The Thinking 
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The Problem is Not Free Trade, But Liberalism

September 7, 2011

 

KRISTOR writes:

Free trade  would work great for us, and we would retain all those high tech industries, if we wanted to. But we don’t. How can I tell that we don’t? Because unlike the Chinese, we load all sorts of economic burdens on our producers: regulations, high corporate taxes, labor rules, etc. We prevent business. The Chinese try to remove those burdens, wherever they can. They bend over backwards to promote business. Steve Jobs said a few months ago that he would love to manufacture all Apple’s products in the US, because it would be so much simpler, except that the regulatory environment here makes it far simpler for him to manufacture everything on the far side of the world, under a foreign government and tax system, using workers who don’t understand English very well, if at all. Think about that: the obvious simplicity of manufacturing close to home with highly educated workers who speak your language is completely overwhelmed by the complexities imposed by our regulatory environment. It’s not even a close decision. Jobs said, as I recall, that he can open an Apple manufacturing line in China in two weeks; in the U.S., it can take two years. 

The problem is that the liberal wants contradictory things. On the one hand he wants cheap energy and independence from the Saudis. On the other, he wants no messy horrid oil wells or coal mines or refineries or power plants or transmission lines anywhere in the U.S. He wants all U.S. energy production to come from renewables, but he doesn’t want to ruin views or the lives of birds by erecting lots and lots of windmills. So, big surprise: the liberal is disappointed. 

The same sort of contradiction is replicated in virtually every industry. And, every time, the industry in question finds it more profitable to do business elsewhere. Why is this a big surprise? 

And our government has been essentially liberal since the Coolidge Administration. Our government, root and branch, is against private economic activity. Why then is it so surprising that we get less and less economic activity, compared with the rest of the world? 

The problem is not free trade, but liberalism. All that free trade does is convey the message of the contradictory, incoherent, illogical nature of liberal domestic policies. The message is conveyed via reduced wages and job growth for Americans. Free trade is just the messenger. Blaming free trade for our job losses is like blaming the stock market for the poor business performance of a company.

 

                                        — Comments —

Jeff W. writes:

I have some questions about dealing with mercantilists for the free trade advocates here.

Suppose that you operate a retail store in a neighborhood full of  mercantilists. It is the policy of the people in your neighborhood to buy nothing from your store. They are happy to sell to you, of course. Every day they come to your store offering items for sale. But they buy nothing. They only buy from stores owned by people of their own ethnic group. What is your free trade solution to this problem?

Obviously your store will go out of business. After acknowledging that your store will be put out of business by mercantilists, do you still assert that the mercantilists in your neighborhood “are only hurting themselves?”

We live in a world where mercantilist China is prospering, just having reported GDP growth of 10% a year. GDP growth is less than 1% for the free-trade U.S.A. Please explain how this can be.

How bad will it have to get in the U.S. for you to change your mind about free trade? We already have 16% unemployment by traditional measures. When it gets to 30% or 40%, will you be willing to reconsider your position?

Alissa writes:

When it comes to economic systems are they only methods or do they embody something? Are they just economic systems that channel humanity’s condition or do they reveal and promote certain worldviews?

Fred Owens writes:

Folks can believe whatever they want to believe, but there is no free love, there is no free lunch, and there is no free trade.

Robert L. writes:

Roger wrote in the previous entry:

YouTube has lots of short clips where Milton Friedman brilliantly deals with just such questions as yours about Portugal. Generally they are being put by individuals who are intelligent and otherwise informed, but ignorant of the principles of free trade. 

Doubtless, they are as ignorant as are Ian Fletcher,Free Trade Doesn’t Work: What Should Replace It and Why; Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism; and Clyde Prestowitz, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline. 

One very much gets the impression from the responses of your dogmatic free traders that they have not actually read Ian Fletcher’s book.

For your less dogmatic readers, I direct their attention to the chapter in both Fletcher’s and Chang’s books that explain how Britain and the U.S.A. both rose to economic ascendance under protectionism and both declined when they adopted free trade. That is to say, if they read nothing else, they should read the unexpurgated history of protectionism and free trade.

The decline doesn’t happen overnight; just as it takes a while to slow and finally halt the momentum of a fast moving train, so too Britain’s economic decline can be traced to the 1860s when they first began flirting with free trade. By 1910, then still protectionist America and Germany were head and shoulders above Britain economically, much to Britain’s frustration and envy.

America began its flirtation with free trade after WW II. Over 60 years later, with its manufacturing base mostly hollowed out, free traders can take cold comfort in continuing to cite chapter and verse from Doctor Pangloss that free trade is the best of all possible worlds while the Titanic ship of state hits hard into cold reality.

Kristor writes:

Jeff’s store analogy is not quite faithful to reality. What is happening between China and the U.S. is that the neighbours are offering to sell you their goods for less than it costs to produce them. You’d be stupid not to buy all that you can on those terms. If they are not buying from you, then your decision to invest in a store in that neighbourhood was a bad business decision – like trying to sell ice to Eskimos or buggy whips in LA. It’s not your customer’s fault that your products don’t suit him at the price you are charging. You should cut your losses, open a store in a neighbourhood that wants your products (sell ice in Miami, and buggy whips in Lancaster County), and use your profits from your new locations to buy as much as you can from your deluded ex-neighbours. 

If you discover that you can’t find a neighbourhood anywhere that will generate sales of your product, then something is wrong – not with all the neighbourhoods out there, but with your product, or the way you are selling it. Either you are pricing it too high, or making it wrong, or it’s just that no one wants what you are selling. If the latter, you need to either direct your capital to some other endeavor altogether. Otherwise, you must examine your business with a ruthless laser eye, with a view to improving your product or procedures. 

You ask how our economic growth can be less than 1%, while China’s is reportedly around 10%. The answer in the first place is that the figures for China are noisy – i.e., bogus. The Chinese are investing their trade surplus in vast uneconomic infrastructure projects. They have built huge new cities, with freeways, malls, apartment towers, commercial buildings, the whole nine yards – but the Chinese are still so poor that no one can afford to live in them. So they stand empty. Yet the expenditures on such construction are added to Chinese GDP. As to why our growth is less than 1%, well, like I said, we have stupid economic and social welfare policies that hobble growth. The solution the Democrats are proposing is that we should spend a bundle hiring people for make-work jobs that build a bunch of things no one wants, just like the Chinese are doing. That’s how they propose to solve the unemployment problem. It’s nuts. We shouldn’t emulate the stupid uneconomic things the Chinese do, we should emulate the smart economic things they do. 

To Alissa:

Economic systems are methods. But, an economic system channels human activities, guiding or organizing them, thereby affecting humanity’s condition, and it reveals and promotes certain worldviews. This is because a method is always aimed at some end; and both the method and its objective are worthy of adoption and use only to the extent that they generate value; and our values differ, depending upon our worldview. The methods we think good, then, reflect our values, and tend to reinforce them. If we think exercise is beneficial, and do it regularly, our bodies become fit for exercise. If we think free markets are beneficial, and interfere with them as little as possible, our enterprises will become fit for competition on free markets – or, for that matter, on unfree markets. 

Markets – i.e., trading procedures – are methods of organizing the exchange of goods and services. Their first order purpose is to enable trade and exchange to proceed in an orderly, regular fashion, so that trading is made easier and more efficient from an operational point of view. But they serve several other purposes, as well. Market transactions generate a history of prices for the goods whose exchange they mediate, and this pricing information is useful to people making economic decisions even when they are not participating in those markets as traders. If for example investors see that the price of wine is going up, they might be led to infer that an investment in land suitable for vineyards is an idea worth investigating, and this might drive up the price of such land. Land and wine sell on completely different markets, but these markets affect each other, thanks to the mediation of human intellects. Thus the prices of goods and services on markets are functions of the integrated evaluations of all human intellects that trade in anything at all. Note in this connection that even a hermit living on his garden in the wilderness, and not ostensibly trading in anything, is nevertheless contributing by his abstention from markets to society’s apprehension of overall demand for its various goods and services. When the hermit walks to town to buy a new axe from the blacksmith, he generates a marginal increase – imperceptible to him, perhaps, but nevertheless real – in the price of axes, and more generally of steel. If he pays for the axe with a tray of fresh tomatoes from his garden, he likewise generates a marginal decrease in the price of tomatoes, and of food in general. Every market exchange helps society discover the prices it is willing to pay for various goods and services. Implicit in those prices is an estimation by society of all the costs and benefits of their production and delivery. 

Price discovery is a crucial secondary function of markets. Markets that operate without constraint on their prices help everyone understand what everything is worth. They transmit true information about reality, so that all our decisions are made more accurate and appropriate to things as they really are. When market rules or procedures interfere with or obscure price discovery, market prices mislead us – they lie. In so doing, they cause us to invest our resources in ways that don’t properly fit with reality, and so they impoverish society unnecessarily. And this is as true of international markets as it is of the transaction between the blacksmith and the hermit. 

Trade between nations is just like trade between stock market participants. If the trade is free, then to the extent that a participant in the market is acting irrationally – as China is in dumping its goods, and as we are in maintaining our bloated, inefficient regulatory, tax, and welfare policies – it is not the market that is at fault for the irrationality, but the participant. All the market is doing is conveying the information that some traders are acting irrationally – and are therefore lawful prey of their more rational competitors. Preventing the market from operating properly, as mercantilists advocate say we should do, does not change the irrationality of the traders, does not change the real situation in the world. All it does is obscure the situation. I.e., it lies. It tries to convince us that things are different than they really are, and fool us into behaving in ways that make no sense, given what other traders are doing. 

Blaming free trade for our economic shortcomings vis-à-vis China is shooting the messenger. We really do have shortcomings vis-à-vis China. China is out-producing us. Markets are not the problem. Our irrational economic and welfare policies are the problem. We penalize enterprise, and subsidize sloth. So, we produce more sloth and less enterprise than we otherwise would, or than we ought. The solutions are simple and well-understood, albeit challenging politically. To erect trade barriers is to play “let’s pretend we aren’t slothful.” There will be a day of reckoning with our problems. Trade barriers defer that day, and so ensure that the ultimate price of the reckoning that we will someday certainly pay, will be far more painful than if we just faced facts, buckled down and got to work right away. 

And to Fred Owens:

You are right that there is no free lunch. Nothing is costless. Thus there is no way to trade for free; trading takes energy, time, money. But “free” in “free trade” and “free lunch” is being used to denote freedoms of different sorts. “There is no free lunch” means that nothing is free of cost. “Free trade” describes market conditions wherein the fact that there is no free lunch is free of artificial obfuscations. It is certainly possible to have free markets, just as it is possible to face reality, tell the truth, and do your duty. That we often fail at these things indicates only that we might have succeeded; the very possibility of a failure of virtue is open to us only because the virtue is in fact really achievable.

David D. writes:

It is quite interesting to see the furor created by an Internet article condemning “free” trade. Almost instantaneously, here comes a pack of very articulate, very sophisticated critics of the free trade critics, so quickly and so numerous it would almost seem that these free trade ideologues were being paid to engage on anyone on the Internet who opposes “free trade.” The least that can be said is that capital concentration certainly has its supporters. Big surprise.

Anyhow, I would like to say that the title of this post, “The Problem is not Free Trade, it’s Liberalism” sums up the whole debate. Does it not occur to anyone that “free” trade IS liberalism, exercised on the economic side of the community’s life? “Free” love and “free” thinking and “no fault” (free) divorce, are, indeed, the same things as “free” trade, only practiced on the societal side with necessarily the same kinds of unintended(?), unexpected(?), and irreversible results. With no restraints but competition, capital inevitably concentrates. What part of that statement flies counter to the last four centuries of economic history? If consideration of anything but profit maximization is out of court, then consideration for groups workers, families, communities, regions, countries be hanged. In the past, America’s and other countries’ wide open spaces and frontiers could accommodate the impoverished millions resulting from European free-trade. Those frontiers are gone. Now we are forced to be our brother’s keeper. The solution is more competition? From where and from whom? Corporations located in countries that have even more terribly enslaved workers? Are we really, really at peace with corporations becoming so huge, so powerful, so world-wide they can’t help but begin to govern? Some would say they do now. Who offsets politically and economically 45 billion dollars – the size of just one of the individual global players’ fortune? How will “free” trade prevent this? No matter, the “market” will soon reveal through economic and political chaos that “free” trade is yet another slogan and ideology generated so the powerful and immoral can take unrestrained advantage of the weaker, more vulnerable. The TV. commentators will call it a “moral free” world.

Laura writes:

It’s not fair to call those who have defended free trade here “a pack” of ideologues. They have not banded together to silence free trade critics and have commented here before. They are simply explaining their views. 

Roger G. writes:

At least part of the reason we are conservatives is that we understand that there are human limitations. In this regard, economic activity is too complex for a favorable result to be obtained by subjecting it to outside control – i.e., by the government (through protectionism). There are too many participating entities, too many factors, and they change too rapidly. The process works best (not perfectly: conservatism, remember?) when all are left free to participate as they deem fit. This is the premise underlying Leonard Reed’s famous essay “I, Pencil.” Reed wrote:

Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

Kristor writes:

Because I offer reasoned arguments in support of free trade, David D. insinuates that I might be one of a pack of ideologues in the pay of corporate interests (I wonder: how does my theological writing fit into that job description?). He doesn’t respond to my arguments, he just lets fly with an ad hominem attack. Since David is a fan of protectionism, would it be proper for me to insinuate in like manner that he is a member of a pack of ideologues in the pay of tyrannical interests? After all, David wants to take economic power away from bad evil corporations that compete with each other tooth and nail to win sales, and give it to good, expert and well-intentioned tyrants, who have an absolute monopoly on the production and distribution to their subjects of their basic product: violence. 

The choice really is that simple, that stark and digital. Protectionism proposes to sequester more economic power in the hands of the state. David asks who could offset a $45 billion corporation. Has he looked at the size of the Federal budget lately? Would he rather do business with Wal-Mart, or the IRS? 

David says, “With no restraints but competition, capital inevitably concentrates. What part of that statement flies counter to the last four centuries of economic history?” Um, all of it. The opposite is true. Does he remember when IBM bestrode the high tech world like a titan? Where is IBM now? Microsoft used to be unassailable; then there was Google, and then the iPod, and everyone knows today that Microsoft had better think of something really good, really fast, if it wants to retain market share. Before they got into big trouble, Yahoo used to be king of the internet; before that, it was AOL. Does David remember when five railroads ran the country? Where are they now? Does he remember when RCA and Zenith made all the TVs – before Sony and Hitachi? Does he remember Sperry Corporation? McDonnell Douglas? Does he remember when there were only three TV networks? 

If capital inevitably concentrates as David says, then how do new business titans like Microsoft, Apple, IBM, or Yahoo manage to get going in the first place? Why don’t the big evil corporations crush them in their infancy? 

If we had been using protectionist policies since the halcyon days of the 1950s, why we’d still have the same lousy GM, Ford and AMC cars we used to have in the 60’s and 70’s, and there’d be no alternative. Instead, we have GM and Ford fighting for their lives all over the world against VW, Toyota, Nissan, Honda, BMW, Hyundai, Mercedes, Fiat, & al.; and cars are far better now than they were in 1970. Net of inflation, they’re cheaper, too. GM and Ford are now making great cars. We’re in an automotive Golden Age. 

The truth is that competition eats away at corporations just a little bit with every mistake they make – I have experienced this personally, as a businessman – except when the state intervenes to prop them up and protect them. When that happens, you sooner or later get monopolies like AT&T used to be. 

Finally, when he says, “‘Free’ love and ‘free’ thinking and ‘no fault’ (free) divorce, are, indeed, the same things as ‘free’ trade,” David conflates several quite different denotations of “free.” I already dealt with one such conflation in my response to Fred Owens. But never mind careful distinctions, let’s stipulate to David’s equivalence of all these diverse denotations. Does David really mean to suggest that it would be better for the state to take over the direction of our thinking, our love, and our marriage, in the same way that he would like to see the state take over the direction of trade? Is David really that much of a totalitarian? 

If he is not, as indeed I earnestly hope, then he should reflect upon the fact that to the extent the state controls commerce, it controls life. If, for example, Obamacare’s individual mandate to purchase health insurance – an intervention in commerce if ever there was one – is found to be constitutional, then it would be only a short step to state mandates that all citizens must exercise daily, buy whole grain breads, and abstain from alcohol, tobacco, and meat – and, to keep costs down, generate at most one child each. Does this seem far-fetched? They’ve been doing it for decades in that beacon of protectionism, Red China. 

We do need limits in every area of life, to be sure, or else there can be no order at all, or therefore any life, or beauty. I have argued that proposition repeatedly. But from the fact that we need limits it does not follow that the state should impose them all upon us. By far the greatest part of the limits we must respect ought to make themselves felt within the human breast; and, to the extent that a man is insensible of such limits, the greater part of the reproach to his ignorance or sloth should, and generally does, come to him immediately from the physical world, and from his family and friends – and his employer, or his customers. The state should become involved in our moral correction only in egregious cases, and must itself be subject to strict limits. And this is as true of the state’s regulation of business, as it is of the state’s regulation of thought crime. Down any other path lies serfdom. Beware when big burly “protectionists” with guns come into your store “offering” to “sell” you some “protection.”

Laura writes:

That’s a terrific statement.  

The discussion continues in this entry and here.

 

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