by Richard M. Ebeling
|“The principle of free trade is non-interference,” wrote the English
classical economist Nassau Senior in 1828. “It is to suffer every man
to employ his industry in the manner which he thinks most advantageous,
without a pretense on the part of the legislator to control or direct
The advocates of free trade in the 19th century argued that the direction of production and the allocation of resources was best left to the private decisions of the individual members of society rather than to be entrusted to the commands of the state. They explained that each man knows his own circumstances better and can more fully appreciate profitable opportunities than any government bureaucrat assigned the task of performing these duties.
“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him,” said Adam Smith in The Wealth of Nations. “The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
And the free traders were insistent on emphasizing that whenever the state interfered with freedom of trade, the benefits that might accrue to the recipient of the protection from competition were always made at the expense of other members of society.
“If one individual, or one class, can call in the aid of the [political] authority to ward off the effects of competition, it acquires a privilege to the prejudice and at the cost of the whole community,” insisted the French classical-liberal economist Jean-Baptiste Say in 1821. “It can then make sure of profits not altogether due to the productive services rendered, but composed in part of an actual tax upon consumers for its private profit. . . . Moreover, arbitrary regulations are extremely flattering to the vanity of men in power, as giving them an air of wisdom and foresight, and confirming their authority, which seems to derive additional importance from the frequency of its exercise.”
Over several decades in the early 19th century, the arguments of the free-trade advocates gained more and more adherents, first in England and then slowly throughout the rest of Europe and the civilized world.
And what did the free-trade era of the 19th century produce? A wondrous epoch of liberty and prosperity. It was the era of what the German economist Gustav Stolper referred to in his book This Age of Fable (1942) as the three freedoms:
How different is our world of the 20th century in comparison to that of the generations of the 19th century? In the 19th century, the guiding idea was, in the words of Wilhelm Röpke, “the [classical] liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of the government and the economy.” In our century, the exact opposite has become the dominant idea. Nothing in the 20th century has been considered outside the interests and the concerns of the state. Governments have assigned themselves the role and obligation to interfere everywhere and with everything.
In his 1921 volume, The Fruits of Victory, Norman Angell explained:
The arrival of the smallest child or the most ordinary adult into one nation from another raises issues of national survival and economic well-being in the eyes of the state. The most innocent choice to invest one’s wealth and savings in one part of the world instead of some other generates pensive debate and political consternation for those in the higher reaches of the state’s bureaucracy who claim the right to determine how people may invest and dispose of that which is the result of their own effort and energy.
We have been again reduced to a state of increasing servitude from which the classical-liberal revolution of ideas in the 18th and 19th century was meant to liberate us. And with the latest international-trade policy proposals of the Clinton administration, we are headed towards more bondage at the hands of the state.
Part IIIn 1836, the English classical liberal Henry Fairbairn looked into the future and this is what he saw:
In 1899, the liberal economist C.F. Bastable could write in his book The Commerce of Nations:
But all such hopes of a return to the path of free trade were killed on the battlefields of World War I. Because in the pursuit of total victory, each of the belligerent governments resorted to total war; and with total war came the total state. German economist Gustav Stolper explained the consequences:
But these restrictions on international trade were the logical consequence of the new ideology regarding the domestic affairs of each of the world’s major nations. This ideology was the belief that the state had to become the predominate arbiter and planner of economic affairs. And once the state took on the responsibility for managing and guiding the internal economic affairs of its subjects, barriers to international trade were soon required to follow. In 1944, the Austrian economist Ludwig von Mises explained why:
In the 20th century, the politicization of domestic economic activities, therefore, has led to the politicization of the international economic order. To secure markets and prices for domestic producers, governments are tempted to threaten or wage trade wars with other countries, with import tariffs and export subsidies being among the chief economic weapons, as well as a host of non-tariff restrictions such as quotas, prohibitions, licensing, and technical and domestic-content requirements. Manipulation of the value of their respective currencies on the foreign-exchange markets also serves as an economic weapon by which governments try to influence the amounts of imports and exports and, hence, the market shares and profits to be earned by privileged sectors of the domestic economy.
There is only one way out of this “economic armaments race,” as the Swiss economist William Rappard once referred to it in the 1930s: a path of non-intervention in domestic affairs—the unregulated, uncontrolled free market. Otherwise, economic conflicts among nations will always threaten to degenerate into global economic warfare. “Government control of business engenders conflicts for which no peaceful solution can be found,” Ludwig von Mises emphasized long ago. “All the oratory of the advocates of government omnipotence cannot annul the fact that there is but one system that makes for durable peace: a free market economy. Government control leads to economic nationalism and this results in conflict.”
Unfortunately, this path to economic peace and prosperity is not the one that the Clinton administration is bent upon following. Rather, its stated intentions in both domestic and international trade point in the direction of an increasing economic armaments race, with economic warfare on the horizon.
Part IIIAmerican economist Francis Walker observed in 1887:
Yet, in spite of their rhetoric and lip service of advocacy for open doors for world trade, their goal is not free trade. Their view of trade among nations is guided by the following ideas:
Let us look at each of these
ideas and evaluate their validity and consequences.
Part IV“The Protectionist creed rises like a weed in every soil,” lamented the English classical economist Walter Bagehot in the 1880s. “Every nation wishes prosperity for some conspicuous industry. At what cost to the consumer, by what hardship to less conspicuous industries, that prosperity is obtained, it does not care. Indeed, it hardly knows, it will not read, it will never apprehend the refined reasons which prove those evils and show how great they are; the visible picture of the smoking chimneys absorbs the whole mind.”
While the imagery of the smoking chimney may be inconsistent with the environmental consciousness of the Clinton administration, Bagehot’s lament can be echoed in our own times in terms of the mind-set that dominates the thinking of the president and those who design policy options in the departments in Washington. Their conception of managed trade focuses upon the desired success of targeted industries viewed as essential to the nation’s prosperity in their conception of the global combat amongst the countries of the world. The cost to the consuming public in terms of higher taxes to subsidize preferred industries or in diminished trading opportunities because of limits on international freedom of exchange matters little to those in the Washington halls of power. What matters is that they see rise in front of them those industries and employments that they view as the most advantageous and attractive.
If the first error behind the thinking of the Clinton administration on the issue of international trade is their view of international trade as a war between nation-states, their second error is the one that serves as the philosophical underpinning for rationalizing the ability for and desirability of managed trade. Let us look at it more closely:
Governments can forecast world economic trends and should construct policies to create desired comparative advantages for American industry:
In spite of the failure of socialist central planning in Eastern Europe and the former Soviet Union, the planning mentality is alive and well in Clinton’s Washington. There exists the belief that it is possible for the government to estimate reasonably the direction and form of future technological and industrial developments in the world and construct a plan of action to assure that America comes out the winner in the international game of trade.
Actually, it is impossible to anticipate successfully the future of technological discovery or innovations for improvements in the methods of producing goods for the market. Every such judgment about the future shape of things to come is made from the standpoint of the knowledge and information in existence today.
But as philosopher of science Karl Popper pointed out long ago, it is a contradiction to speak about tomorrow’s knowledge today. We can never speak about what we will know tomorrow but only about what we think tomorrow may be like from the perspective of what we already know today. Tomorrow’s knowledge cannot be known until tomorrow comes, because part of what we know tomorrow will be the result of the experiences we have as time passes and the creative new ideas that people come up with on the basis of those experiences.
Thus, unless we assume that we possess perfect knowledge of the future, all judgments about the future—including new technologies, innovations, patterns of consumer demands and the strategies of competitors—are incomplete and personal estimates about what the future might hold in store from the perspective of the present.
I remember as a teenager coming across an old copy of Popular Science published shortly after the Second World War. The issue was devoted to what life would be like in America in the 1970s. The cover showed a suburban home with a white picket fence, with mom and the children waving good-bye to dad as he went off to work—in his one-man helicopter. The articles talked about the various home conveniences and appliances that the future held in store for the average American family.
But the one thing that was not talked about or even hinted at was the potentials of the personal computer and its revolutionizing effect on home and business life. Why? Because the microchip had not yet been invented and, therefore, all the projections about life in the late 20th century were incomplete.
The writers of the articles wrote their stories about the future under the constraint of the knowledge they possessed at the time in the late 1940s. It was impossible for them to construct the uses of a technology that had not yet been invented in the minds of some men, and, therefore, they were not able to conceive of its applications, because they could not image possibilities that would have to wait for the creation of the microchip.
To manage the economy requires The Planner to make the plans of a multitude of others subordinate to his own. And as Austrian economist Friedrich A. Hayek explained, this means that economic development is constrained and limited to what The Planner knows and can understand, since everyone else’s plans must conform to and be confined within the bounds of The Planner’s overarching plan. If the state taxes some in the society to subsidize the activities of others, those who are taxed are constricted in their own actions to the extent that their income has been reduced by the tax. The resources that might otherwise have been used and possibly applied in creative and unknowable ways are taken from their hands. Creativity, technological innovation, and economic progress are limited to what The Planner sees as possible and worthwhile to support and fund.
The government-business partnerships and high-tech subsidy programs for America advocated by the Clinton administration are really proposals for a political centralization of the discovery and application of knowledge, and they channel their development according to the judgments of those who man the bureaucracies in Washington. They propose to figure out where the industrial innovations of the future are likely to be. Then, based upon their judgment about the shape of things to come, they aim to give shelter to American firms they want to be on the world market first with these new technologies and, thus, to preempt that new comer of the global market before anyone else can fill it.
What is not discussed in these grandiose schemes for America’s industrial future are the costs of undertaking them. The costs involve more than the corruption that is likely to occur as special interests lobby for a fraction of the tax- and subsidy-plunder. The costs also involve more than the loss of economic liberty, as those individuals not on the receiving end of the government largess are restricted in their choices by both regulations and tax burdens to bolster and support the privileged sectors of the economy.
The costs also include the loss of all the innovations and creative possibilities that will not materialize or which will be delayed from coming to fruition, because those who might have come up with them will not have the income and financial wherewithal to realize them.
What idea equal to the microchip will we not benefit from because those in whose minds such an idea might have germinated will be denied the market opportunities that would have acted as the incentive for them to think such creative thoughts? Because the income, profits, and wealth that could have been theirs from such creative thinking will be denied them by the state’s manipulation of the market, they may turn their efforts to less original ideas. And the world will have lost a profoundly important “might have been” as a consequence.
But precisely because it is a “might have been,” its importance will remain stillborn. It is an example of Frederic Bastiat’s famous example of “what is seen and what is unseen.” What will be seen are the industrial and technological projects subsidized into existence due to the actions of the state. What “might have been,” instead, will never be known precisely because the state assumed to know better, to see the future more clearly, rather than to allow each man to follow his own vision of a better future for himself and others through peaceful and voluntary transactions in the marketplace.
The market niches that the government creates for American industries through managed trade will be the industrial equivalents of the hothouse in which, under artificial conditions, plants are grown in an environment naturally hostile to their development. Their maintenance and further development will depend upon the continuance of the governmental policies that have brought them into existence. They will be the 20th- and 21st-centuries’ versions of the 19th-century argument for protecting the “infant industry.”
Protectionists in the last century would often argue that an undeveloped country could not afford free trade until it was as industrially developed as its more technologically advanced trading partners. Only then, when the underdeveloped country was sufficiently developed behind high tariff barriers to protect it from cheaper suppliers from abroad, could it afford to lower its trade walls and deal on an equal basis with its commercial neighbors. The only problem was that the infant industries never sufficiently grew up; they always clamored for continuing protection from their foreign competitors.
Having fostered the artificial emergence and development of certain high-tech industries and employment opportunities requiring particular government-subsidized labor skills, the proponents of managed trade will always find arguments for perpetuating the “temporary” taxing and tariff privileges needed for initially establishing these strategic positions in the global market. The American taxpayer and consumer will be permanently burdened with the costs imposed by those who believe that they possess the knowledge and wisdom to know the industrial and economic structure most desirable for America’s future.
Part VIn the 1870s, English classical economist Henry Faucett warned:
Three errors dominate the Clinton administration’s case for managed trade. The first is the belief that international trade is an economic war between nation-states; the belief is that if one nation gains, some other nation must lose.
The second error is the belief that the state has the capacity to anticipate the future direction of technological development and to design policies to assure that American industry will have a permanent edge in the battle for winning world markets against our trading partners.
The third error serves as the pragmatic rationale for a policy of managed trade: If other governments restrict the importation of American goods into their countries, it is the duty of the U.S. government to use various weapons of economic warfare to force open those foreign markets for American competition.
It is argued that if, in a world of free trade, another nation closes its market to some or all of American goods, while desiring to sell its own goods in the United States, the U.S. government should put retaliatory pressure on that country to open its market through the imposition of reciprocal tariffs and other trade restrictions.
Writing in the early 19th century, the French classical-liberal economist Jean Baptiste-Say, admitted:
Closing a portion or all of the American market to the exports of the foreign country subjected to the wrath of the U.S. government narrows the competitive alternatives available to American consumers. Their set of choices is now limited to those offered by American sellers of various products and those foreign sellers of other countries not affected by the retaliatory trade barriers. The variety of goods, therefore, from which the U.S. consuming public may select is smaller than before. Because some American exporters have been put in a less favorable position due to the foreign country’s trade limitations, all other Americans are denied buying opportunities by their own government.
At the same time, prices will now be higher for the particular products upon which there have now been imposed the retaliatory trade restrictions. The segment of the American consuming public that was previously buying the foreign goods in question will now find themselves having to pay higher prices for those commodities. Whether the retaliation takes the form of a tariff or a limit on the quantity of the foreign good now permitted to enter the United States, the good’s price will tend to rise. If a tariff has been imposed, the foreign seller will have to sell his good at a higher price to cover his costs (now including a higher import tax) or to retain the rate of return that makes it advantageous to sell the good in the U.S., as opposed to somewhere else. If restrictions are imposed on the quantity that may be sold in the U.S., the total quantity available in the American market will now be smaller, which will tend to result in a higher price. Because U.S. export “X” is not permitted to be sold in the foreign country in question, American consumers will now be faced with higher prices and smaller quantities of imports “Y” and “Z” purchased from that other country.
Also, the segments of the American import industry that sell the goods now under retaliatory restriction will find themselves with the burden of having to pay more for the goods they purchase from the foreign seller and then having to try to sell those goods to American consumers under less competitive terms than before. Because an American exporter claims harm, income earners in an unrelated importing sector of the U.S. economy will have to pay for the exporter’s misfortune.
Many of these effects remain hidden from view by governments’ arguing in terms of “our” nation being harmed by “theirs.” But once we stop thinking in this aggregative and collectivist manner and ask who is harmed or helped in terms of particular individuals or groups of individuals, the consequences are seen to be more complicated than the simplistic categories of “them” versus “US.”
The real effect of trade retaliation is something more like the following: The government of Boobistan prohibits the sale of American bicycles in Boobistan, resulting in fewer foreign sales for American bicycle manufacturers and higher prices for bicycles in Boobistan to benefit Boobistani bicycle manufacturers at the expense of Boobistani consumers. Therefore, in retaliation, the U. S. government imposes a tariff or prohibits the sale of Boobistani dingbats in America. American consumers of Boobistani dingbats now find themselves paying more and buying a smaller quantity of this valued commodity, and the American import companies that make their living selling Boobistani dingbats find it more difficult to make a living in this line of business.
Who gains from this retaliation against Boobistan? Not American bicycle manufacturers—they are still locked out of the Boobistani market. Not American consumers or importers of Boobistani dingbats—they bear the negative effects we have just explained. If the retaliation has taken the form of a higher import tariff on dingbats, the U.S. government may or may not gain greater tax revenues, depending on how many Boobistani dingbats are now brought into the United States at the higher tariff. The only gainers are the manufacturers of the American version of dingbats, who now face less price and quantity competition from their Boobistani rivals, and the sellers of goods that are bought by American consumers as substitutes for the now more expensive dingbats.
But what do dingbats—and helping American dingbat manufacturers to earn higher profits—have to do with the lost sales and lower profits experienced by American bicycle manufacturers caused by Boobistani trade barriers? Nothing. They simply provide the rationale for American dingbat producers to lobby for restrictions of Boobistani imports. And they enable American politicians to “act tough” with Boobistan, thereby looking good in the eyes of American voters who have been led to believe that Boobistan is destroying American jobs because “they” won’t buy “our” bicycles.
Might not Boobistan back down and eliminate its trade barriers against American bicycles under the threat of retaliation against their export trade in dingbats? Yes, they might. And the proponents of trade-war brinkmanship often use this as an argument to defend the use of the retaliatory threat.
But the danger of accepting this rationale for one of the tools of economic warfare among governments is that it legitimizes the idea that the state is responsible for and has the right to intervene in the exchange relationships between their own citizens and the citizens and governments of other nations. It accepts the nationalization of international trade, because it accepts the premise that among the state’s duties is supervision of the patterns of terms of trade among the producers and consumers of the world.
Furthermore, if the Boobistani government doesn’t blink first, the retaliatory restrictions must then be put in place—if the threatening government is not to lose credibility both at home and abroad. And this creates the risk that Boobistan might counter-retaliate, setting in motion a spiral of expanding trade barriers and the disintegration of an increasing portion of the international division of labor.
Unfortunately, this is the path that the Clinton administration is threatening to lead us down even further than we have already come. And the further we travel down this path, the more difficult it will become to retrace our steps and return to the high road of individual liberty and free trade.