The Free Trade Cult

I started Throne, Altar, Liberty in May of 2010, but I had been writing essays on political, theological, and cultural topics for at least a year before then. I distributed these to friends through e-mail and Facebook. Since starting Throne, Altar, Liberty I have reposted several of these earlier essays here. Last year in April and May, for example, I posted nine of them, with new introductions, as a series entitled “GTN Tory Classics”. My main reason for doing this is that I did not want Throne, Altar, Liberty to sit dormant while I researched a couple of topics that I wished to write new essays on.

Among the essays reposted last year, were several from an eight-part series on economic subjects that I had written in 2009. I had intended to include the final essay in that series, “The Free Trade Cult”, but for some reason or another neglected to so. Since I once again wish to buy myself time to complete some new essays, I will make up for that neglect by posting it now.

My argument against free trade in this essay, is built upon the fact that history has demonstrated that free trade does not work the way it is supposed to. Liberalism – and free trade is the cornerstone of economic liberalism – predicts that the more countries reduce barriers to trade the more they will prosper. History, however, shows the opposite. Countries that are industrialized or are undergoing industrialization, become economically strong under protection and decline under free trade. I pointed to two elements of liberal theory as the explanation for why free trade does not work – liberalism’s placing the individual over the family, community, and nation and placing consumption over production.

Liberalism’s exaltation of consumption over production is derived from liberalism’s desire to be fair. Protectionism is not fair. I don’t think anybody ever claimed that it was. A tariff on milk benefits domestic dairy producers at the expense of foreign dairy producers and all domestic consumers of dairy products. A tariff on grain benefits domestic grain producers at the expense of foreign grain producers and all domestic consumers of grain. The same can be said for any tariff on any product. The unfairness of this is manifest for anyone to see.

Free trade, liberalism claims, is fair. Under free trade domestic and foreign producers compete in the market, with no unfair advantage given to either. The advantage is rather to the consumer, who is able to buy goods at a lower price. Since the consumers of any particular good will always outnumber the producers of that same good, free trade is the fairest system possible.

There is a certain logic to this, and even a certain truth. No false doctrine is ever entirely false – otherwise, nobody would ever be deceived, by it. The problem is that this kind of reasoning leads inevitably to the conclusion that the economy should favour consumption over production. It is true in one sense, that the producer must be the servant of the consumer. If a producer were to decide that he was going to produce whatever he wanted regardless of whether anyone else wanted it, and so begin manufacturing such things as manure-flavoured licorice, pills that do nothing but enhance the pain from which one is already suffering, and record albums such as “Chalkboard Scratching: the Greatest Hits”, he would not remain in business very long. The only exception to this rule that comes immediately to mind is the contemporary artist, who is subsidized at the taxpayer’s expense by an arts council that believes that artists are entitled to public support and that restrictions on the artist’s output, such as that it should be something people want to see or hear, squelch creativity.

If it is true that production should and must be the servant of consumption, it is only true, as Evelyn Waugh’s Mr. Milner said to Lord Copper, “up to a point”. Looked at from a different angle, production must take precedence over consumption. Some forms of consumption, such as that of food and drink, are necessary to sustain our existence, whereas other forms of consumption, such as that of the products of the entertainment industry, are not. Whether necessary or not, however, consumption cannot take place without production. If we encounter a person who consumes without producing anything by living off of what he has previously accumulated or by borrowing from others we know that that person will not be able to do so indefinitely. Eventually, he will run out of accumulated resources, credit, or both. Then he must become productive or die.

That this is true of individual persons is not disputed. It is also true of countries. A country cannot survive long with an economy that consists primarily of moving existing wealth around and consuming goods that are produced elsewhere. Only production can increase wealth – consumption always decreases it. The liberal, who seems only the individual as being real and not the country, does not appear to recognize this. He also, and for the same reason, is blind to the fact that in practice, his doctrine, like that of the protectionist he so despises, does actually work to the benefit of one group of producers against another. Large, multinational or transnational companies, that answer to the laws of no one country in particular, are given an advantage over the smaller domestic producers of any country, by free trade.

At some point in the future I will likely compose an essay exploring the reasons why the classical liberal concept of the free market works better within the context of a national economy than when it is extended internationally. For now, I give you "The Free Trade Cult". - GTN

The Free Trade Cult


By Gerry T. Neal
June 30, 2009

Although there is much that economists disagree on, one thing that unites most if not all mainstream schools of economic thought is a belief in free trade. Free trade is one of the earliest concepts of modern economics. Adam Smith argued in the 18th Century that a country would be foolish to produce at home what it is cheaper to import from abroad. David Ricardo built on this theory in the 19th Century and Richard Cobden made it his life’s goal to see free trade implemented.

Libertarian schools of economics like the Chicago School of the late Milton Friedman and the Austrian School of Mises, Hayek and Rothbard believe devoutly in free trade. But so does Paul Krugman, the most prominent contemporary exponent of Keynesianism. Free trade, we find, gets a lot of support from people who are otherwise not big fans of laissez faire. Liberal columnist for the New York Times, Thomas L. Friedman, is a noted advocate of globalization. American Presidents Franklin D. Roosevelt, John F. Kennedy, and William J. Clinton all devoutly believed in international free trade while supporting massive state intervention in the domestic economy.

Free trade’s wide, cross-spectrum support base, among political and economical theorists may suggest to many that it is a basic concept, obviously true, that only a fool would question.

But is it? What is free trade, how is it supposed to work, and where is the evidence that it does work?

Free trade is the expansion of the concept of the free market across international borders. At the time free trade was first being proposed as a theory the Western nations practiced an economic policy known as mercantilism. Mercantilism was the idea that to become wealthy a nation needed to amass gold and silver, and that the way to do so was to have a trade surplus, i.e., to have more products flowing out of your country than flow in. The powers of Europe sought to accomplish this by subsidizing exports and restricting imports by quotas, tariffs, and other measures that today are known as protectionism.

Adam Smith, in his An Inquiry into the Nature and Causes of the Wealth of Nations, challenged mercantilist thought. Wealth, he argued, was the result of production and production was enhanced by the division of labor and specialization. These, in turn, were made possible by trade, which allowed the specialist to concentrate on producing one thing and trading his surplus for everything else he needed. Trade, operates best when buyers and sellers are allowed to come to their own agreements as to price rather than having them set by government.

This was the case for the free market and Smith argued that it applied to nations as well as to individuals within a nation. Tariffs, quotas, etc., Smith argued, only prevent a country from obtaining what they need at the lowest price possible, and so rather than enriching a country, impoverished it.

The argument seems impeccable on paper. If it is true then observing the results of free trade versus protection in practice should bear the theory out. After all, all other predictions of laissez faire theory can be demonstrated to be correct. Laissez faire theory says that minimum wage laws do nothing but eliminate jobs that are not worth minimum wage to the employer, usually starter jobs. It says that price controls cause shortages. It says that rent controls lead to housing shortages and neighborhoods decaying into slums. We can point to case after case where these interventionist measures have had exactly these outcomes.

What have been the results of free trade?

The United Kingdom was the first country to put the theory into practice. This began with the repeal of the Corn Laws, which protected British agriculture from imports, in 1846. This was accomplished by the government of Sir Robert Peel after relentless campaigning by Richard Cobden, “The Apostle of Free Trade” and a league of Manchester manufacturers he led. Over the next two decades the UK would lower its tariffs to the point where the average import duty on the vast majority of goods was 0. This would remain UK policy until the first World War.

Did this help or harm Britain?

The UK was the home of the Industrial Revolution, which had started there in the late 18th Century. At the time Britain began her experiment in free trade she dominated the world of manufacturing. Her steel and textile industries were surpassed by none. By the time her long experiment in free trade came to an end she had been eclipsed by another industrial power – the United States of America.

What was America’s trade policy?

The USA had always been protectionist, but during the period when the UK was practicing unilateral free trade it was taking protectionism to an all time high. The 1860’s had seen the rise of the Republican Party, which succeeded in putting into practice the “American system” of Alexander Hamilton and Henry Clay. The main feature of the “American system” was a tariff wall protecting American industry. Following the Republican institution of this system the average tariff on manufactured goods was around 45%.

Did this help or hurt America?

The century from 1870 to 1970 is often called America’s “Golden Age”. As America became the world’s leading industrial power, profits and wages rose simultaneously as did the average American standard of living. When the War came, and the UK was no longer producing enough to meet her own needs, it was to the USA that she looked for help – help the USA was able to provide.

How does the free trader explain that?

“Other factors were involved”. “That is a post hoc ergo propter hoc argument”.

Perhaps. But the USA wasn’t the only country that fared well under protection in that era. In 1879 Otto von Bismark introduced economic nationalism based upon the American system to Germany. The same year the Conservatives brought in protectionism here in Canada. Both countries did very well under high tariffs.

What happened when America abandoned protection?

FDR, the author of American socialism, obtained for the American president the right to lower tariffs in negotiating treaties with other countries. This set the stage for America’s post-WWII retreat from protectionism. During this period of increased free trade America’s GNP and GDP have continued to rise but the average real wage (wages adjusted for inflation) has gone down as America’s manufacturing base has shrunk and her domestic economy has increasingly come to be based on services.

This era has seen the rise of new industrial giants – most notably Japan. Japan practices protection.

What have the free traders missed? What is wrong with their theory? Why are the results so different from what laissez faire would predict here when elsewhere laissez faire theory is so accurate?

The basic problem with free trade is that it is derived from classical liberal ideology. To classical liberalism individuals are all that matters – families, communities, and nations don’t count. Especially nations.

With the exception of Adam Smith (who made numerous exceptions to his theory of free trade) the classical free traders were contemptuous of nations. They believed in an enlightened age to come in which international trade would foster international friendship, war would disappear, there would be world peace, and we would all be one.

In the real world, however, nations matter. And it matters very much, to a nation, who produces the goods that it consumes. Remember that production creates wealth, consumption uses it up. Consuming more than you produce is not the path to prosperity, for individuals or for nations. It is the path to bankruptcy.

Free trade ideology insists that free trade is superior because it favors the consumer with low prices, whereas protection favors the producer with high prices. Everybody is a consumer, the free trader’s argue, but not everybody is a producer, so it is best to do what is in the interests of the consumer. Free traders are nothing if they are not utilitarian.

But how is the consumer going to pay for what he consumes? The answer for the last few decades has been cheap credit. That cannot last forever, however – or much longer, for that matter, if the recent economic crisis is any indication.

A policy that favors consumption over production is a policy that will doom your country to poverty.

A country that wishes to survive, that does not want to bring its people down into poverty, must encourage production, and it must produce more than it consumes. Socialists have attempted to do this by having their government’s seize control of the economy and try to plan it from the top down to be more efficient. All such experiments have been radical failures.

Protection, on the other hand, is historically associated with high productivity.

Today our government’s have got it backwards. They are removing barriers to international trade while doing everything in their power to intervene in their domestic markets with restrictions, and legislation, and red tape. They should be doing the exact opposite – protecting domestic producers while otherwise practicing laissez faire.

But our government’s no longer care about their countries. In lowering tariffs and other protective measures so as to free up international trade, they have surrendered part of their sovereignty to international institutions. The most complete form of this surrender of national sovereignty can be seen in the European Union. But NAFTA provides the basis for a future North American equivalent. On a global basis the long series of GATT talks resulted in the creation of the World Trade Organization. The path down which the free traders are taking us is clear: one market, one currency, one government.

Libertarian free traders will argue that what we are seeing in these developments is not true “free trade” as described in theory, but governments colluding to grant special trade privileges to favored corporations. That is certainly true but it may not be relevant. A one world system – dare I say “New World Order” - is exactly what David Ricardo, Richard Cobden, and the other formulators of classical free trade theory were hoping for.

It will not be the rosy paradise they had in mind however.

Those who do not want to live under the global regime of a global government, who prefer living in their own sovereign countries, and wish to see those countries prosper, should not support a global economy.