exclude them. You wouldn’t want to set quotas. But if you set an appropriate tax that applies to both domestic and foreign citizens so it’s not protectionist per se. It’s just accounting for the externality of degradation of overuse or something like that.

COWEN: If you’re the Icelandic median voter, do you favor such a tax?

IRWIN: That’s a good question. It’s on my list of places to go, so I haven’t measured that myself. But I would think that they’re getting quite wealthy as a result of this. Whether they’ve gone too far, I don’t know, and whether it’s taxing of their infrastructure.

COWEN: Let’s take a somewhat different approach to trade. It’s found, I think, especially in China. Some people would argue it’s even practiced by Germany as well. And that is to have a focus simply on everyone being able to keep a job, not efficiency as economists would describe it, not output, not productivity, but the notion that exports possibly can take away some of your jobs as they’ve done in parts of the American Rust Belt, that that’s very bad for your political economy.

You might, believe it or not, start electing rather strange candidates, or perhaps start opposing the Chinese government in nonproductive ways. Therefore trade policy really should be governed by making sure everyone has a good enough job.

China has done this through a rather extreme mercantilism. Some people would say Germany has done it by its role in the Euro system, which gives it a currency which has arguably a permanently low value relative to German productivity.

Do you think there’s much to this argument?

IRWIN: No, in the sense that I don’t think you want a trade intervention per se as a job creation mechanism. If you want to guarantee jobs for people, that would be one approach. But you don’t have to link it to the trade sector per se.

In fact, there’s sort of a theme through all of your little exceptions that you’re throwing at me — which I enjoy very much — in that the case for free trade has never been the case for laissez-faire. There may be cases for intervention, either overuse of certain tourist sites or you need a certain industry or sector for national security.

These don’t necessitate an intervention in trade. You don’t need tariffs, quotas, export subsidies, things of that sort. There are other domestic policies that can more efficiently and more directly address the situation you’re trying to deal with.

“The case for free trade has never been the case for laissez-faire. There may be cases for intervention, either overuse of certain tourist sites or you need a certain industry or sector for national security.

These don’t necessitate an intervention in trade. You don’t need tariffs, quotas, export subsidies, things of that sort. There are other domestic policies that can more efficiently and more directly address the situation you’re trying to deal with.”

COWEN: Let’s take some of the recent free trade agreements, which, as you know, large parts of them are not about free trade in the older classical sense of cutting tariffs, but they’re about regulatory standardization. This always tends to make me a little bit nervous, even though on average, I favor these agreements.

Regulatory standardization often lowers the cost of trade, but it also tends to bring, in many cases, more regulation. We live in this funny world where more free trade or semi-free trade and more regulation, albeit better regulation, come together. If you’re skeptical about there being more regulation, as I often am, but you’re favorable toward more free trade, you’re not sure always how to feel about these new trade agreements.

Do you think the future inevitably is one where what we’re calling free trade agreement actually, on average, will be bringing, on net, more regulation to the economies they’re covering?

IRWIN: Unfortunately, yes. Tariff levels have been beaten down. Obviously, they’re not zero. They’re still scoped to reduce those. There are many parts of the world that still have relatively high tariffs.

But if you look at the big trade agreements — Trans-Pacific Partnership was this — if the US and the EU ever reach a trade agreement, there’s going to be a lot of regulatory provisions. Once again, I share also your view that this could go either way.

One of the things that at least US trade negotiators say is that there’s a lot of regulatory protectionism out there. This is a way of not necessarily even setting standards, but ensuring that there’s a mechanism to ensure that other governments are not tweaking their standards to favor domestic firms or to serve some special interest.

Yes, it could lead to more regulations. It could lead to standards that maybe developing countries can’t adhere to, so it has that downside. But it also could, not clear the decks of regulation, but prevent regulatory protectionism, which that’s a possibility as well.

COWEN: Many recent, and even some older, trade agreements have embodied in them investor arbitration panels, sometimes called ISDS or investor-state dispute settlement. These panels, as you know, sometimes have the ability to override national laws or the court decisions of a national government.

The possible conflicts between these panels and what some would say is democracy or some would say is constitutionalism — (a) to what extent does that worry you? And (b), in general, do you want to see ISDS in the trade agreements we’re writing or do you feel it’s somehow gone too far?

IRWIN: Personally, I wouldn’t want them in. They distract from, I think, what is the main purpose of these trade agreements, which is to reduce trade barriers and regulatory barriers. So I’m not particularly happy that they’re in there.

But I do think, on the other side, the progressive Left if you will, there’s a lot of ISDS horror stories about how it undermines democracy, it’s a terrible thing, and the US is foisting this on the international system, and other countries don’t want it. But, in fact, it turns out a lot of developing countries insist that this is in. Mexico just recently asked for this in, I believe, a new agreement with the EU or Canada. I can’t recall where I read it.

The reason why developing countries want it is because it’s a way of ensuring that they can commit themselves to treating foreign investors fairly. They want to attract foreign investment, and they maybe don’t necessarily want ISDS, but they’re willing to go in for it. They ask for it because it’s a commitment device.

Let’s see, I was reading also Canada and the EU, I think, their recent CETA, their agreement, also has ISDS. Once again, it’s not something the US was pushing. Many in Europe are very much opposed to these things, but it got in there for various reasons.

COWEN: Take a trade agreement such as TPP with or without the United States. What percentage of the gains from TPP do you think are coming from more foreign direct investment? And what percentage of the gains do you think are coming from more trade in the narrower sense of the term?

IRWIN: Oh, that’s a great question. It depends a lot on the particular country.

Australia’s already a pretty open market. Vietnam could be a big winner in the sense of getting a little bit more market access, but also liberalizing their own tariffs and quotas that they’d be forced to do. Their liberalization within the context of a TPP is good for them, and to the extent that they institutionalize this as a trade regime, they may attract even more foreign investment.

Certainly, we’ve seen when Mexico and other countries reach a lot of foreign trade agreements, they can become expert platforms and attract investment.

COWEN: To the extent we think the gains are from more direct foreign investment, does that not mean we should favor more ISDS rather than shy away from it? Enter the debate, argue against the Europeans, try and get ISDS in as many agreements as possible for the purposes of more foreign direct investment? Or no, you’re still gun-shy?

IRWIN: [laughs] Once again, I take the world as evolving and want to analyze what’s driving this. Even if I say, “Any future trade agreement, we’re not going to have no ISDS,” they’re already embedded in the system, known as BITs, bilateral investment treaties. They’re going to crop up one way or another.

As I mentioned, this is not something that the nefarious United States is foisting upon unsuspecting other countries. Other countries sometimes want this as a way of saying, “Look, maybe you don’t trust our judicial regime, but we’ll do this as a way of promoting investment.” Once again, with Canada and the EU, no one doesn’t trust their judicial regimes, but still somehow those two countries — very progressive — wanted ISDS in their agreement.

COWEN: Here’s a question that’s a complete softball, so easy, I can’t believe I’m asking you. How strong is the connection between free trade and world peace?

IRWIN: [laughs] This is something I’ve actually wanted to investigate in more detail. Certainly, my gut reaction — and I think there’s a lot of evidence for it — is they are related.

Certainly, when you read the memoirs of statesmen of the mid-20th century, they definitely saw that, Cordell Hull being the leading example, who’s the US secretary of state from 1933 until 1944 or ’45.

And he wasn’t alone. A lot of economists, Jacob Viner and others, also saw that connection because when you had either trade protectionism or imperialism closing off markets, it led to the scramble for Africa or something like that. Instead of trading these resources freely, you had territorial acquisition as being the counterbalancing of that.

What’s interesting is, just as economists have done a lot of empirical work on the benefits and costs of trade, political scientists have done a lot of work on this. The empirical work is not quite up, I think, to the standards of what economists have done in terms of the economic phenomena, but partly it’s because it’s very difficult to quantify, first of all, what constitutes peace, how you operationalize this, what constitutes a trade agreement.

Trade is endogenous in many respects, so if there’s a lot of trade, what exactly is the consequence of that? What’s the exogenous variation where more trade leads to more peace? You’d like to see something like that. I’m not sure we have really hard social science evidence on it, but I think it’s a factor that we economists often overlook. A lot of trade policy debates are foreign policy driven, and it’s not something we should really neglect.

COWEN: The idea that free trade might be connected to peace seems quite plausible to me in an era of communism, where you have expansionary foreign governments, and for a long time, there was, as you know, no McDonald’s in Moscow.

If you look today, it seems something has changed. China is our largest trading partner, but many observers of foreign affairs would argue that the relationship between US and China has some reasonable chance of leading to foreign conflict. So something has changed in the structure of the equilibrium where now nations that trade a fair amount might fairly readily go to war relative to what we used to suspect.

Of course, there is a McDonald’s in Moscow. There’s probably quite a few. People in Moscow eat sushi. They consume all kinds of American popular culture, if only downloaded illegally on the internet.

What do you think has changed in the structure of the problem to have made the free trade–peace connection possibly now so weak?

IRWIN: I don’t know that it’s weaker. I think China’s a really difficult one to figure out in terms of whether all the openness we’ve seen over the past two decades or so is going to lead to political transformation or a change in their foreign policy. It doesn’t seem to have yet, so I’d say that the jury is still out. Still the costs . . .

This goes back to Norman Angell’s point. Of course he’s widely misinterpreted from saying, “We won’t see wars in the future because of increased trade.” He didn’t say that. He said it changed the cost-benefit calculation. I think it may have for China.

Just recently, watching the Ken Burns Vietnam series on PBS, there were a lot of wars in Southeast Asia beyond the Vietnamese War. China invaded Vietnam. Vietnam invaded Cambodia. I’m not sure that that sort of local conflict . . . I don’t think it’s more likely, given the tremendous amount of commerce that’s going on and the perceived need of the governments to justify themselves by saying, “We’re providing an adequate standard of living for our people.”

COWEN: Some questions about trade in Asia. Should the United States allow China to buy US semiconductor companies?

IRWIN: One could invoke national security. Without answering that specific question — and of course, we do have a process for reviewing those things — there is a big question about how easily we can integrate China further into the world trading system. That is, I don’t think things have developed the way a lot of people hoped when China joined the WTO and we gave them a permanent normalized trade status. It’s become much more mercantilist, much more interventionist, much more protectionist in nontariff ways than a lot of people thought and hoped that China would evolve.

This is a question that economists raised after World War II, as well. A great trade economist such as Jacob Viner saying, “Can we really integrate the Communists and the non-Communist worlds in a trading system?” Turns out the answer was no.

“This is a question that economists raised after World War II, as well. “Can we really integrate the Communists and the non-Communist worlds in a trading system?” Turns out the answer was no.”

I guess my worry with China is, the more they push it, and they are pushing the envelope in terms of the rules of trade as we in the West see them, in terms of limited government support for firms, and things of that sort, they’re pushing things. I think that we could be moving in a direction where there will be more trade conflict, even set aside Trump and all that sort of thing.

COWEN: China decides to keep out Uber, and Didi, of course, becomes the market leader for ridesharing in China, a much larger company than Uber now. China also keeps out Google and Facebook, and there are Chinese equivalents or near equivalents that rise to take their place.

Just from the point of view of Chinese economic welfare, not global welfare, but China alone, are those economically rational decisions good for the Chinese economy?

IRWIN: I think they’re being taken, not for economic reasons, but for political reasons.

COWEN: And national security reasons. But just on the economic side, does it boost Chinese GDP for the Chinese and the median or average wage to keep out Uber, Google, and Facebook?

IRWIN: Personally, I don’t think so because you’re limiting access to more choice. Google’s a very efficient search engine. By limiting access to information by your domestic citizens, your scientists, and others — unless they can breach that wall — they’re not going to have access to the best ideas out there.

COWEN: But if you get from that decision a Baidu, which is the Chinese equivalent of Google; you get Tencent, WeChat, being in some ways like Facebook; Didi of course is an all-Chinese company — they get a version of the services.

Scientists who need the research use a VPN. They still access Google. But it seems there’s much more output within the Chinese economic nexus than if those decisions had not been taken.

IRWIN: Possibly, but the question is, also you would have a lot of Chinese entrepreneurship in terms of web development and new apps and things of that sort simply because they know the local market much better than a foreign firm coming in and saying, “We’re going to provide this particular service.”

In addition, if you were able to attract Google and other apps to produce in China, you’re adding to local capabilities. So, foreign ownership, I don’t think, is a particular problem.

COWEN: When the United States, and indeed the West more generally, let China into the WTO, many people are now saying, “It turns out, looking back, we gave up too much leverage. We had a lot of leverage at the time. We didn’t use it. China entered on terms where it’s allowed to violate too many of the rules subsequently.” Agree or disagree?

IRWIN: A little bit agree because, actually, US negotiators were very defensive in terms of what they were asking China. They wanted, really, exceptions that the US could impose trade barriers against China rather than saying, “We want much stricter rules that you can’t intervene in this sector or that sector,” provide free credit to domestic firms.

We were more interested in exceptions for ourselves to block their textiles or have a special safeguard exception rather than making firm our insistence that China not get its fingers all over their own economy.

COWEN: As you know, there’s a series of papers by MIT economist David Autor with co-authors, and they argue to varying extents that Chinese import penetration has hurt US middle-class wages and indirectly would seem to imply it’s damaged a fair number of US communities. This may account for some of the sad state of our Rust Belt and former manufacturing areas.

(a) How much do you believe that result? And (b), to the extent there’s something there, how well do you feel that result is being processed by the policy community and the policy discussion?

IRWIN: They’ve done some really interesting work. I call it a great piece of economic history because the China shock was a one-off shock. It’s not going to happen again.

There’s a huge increase in the supply of labor to the market sector in China from the 1990s and into the 2000s. Actually, I think we’re going to have some papers in the future about the negative China shock because the Chinese labor force is going to be shrinking.

So it was a very particular, unique period of economic history. If you’re thinking about bringing in hundreds of millions of people in China into the market sector, and then you’re losing one million jobs in the United States over 10 years, that’s actually a pretty small impact on the United States.

Now, impact is particularly hard on those communities where it’s a one-factory town or something like that. They’re producing furniture or apparel. It’s clear that that had a negative impact there. But there’s also a macroeconomic context to what you have to think about in terms of the China shock.

I don’t worry about the 1990s so much because we had a robust, growing economy then, and actually there’s some evidence that workers who were displaced from the textile industry in the 1990s were actually getting higher wages outside. But the 2000s is a very different situation. Even though the aggregate unemployment rate was coming down in the 2000s, the Fed was tightening.

The China shock was not a macroeconomic shock, not an aggregate demand shock in a sort of Scott Sumner point of view. Certain communities were hurt, but this is also a period where we had 10 percent of Chinese current account surplus and a big US current account deficit.

So I think the problem during the 2000s was, the economy wasn’t particularly robust. We had these big macroeconomic imbalances, which you have to understand the context during that period. If, for example, US export growth to China had been matched or matched our import growth from China, we probably wouldn’t be having this debate. There would have been a China shock, but we’d have said, “Boy, there are a lot of alternatives elsewhere.”

Yes, we were getting capital inflows and had lower interest rates because of the inflows of capital from China, but people don’t see that as much and think maybe it propped up the housing bubble and shifted resources into housing.

It’s history. It happened. It doesn’t cause me to rethink the case for free trade in any way. We’ve always known there are adjustment costs. We’ve always known certain communities are going to be hurt. But I do think we can exaggerate how important that was in terms of where the US economy is today.

COWEN: Ed Conard has an argument for why he’s skeptical about some of the trade with China. He worries about the capital inflow from China, that it hasn’t been sufficiently concentrated in risk-taking entrepreneurial capital. He says the capital has come in in the form of buying off in government securities. Government at times is actually one of our less productive sectors.

We’ve gotten more quote, unquote “investment” from that capital, but we get it in an area that’s a bit of a lemon in productivity terms. Therefore Ed thinks trade with China hasn’t been a good deal necessarily at some margins. What’s your take on that?

IRWIN: A lot of government spending is just transfer payments. So it made those transfer payments and the US fiscal deficits easier to accommodate. But of course, there is going to be a reckoning. We do have to pay for those at some point. Just because you’re getting cheap credit for a 5- or 10-year period doesn’t mean that you don’t want to think about correcting that fiscal deficit and worrying about access to cheap credit, which may not be there forever.

COWEN: Now we switch back to our home shores, American economic history and trade policy and other matters. Some of this, of course, comes from your book, but your book has much, much more. It’s what, about 900 pages?

IRWIN: I try to cut it down by saying a lot of it’s the index, a lot of it is the endnotes and the references, so it’s actually about 690 pages of text.

COWEN: OK, but it’s a highly readable 690 pages. Here’s some questions about US trade history. We used to have bills have fun names, like the Tariff of Abominations, and now our trade bills have boring names. Why did that change? Why do we have complacent names for our trade bills?

IRWIN: They used to be just tariff acts, so they would just change US tariffs, and that was the main purpose of it. So they would be named for the chairman or chairwoman of the House Ways and Means Committee and the Senate Finance Committee.

For example, Smoot-Hawley, which actually should be called the Hawley-Smoot Tariff because it’s always House first and then the Senate, but the official name of that is the Tariff Act of 1930. Either the press or the members of Congress themselves introduce the moniker to give it a little bit more cachet.

But since Smoot-Hawley, all of the trade acts are not really about tariffs per se. They’re about trade negotiating authority. That’s maybe a little less interesting, and so we have the Trade Expansion Act of 1973, the Trade Act of 1974. It’s not really like there’s one or two key people on key committees who are saying, “I’m setting tariff rates here,” like a tax bill or something like that. I guess because they’re less interesting in that sense, they don’t get named.

COWEN: In the years leading up to the American Revolution, of course, there are restrictions on trade. There was a common complaint, still repeated: “Taxation without representation,” now applied to the District of Columbia at times.

In those years leading up to the American Revolution, how high actually were trade barriers in real net-effective terms? Were we just a bunch of whiners? Or were these trade restrictions actually terrible?

IRWIN: [laughs] I actually think we were very good at whining. First of all, we were getting an enormous implicit subsidy in terms of British national defense. And our tax burdens, compared to the average British citizen, were very, very low.

We wanted to have it both ways. We wanted Britain to underwrite our defense, but we didn’t want to have to pay for it. All the tax debates in the 1760s, we are a little bit of a whiner.

In addition to the trade barriers, Britain was our natural trading partner anyway, and there are some commodities, such as tobacco, which were enumerated and had to go through Britain. But when you look at the post-independence period, we don’t really shift away from Britain too much.

So I think the Navigation Acts have been exaggerated in popular history in terms of how much they were really constricting US commerce and harming the American economy.

COWEN: The Tea Party, not the modern Tea Party but the real, good, old-fashioned Tea Party, were they the good guys or the bad guys?

IRWIN: Once again, they weren’t tax cutters. They actually wanted to stop smuggling. People don’t —

COWEN: So they were protectionists.

IRWIN: [laughs] They really were in a sense. What Britain was doing, actually, during this period, through the Tea Act, was cutting the duty on tea and trying to help out and undercut smuggling and help out the East India Company. So it wasn’t a big tax hike at all. It was actually a tax cut, but the smugglers were the ones who really were invading the British ships and throwing the tea overboard.

COWEN: You mentioned to me in an email before this chat, a notion of understanding the American Revolution in part as America’s early version of Brexit. Could you explain that for us a little more?

IRWIN: Sure. The Founding Fathers really didn’t want to lose market access to the British Empire.

We wanted our political independence. We didn’t want taxation without representation. We thought, long term, we’re very integrated with the British economy. We should maintain that integration. There was this hope, and actually there’s some reason for the hope, after we had won the war, that Britain would be magnanimous, and we could maintain our trading status within the context of the British Empire.

But of course, the British didn’t see it that way. They said, “OK, if you want your political independence, you’re going to get your economic independence as well. All the privileges that you used to have, they’re out the window. You’re now outside the British Empire.” I don’t think the Founding Fathers really anticipated that this would be the case, and they spent a lot of the 1780s trying to claw their way back into the British Empire and got absolutely no give from the British authorities.

A lot of this had to do with the Constitution itself and the formation of the Constitution as a way of allowing 13 independent states to sort of band together and have negotiating authority against other powers, which we didn’t have during this period. So the Constitution is very much an outgrowth of US trade politics during this time.

Revenue, of course, was another key consideration there since, under the Articles of Confederation, Congress couldn’t raise funds. We had these big deficits, and the debts couldn’t be financed. So I think it was a Brexit gone badly.

In fact, economic historians Jeff Williamson and Peter Lindert have a book just a couple years ago on American wealth over time. And once again, the data are sketchy. When you look at American wealth and income in 1776 or the early 1770s, and then you look at it in the 1790s, we’re basically, after 20 years or so, just getting back to where we were before.

A lot of people think this is possibly worse than the Great Depression in terms of the impact on the economic activity of the United States. It wasn’t just the revolution. The 1780s was not a good decade, partly because our trade had been so severely disrupted by being outside the British Empire.

COWEN: Let’s shift to Broadway for a moment, Alexander Hamilton. Was he at the time, in fact, the founding American protectionist?

IRWIN: No. First of all, he gets that reputation because of the Report on Manufactures, which can certainly be read that way. What’s interesting about the Report on Manufacturers is an anti–Adam Smith argument. It’s also an anti-physiocrat argument.

It’s anti–Adam Smith, in the sense that he doesn’t think that the invisible hand will lead to the right allocation of resources. It’s also an anti-physiocrat argument because, apparently, he was confronting, at the time, the argument that the wealth of nations is really based on agriculture, and manufacturing is not something we want to get into.

He said it’s actually useful for various reasons, not just defense, but possibly for productivity increases. It’s producing useful things. It’s an economic activity that we should want and not try to discourage.

There are so many things to point out about that report. The main thing is, when you look at his activities when he was Secretary of the Treasury, he did not want to keep out imports. He wanted a constant flow, a large flow of imports coming in because that was his tax base. He viewed the fiscal sustainability of the federal government as being much more important than any tinkering with trying to promote manufacturers here and there.

He actually rejected proposals coming from the opposite party, Jefferson and Madison, to have embargoes against Britain or limits on trade because he wanted to finance the fiscal deficits, and he thought any sort of disruption to imports would upset those fiscal plans.

In fact, he was so much against those plans that import-competing producers in Philadelphia and elsewhere began shifting their allegiance from the Federalists, who were thought to be in favor of a strong central government and promotion of manufacturing, to the Jeffersonian Republicans, who they saw as much more willing to impose pretty draconian restrictions on imports.

COWEN: Let’s say it’s the 1870s, and you are Rutherford B. Hayes. You’re faced with a series of choices about tariffs. As you know, tariffs in that era are a significant means of funding the national government.

You can either have higher tariffs or probably have higher excise taxes. Or maybe there’s something else you’d like to put on the menu. How do you think about that tradeoff? What decision would you, as Rutherford B. Hayes, have made?

IRWIN: Remember, we had huge fiscal surpluses in the 1880s, late 1870s and 1880s. So there was clearly scope for a big tax cut in tariffs. You don’t need protectionist tariffs to raise enough revenue to fund the federal government.

The sugar tariff alone . . . It’s in the book. I can’t remember off the top of my head. The sugar tariff alone accounted for 25 percent of all revenue coming from the tariffs, maybe even more. You could tax a few select commodities, have them as excise taxes. That raises all the revenue that you need.

You don’t need heavy duties on steel rails and cotton textiles and things of that sort, which truly were protectionist duties. They didn’t raise much revenue. They did block imports and helped out domestic interests that way.

COWEN: Fast-forwarding in time quite a bit. The 1990s, we passed NAFTA, North American Free Trade Agreement. At the time, many people were quite optimistic about NAFTA. But today, as you know, there are numerous research papers which look pretty hard to find any gains at all.

You may be able to find small gains from NAFTA. But it’s unclear what the payoff from NAFTA really has been. If you look at the Mexican economy, there doesn’t appear to be convergence. They’re growing at a rate between two and two and a half percent.

Looking backwards, what is your view of NAFTA? Did we, in some way, do the treaty wrong? Other than mere updating, how might you revise NAFTA today?

IRWIN: I spoke to one trade negotiator about this once. They said NAFTA is not a good trade agreement. NAFTA is an effing great trade agreement. And I agree. It’s a great trade agreement. Once again, US barriers towards Mexican products were already pretty low. So it’s not like we’re getting some big consumer surplus gains from taking down pretty big barriers.

“I spoke to one trade negotiator about this once. They said NAFTA is not a good trade agreement. NAFTA is an effing great trade agreement. And I agree.”

What it did was solidify the US-Mexican relationship. Here you’re appealing to foreign policy a little bit. But also, you’re trying to undertake measures to strengthen the Mexican economy and have a long-term partnership.

I think it’s, on net, been very good for Mexico. Once again, it hasn’t been perfect. You recall that, within a year after NAFTA went into effect, they had a financial crisis. They’ve had major banking and financial issues through the late 1990s into the 2000s.

Obviously NAFTA’s not a silver bullet, where it just makes the Mexican economy transformed into something great. There are a lot of still reforms that have to be done in Mexico, some of it macroeconomic, others not.

But to say that we’d be better off without NAFTA, I don’t think either the United States or Mexico would be. Here’s where you get these nebulous things. John Stuart Mill talked about them, in terms of the benefits of trade. There is an attitudinal shift in Mexico, a much greater openness towards the world.

That’s been all to the better. We’ve seen the basically one-party state dissolve into a competitive democracy. So I think NAFTA and the greater openness that it’s brought about have been very good for Mexico.

COWEN: Is there a future for the World Trade Organization? It has not achieved significant reductions in tariffs for some while. Some people, not all, compare it to the political economy of riding a bicycle, that if you don’t keep on moving forward, you may stop altogether. The action we’ve seen in free trade has been multilateral agreements, outside of the framework of the WTO. It hasn’t achieved real progress on agricultural tariffs.

There is a resurgence of nationalism, populism, whatever you want to call it, in a number of nations, including our own. Is there indeed a future for the WTO?

IRWIN: I think that’s a big question about whether there is. It used to be said that it’s not so great for negotiating trade agreements anymore. They can’t seem to get a consensus. The Doha Round was the first real negotiating round that absolutely failed, and that’s been terminated now.

It’s been over 20 years since they have reached any major, multilateral agreement. The argument among economists has been “Well OK, it’s not so great. People are bypassing it in terms of trade negotiations, but it’s great because of the dispute settlement system.”

But now we see the Trump administration saying, “We don’t like this dispute settlement system.” If the US undermines that, it’s really not clear what role the WTO would have. It wouldn’t be an efficient forum for trade negotiations, and it wouldn’t have an effective dispute settlement system if the US blows it up or walks away from it or something like that. Part of the problem with the WTO, at least in terms of negotiations, has been something that Canada identified, way back in the 1940s, which I think is in the book.

After World War II, we were going to set up a big multilateral organization called the ITO, the International Trade Organization. At some point, as we were moving in this direction, Canada snuck up to the US negotiators and whispered in their ear, “You know what? It may not be a good idea to get every country talking about these things because not everyone’s on the same page.”

In particular, they pointed out India and Brazil and a few others, which they called the more protectionist-minded countries of the era. That’s why we went ahead with the GATT, which is a smaller, nuclear club of like-minded countries to liberalize trade, and the ITO actually never came into being.

But when we shifted from the GATT to the WTO, in 1995, we brought everyone into the room. Now it has 160 members or something like that. It operates by consensus, meaning it’s the lowest-common-denominator negotiating forum. Everyone has to agree. The former director general of the WTO once said it’s like a car with one accelerator and 150 hand brakes. Any country, not quite, but almost any country can step on the brakes and stop the process.

The question is, is this a way to go forward? What you’ve seen is countries just bypassing it. They’ve gone to regional, bilateral, or even sectoral sorts of agreements to avoid the whole mass of countries trying to agree on one common trade policy for everyone.

COWEN: The United States federal government, it often embodies a great deal of messiness. If you think how many different agencies have we had that regulate banks or financial institutions in some way, it’s quite a few. You could say the same of trade.

There’s USTR. There’s the State Department. There’s the Department of Commerce. There’s OPIC. There’s a lot of different layers at which we address trade. Should we just consolidate those into a big, supposedly consistent Department of Trade? Or do you prefer the sprawling mess?

IRWIN: I prefer the sprawling mess.

COWEN: Why?

“COWEN: There’s USTR. There’s the State Department. There’s the Department of Commerce. There’s OPIC. There’s a lot of different layers at which we address trade. Should we just consolidate those into a big, supposedly consistent Department of Trade? Or do you prefer the sprawling mess?

IRWIN: I prefer the sprawling mess.”

IRWIN: I spent a year at the Council of Economic Advisers a long time ago, and I got to watch this interagency process work its way out. What it does is it provides checks and balances on USTR or any lead agency in terms of any one particular area of trade negotiations. It’s internal checks and balances. It provides coherence because USTR’s not going to do something that the Department of Agriculture is going to be very upset about. They can coordinate that.

The problem is, if you centralize . . . There have been many proposals over the years, particularly in the 1980s, when we needed a MITI, just like Japan had — one negotiating arm that would do everything in industrial policy. You centralize power. Whenever you centralize power, it will do things that we don’t necessarily want it to do.

COWEN: Trump supposedly has said, I think sitting at his desk, to some of his advisers, “Tariffs. I want tariffs. Bring me tariffs.” Possibly he screamed this out. Now I know you don’t work for Trump, but if you were put in the position of actually bringing to Trump a tariff, what would it be? Call it least harmful if you wish, but what would it be?

IRWIN: [laughs] I haven’t thought about which tariffs I’d like to impose recently. I guess, if I was an advisor, I’d say they’re coming because there are certain cases under the provisions of US trade law, where you will have a choice on your desk about whether to impose tariffs or not.

That’s the way the process works. You cannot, unilaterally, decide to raise these things by yourself. You have to wait for them to come to you, and they are coming. Just be patient. Of course, he’s not very patient. We’ll see.

COWEN: What will Trump actually do on trade? If you look at the data, the Mexican peso this year is up, last I looked, around 20 percent. Of course, it was down about that much right after the election. That would seem to suggest Trump on trade is now thought of as a bit of a paper tiger.

Other people, like Bob Zoellick, whose judgment I respect greatly, a very smart guy — he seems to think Trump could do a lot of damage in the trade realm. Where do you stand on the spectrum of views?

IRWIN: Well, if we go back to this decentralized view of US trade policy, that’s partly been a check and a balance within the government of Trump just doing something very quickly.

Wilbur Ross and the Department of Commerce, they’ve encouraged higher steel tariffs, in some guise, under national security, what have you. That report has been delayed — delayed and delayed and delayed. The reason is because there are other agencies that can weigh in, other constituencies that can weigh in and say this isn’t good for diplomatic reasons, for national security reasons, for downstream user reasons, or something like that.

So you see the administration divided. The reflex can’t be activated because there are all these other parties that are getting their voice heard. Whereas, if you did centralize things, it might be very easy for that centralized authority to say, “This is what we’re going to do. It doesn’t matter if there are voices to the negative. We just won’t listen to them.”

I think you are referring to Bob’s Zoellick’s Wall Street Journal article of not too long ago. The damage is not so much in particular actions because we really haven’t seen many actions, except for pulling out of TPP, which, arguably, Hillary Clinton or Bernie Sanders would have done as well.

We haven’t seen the trade cases come to the president’s desk and higher tariffs being imposed or quotas or what have you. The damage is more the rhetoric in some sense. You’re alienating South Korea, an ally, during a very tense time.

You’re getting the Mexicans to actually think about, “Gee, we could live without NAFTA. We could stick it to the Americans like we used to in the past, instead of thinking about them as a partner because we’ve got all these other free trade agreements with the EU. We’d keep the one with Canada. We could keep TPP.”

There’s no gain to the US from that. We lose market access, in terms of exports, if we’re discriminated against. There is this deterioration and this rot that can set in.

COWEN: In all of these chats, we have a segment: “underrated or overrated?” I’ll toss some ideas out to you. You’re free to pass, if you’d like.

Underrated or overrated? Brexit.

IRWIN: It remains to be seen. I hate to punt and be a waffler.

COWEN: What does it depend upon?

IRWIN: It depends on whether it actually happens.

COWEN: Assuming it happens.

IRWIN: Assuming it happens, OK. When you listen to the debate, this is maybe Britain’s NAFTA, in some sense. If you went back to the NAFTA debate, you got some people saying it’s going to create a lot of jobs, create a lot of exports. It’s going to be a huge gain for the United States. Or the other side: huge number of jobs losses, disaster for the United States, a giant sucking sound, and what have you.

Then you lose the middle ground. The weight of the evidence, in my view, is that Britain would lose some of its market access to Western Europe. They’re going to lose some of their financial sector. And it’s not clear what they gain in terms of sovereignty, or regulatory freedom, is going to compensate for that loss of trade and investment.

COWEN: The movie Dunkirk.

IRWIN: I enjoyed it. It got a lot of criticism because it didn’t show the context or it didn’t show Churchill. But that’s not the purpose of the movie. The movie was to show what the men on the ground were feeling and reacting to, and I thought it succeeded. I liked it.

COWEN: Churchill, himself.

IRWIN: He’s very highly rated, and I think deservedly so. I don’t think he’s overrated or underrated.

COWEN: Bismarck.

IRWIN: I’ll punt on that one.

COWEN: The Smoot-Hawley or, perhaps, Hawley-Smoot Tariff.

IRWIN: Underrated or overrated?

COWEN: Correct.

IRWIN: It depends on what dimension. It’s gotten a lot of attention. I’m very happy with that because I have a book on it. More people should be aware of it and some of its costs. It does get brought up a lot in trade policy debates, mainly among wonks.

It used to be the reflex that a trade economist would bring about, saying disaster will happen if we impose this tariff. To that extent, the dirty little secret might be that it’s overrated because it didn’t cause the Great Depression. A lot of the weight that was put on it doesn’t support that. That said, it was a very bad thing.

COWEN: So its evils are overrated? It’s actually, in a funny way, underrated.

IRWIN: Yes. That’s right, yes. OK.

COWEN: You’ve now lived in or near Hanover for a long time, so the State of New Hampshire.

IRWIN: In other words, is it, what did President Trump say? It’s a hotbed of, a den of —

COWEN: Opioid use.

IRWIN: Opioid use, yes.

It’s a very beautiful place. It’s got the highest per capita income in the United States.

COWEN: Yes, how did you manage that?

IRWIN: I’m not sure. If you look at the southern part of the state, where I don’t live, Manchester, Nashua, it seems very prosperous. There’s a lot of spillover investment from the Boston area. Its proximity to Boston has been a great help.

It’s a little bit isolated. The winters are cold. I worry a little about — in fact, a lot of economists in the state worry about the demographics and the business climate. A lot of young people are not being attracted to the state. The business climate is not as favorable as we, in the state, like to think. We say, “We have no income tax. We have no sales tax. We want businesses to come here.” But the business taxes are more of a hurdle than one would think.

COWEN: If it’s the highest per capita income — and even if that’s measurement error, it must be near the top — why don’t more people want to live there?

IRWIN: Probably isolation. People are moving.

COWEN: If more people lived there, they wouldn’t feel so isolated, right? It seems like an easy equilibrium to get to. Just have people trickle in, as they did with California, and all of a sudden, you’ve got a lot of people.

IRWIN: Yeah, but you need the investment to draw people in or something. The Boston area has been much more flourishing, in terms of attracting young people, certainly professionals.

I’m not sure exactly what New Hampshire’s big claim to fame is. It’s an older state. Maybe that’s why it’s a high-income state. In the Hanover area, you’ve got a lot of doctors and things of that sort or retirees.

COWEN: What’s the story of the first time you met Milton Friedman?

IRWIN: [laughs] You know the story, actually?

COWEN: No, I don’t.

IRWIN: Really?

COWEN: But I was told to ask you.

IRWIN: There is a story. OK. Well, this was in 1987, I believe. I was at the Council of Economic Advisers, and I was in graduate school. A big fan of Friedman, read his column in Newsweek in the 1970s, in middle school.

I was very excited. He was going to give a talk to people in the administration. There was some room in the Old Executive Office Building where he was going to be speaking. I made sure to get there very early and to get a good seat right out front, so I could see him. So I sat literally in the front row, right in front of the podium, anxiously awaiting his arrival.

He comes in. The crowd fills in, but I’ve got the best seat. Of course, he was standing behind the podium, and I didn’t see anything but the top of his head for the hour that he lectured because he’s so short that he didn’t poke over the podium. I should have sat 10 rows back and I would have seen him. I did get to speak with him afterwards, but during his talk, I didn’t see him at all.

COWEN: What’s the influence of Jagdish Bhagwati on you and your ideas?

IRWIN: Very big impact. He was my thesis advisor. I took a number of courses with him at Columbia University. I learned two things from him.

One, he made economics very fun. I don’t know whether you’ve ever talked to him, but he’s always telling jokes. He’s a great raconteur. He has great stories. He’s laughing a lot, and that came across in his class. Economics is a fun activity. It’s a fun discipline. It’s not just sterile theory. I try to bring that little bit of joy and levity to economics, the way I teach it and hopefully the way I write about it as well.

The other thing I learned from him is marketing. This is back in the pre-internet era, pre-Twitter. We wrote a paper, when I was in graduate school. Not only was there a paper, but he got a New York Times column that we were allowed to write for the business section out of it. The Economist did a box on that article.

He was a master at disseminating his work, not just to other academics, but to journalists, to public policy professionals, and things of that sort. That’s one thing that I’ve also internalized a bit as well. You just can’t write a paper, submit it to a working paper series, and then send it to journals. You have to market it a little bit. That’s much easier today, in the age of Twitter, but back then, that was considered something very unusual.

COWEN: What’s your connection with Randall Scott Kroszner, who teachers at the University of Chicago Business School?

IRWIN: [tongue-in-cheek] I’m responsible for all of the success he’s had in his career because I interviewed him for a job with the Council of Economic Advisers. That was the first time we met. If I had said, “This guy doesn’t merit a position here,” he would have gone back to Harvard and nothing would have been heard from him since. By launching his career and getting him into the CEA, it made available many opportunities for him later on.

COWEN: Our last and final segment. I have a number of questions for you on international trade theory. These are super nerdy, super wonky. Feel free to give it full blast. When it comes to international trade, how much of it is driven by comparative advantage versus how much of it is driven by specialization?

IRWIN: It’s almost hard to separate those things out because they are reinforcing. Comparative advantage is a narrow concept, but it has a broad applicability. The way we teach it is, it’s just a technology factor. Specialization reinforces technological advantages in many senses. So I’m not sure I could load what percent of trade is due to comparative advantage. In some sense, a lot of it, but can’t give you a metric or a number.

COWEN: From 1990 to 2007, at least from the numbers we have, it seems that global trade rose at a rate about three times higher than global GDP. This now seems to have stopped. This is sometimes called the global trade slowdown, though it may just be the normal state of affairs, but why is there now a global trade slowdown?

IRWIN: My story for that is that what we saw in the 1990s is the great opening of the developing world, so China, India, and a bunch of African countries, other countries in Southeast Asia — Vietnam would be a great example, too.

You got this one-off, big effect of countries that had been relatively closed to world trade really reducing trade barriers significantly, and big boost to world trade growth as a result of that.

That’s a one-off thing. Once you’ve cut tariffs from 30 percent to 10 percent, or 5 percent, or something, if you further cut them, you’re just not going to get the growth and trade effects that you had before. So I think it’s a one-off effect of many developing countries entering into world trade, sometimes for the first time in a big way.

I’m not worried by the slowdown. Obviously, the world economy’s slowed down. That’s one reason why. But we shouldn’t expect world trade to grow at two or three times the growth of world GDP in perpetuity.

COWEN: Will this happen again with Africa and South Asia? After all, those are billions of people. Tariffs aside, their infrastructure is often so bad that the real tax on trade, all costs considered, is quite high now. You could imagine it falling a great amount, both by liberalization, but also by better infrastructure. So will we have this period again in the future?

IRWIN: Once again, the 1990s was special because we had the collapse of communism, the fall of the Berlin Wall, and so a lot of regime change that led to some of these things.

We need a big reform moment in Africa. I agree with you entirely that Africa’s the big chunk of the world where there are a lot of people, and they’re still very closed to trade. They both have trade policies and bad infrastructure that greatly increase trade costs. So if we’re going to see big growth in the future, you’d think that’s where it’s going to be.

But I don’t think we’re going to necessarily have a big reform moment in Africa where there’s a simultaneous opening up. It could be more piecemeal. It could be more drawn out over time. That’s where the growth could occur. I don’t think it’s going to be a big bang, like we saw in the 1990s.

COWEN: Globalization theorists used to write about the death of distance, it was called. That doesn’t actually seem to be true — what we call the gravity equation, how much trade depends on distance, it doesn’t seem to have changed much over time. That is, you still tend to trade with countries that are close to you. If you look at real estate values, what’s really gone up are a few major cities, such as New York City, London, San Francisco/Silicon Valley.

It seems location matters more than ever before, and yet there’s more trade. What’s the right way to think about that apparent paradox?

IRWIN: The death of distance may have more of an impact in terms of trade in services. For merchandise, there are shipping costs and things like that, and they have come down, of course. With services, either you need direct investment or it can be transmitted over the internet. So there, distance doesn’t matter quite as much.

COWEN: As you know, containerization was a big breakthrough for trading a lot of manufactured goods. It made it easy to automate, lowered a lot of costs. But services are much harder to trade, along many dimensions.

How optimistic are you about future series of technological breakthroughs — analogous to containerization but for services — that will make them much easier to trade and give us a fairly rapid trade boom in services?

IRWIN: Not particularly optimistic because, unlike manufactured goods or agricultural goods or merchandise in general, each service sector has its own specific trade costs, if you will. Financial services — every country has its own regime, its own regulatory regime. A lot of services are regulated locally. Harmonizing those is very difficult. It’s not like you have one single transport cost or a tax at the border. It’s more the regulatory regime with regard to services.

That’s why I think the WTO has actually — I wouldn’t say failed — but there is a GAATS, a General Agreement on Trade and Services. It’s a pretty, in my view, empty agreement. It doesn’t have a lot of deep commitments. It hasn’t stimulated a lot of growth in trade and services in my view. It has this vague language about nondiscrimination and what have you. Every service sector is different — airline services, banking services, insurance services. So these have to be addressed, not within one technology or one agreement, but it’s more piecemeal.

COWEN: There’s a phenomenon sometimes called premature deindustrialization. At times, it’s associated with the name of Dani Rodrik. That’s the claim that some parts of the world, possibly, for instance, Africa or some parts of South Asia, will never industrialize as, say, South Korea did because now manufacturing production is so automated and, as you note, it’s harder to trade services.

So they may be stuck in a kind of permanent rut. They industrialize to the extent they do by buying things from factories elsewhere, and they won’t ever go the same path that parts of East Asia did. Agree or disagree?

IRWIN: I don’t necessarily agree. When you look at the steel industry in the United States, it’s really become fragmented. You don’t have the big, integrated mills anymore. They’ve spread across the whole geography of the United States. You have the local mini-mills.

The same thing can happen in many developing countries. You can have a local, small steel industry that’s efficient, same with other things. You can still have this fragmentation of production and local production and not necessarily have everything centralized in one or two countries.

COWEN: But say you look at countries such as Brazil, India, South Africa. It seems their share of employment in manufacturing has stagnated and is even going down. It never reached 15 percent. Whereas in the United States, Great Britain, Germany, you have the share of employment in manufacturing going well over 25 percent, sometimes as high as 40 percent. It ends up falling, but you build a stable middle class first that supports a democracy. Is this a reason to be more pessimistic about the economic prospects of countries that have not yet industrialized?

IRWIN: I don’t know about pessimistic, but certainly they’re going to have to choose a different path. If these people are going to be going into services rather than manufacturing, it could be the schooling system is much more important to the extent that human capital is more important for services. They just can’t follow the old recipe that other countries did before them.

COWEN: Last question. What might you, Douglas A. Irwin, know about the history of Chicago School of Economics that the rest of us do not? And what are you planning on working on, on this particular question?

IRWIN: I’ve always been interested in that, particularly because there was something unique about Chicago in the 1930s. They had these people — James Buchanan, your former colleague — who would go there as a socialist and come out as a free-market advocate. In fact, he said that, within the first six weeks of Frank Knight’s course, he was converted. But he wasn’t the only one. Milton Friedman went in as a New Dealer and said Jacob Viner’s course on price theory opened his eyes.

There are many testimonies of other people, who go there with leftist views, but they come out thinking something else. To have that intellectual or ideological conversion in the 1930s, during the Great Depression of all periods, there must have been something going on in the classroom that is convincing people that, despite the problems we see, socialism or communism is not the correct alternative.

I’ve always been interested in what was Frank Knight teaching, Henry Simons, Jacob Viner that convinced people that the market-oriented system, despite its defects, is the right way to go.

COWEN: Doug, thank you very much. Again, I’d like to recommend your book, Clashing over Commerce: A History of US Trade Policy. Thank you, Doug.

IRWIN: Thanks for inviting me.