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Behavioural Economics, Psychology and Free Trade

Behavioural Economics, Psychology and Free Trade

By Ahmad Mobeen

Renowned author and Professor of Economics at Harvard University, Gregory Mankiw, recently published an article in The New York Times. In it, he discusses why a majority of people consider international trade and globalisation unfavourable, even when “experts” and leaders advise them not to resist such forces. He cites the research work of Edward Mansfield and Diana Mutz, political scientists from the University of Pennsylvania, to help explain the opposition to globalisation and free trade.

Mankiw’s article explained that Mr Mansfield and Ms Mutz found this ill will towards trade and globalisation unwarranted. They felt that with education and time, this opposition can be softened and eventually replaced by pro-globalization sentiments.

With this article, I attempt to highlight the limitations and misguidedness of their conclusions, in the context of Behavioural Economics, Psychology and Economic Geography.

Isolationism That Breeds Anti-Cooperation

Isolationists believe that nations should not interfere in the political and socio-economic spheres of other nations.

According to Mansfield and Mutz, the first reason for the negative sentiment against globalisation is isolationism. Isolationists believe that nations should not interfere in the political and socio-economic spheres of other nations. Along the same lines thus, the authors claim, that isolationism places anti-cooperation feelings within the policy of non-intrusiveness. In Mankiw’s words, “They (trade skeptics) are not eager for the United States to work with other nations to solve global problems like hunger and pollution.” This line of thinking is only partially accurate.

Destruction in Syria

Destruction in the Middle East due to terrorist groups | Photo Courtesy: IBI Times

A majority of civilians are vehemently opposed to others meddling in the political and sensitive matters of their nations. And there are well-founded reasons to back their stance. For good or for otherwise, the recent political interference in the Middle East has resulted in an unimaginable array of catastrophes. Terrorism, extremism, mass atrocities, collateral killings, monumental exodus, civil wars, cold wars; everything is happening concurrently.

However, the claim that within isolationism, non-intrusiveness allows for anti-cooperation feelings is misguided.

However, the claim that within isolationism, non-intrusiveness allows for anti-cooperation feelings is misguided. In fact, in recent discussions on behavioural economics, economists had to accept that the “self-interest” their normative theory indicates, has limits. In simple words, people are much more altruistic.

Furthermore, the stance for one matter does not necessarily translate to a similar stance on another matter. Conditions such as perceived fairness and the ability of others to misuse and abuse certain policies affect this non-transference of ideas. These are all tested developments by renowned economists and psychologists such as Richard Thaler, Herbert Simon, and Daniel Kahneman.

Basically, people are against other nations meddling in their socio-economic policies and they have every right to be. But no one ever claimed that they did not want to see countries cooperating with each other to eradicate hunger and diseases! And even if there are such ultra-isolationists, they are in a deep minority.

A Superiority Complex Called Nationalism

Coming towards the second reason given in the article: Nationalism.

Although it is a short-term measure, it provides domestic producers with a cushion by substituting imports with the local goods.

The authors argue that nationalism ignites condescending behaviour among trade skeptics. According to them, trade skeptics believe that others should strive to emulate the characteristics and policies of their nation. And only then would they consider them equal enough for further interactions. This is a superficial conclusion.

Nationalism does not equate to a superiority complex. Nationalism is a vast concept. Broadly, it means protecting local institutions and human capital from foreign competition. At least until they can function in the “free markets” efficiently. Although it is a short-term measure, it provides domestic producers with a cushion by substituting imports with the local goods. Domestic firms can then get financially competent and consumer-experienced to compete internationally.

Nowhere is it claimed that “we are superior and others should be like us”. In fact, “Washington Consensus”, a contradictory theory popular in the mid to late 20th century, argued the same with its roots in liberalism rather than nationalism.

The Author’s Conclusion

Thus, the two main reasons Professor Mankiw’s article mentions are either flawed or poorly applied to this specific phenomenon. More “palpable” reasons voiced by the public on several occasions and protests have often been ignored.

I would like to try to explain two reasons through the lens of “behavioural economics”, the field of study that tries to bridge the gap between economics and human psychology.

Loss Aversion

First of them relates to “loss aversion”, a theory put forward by Daniel Kahneman and Amos Tversky. It states that losses hurt more than gains, even if they are of equal magnitude. This “prospect theory” eventually became the gold standard in this up and coming field.

Following their theory, purchasing commodities cheaply would be less satisfying in the face of dissatisfaction felt from the unemployment of a loved one. It is this unemployment which contributes to the sources of lower prices: free trade and outsourcing. And this is precisely what people are complaining about. They think that free trade is a danger to their job security and are thus retaliating.

Rather than placating their fears, telling citizens that they are wrong worsens the matter.

Transaction Utility

The second cause is associated with what is known as transaction utility. The transaction “utility” (economists’ term for satisfaction) compares the price one thinks is justified (the “reference price”) to the actual price they have to pay. If reference price is less than or equal to the actual price, humans get satisfied.

For free-trade skeptics, buying a relatively varied and less expensive basket of commodities is an alluring development. However, the transaction utility (satisfaction) is severely negative. This is because they are not willing to pay the price of substantial layoffs and unemployment at home (incidents that they perceive chiefly stem from globalisation) in order to get the goods for cheap.

Whether they are right or wrong is another matter, but the heavy moral cost they face because of perceived guilty conscience is too high. This results in a dissatisfaction with the current state of free trade and borderless transactions. In short, they suffer from a negative overall utility.


It is neither about the reasons why people feel dissatisfied with globalisation, nor about whether people are right in assuming its negative implications. Rather, it is about striving to understand people’s preferences and thinking to work towards a future where the perceived “utility” is fairly positive. Everybody knows that it is easier said than done. But with a little less of blame games and a bit more cooperation and understanding, we can start this uphill journey.

The author is a University of London graduate.

Feature Image Source: Jose Martin via Unsplash

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