A recent article in The Economist discusses the on-going flap about the economic benefits of the WTO. UC-Berkeley economist Andrew Rose published an excellent paper on this issue last year in the American Economic Review ("Do We Really Know that the WTO Increases Trade?"). In this piece, Rose finds that there is startlingly little evidence that the WTO has done anything to enhance trade.
Building on Rose's model, I've recently written a paper attempting to determine the importance of state-provided contract enforcement for international trade. I find that state enforcement has a small, positive effect on trade--but not the impressive impact suggested by the conventional wisdom that state enforcement is critical for trade to flourish.
The work of several Austrian economists provides a potential explanation for this result. Following Menger, Austrians such as Mises and Hayek view understanding spontaneously emergent institutions one of the critical tasks of economics. Where there are sizable gains from trade, individuals find inventive ways of overcoming obstacles that stand in the way of realizing them. Out of this, in the international arena, emerged private arbitration, private international commercial law, and customs for dealing with disreputable traders. These spontaneously emerged private institutions are ultimately responsible for the boom in international trade--not government.
Many economists I've discussed this with are surprised that state enforcement is so unimportant for trade. But for those familiar with the Menger-Mises-Hayek line of reasoning, there is nothing particularly unusual about this finding at all. In fact, for some, like Murray Rothbard, who emphasized the superiority of private enforcement to public enforcement, this is precisely what we should expect.
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