A Capitalist Looks at Free Trade

by William L. Law

Protectionists seeking relief from the rigors of foreign cornpetition bring to mind Milton Friedman’s dictum, “The great enemies of free enterprise are businessmen and intellectuals—businessmen because they want socialism for themselves and free enterprise for everyone else; intellectuals, because they want free enterprise for themselves and socialism for everyone else.”
        I speak from personal experience. Baseball-glove leather was the principal product of our firm until 1957 when ball gloves of Japanese manufacture appeared and ultimately gained seventy percent of the United States’ market. Today, we tan no baseball-glove leather. Sentiment in the ball-glove industry at that time was very strong for protective action. I investigated the matter in some depth and found that I could not in good faith urge protectionist action on my political representatives; such action would have been wrong economically, politically, and morally.
        My sentiments stern from the fact that I look upon myself not as a tanner whose product is leather, but as a capitalist whose product is profit. That climate most beneficial to capitalists—and to workers—is one in which there exists a minimum of governmental interference.
        The protectionist argument is almost as widespread today as it was two hundred years ago when Adam Smith in his treatise An Inquiry into the Nature and Causes of The Wealth of Nations so brilliantly demonstrated its fallacies. Fortunately, we have the work of Smith and his many successors, plus the empirical lessons on the benefits of free trade—our fifty states united in one common market are a notable example—to demonstrate the advantages of free exchange.
        No improvement can be made on Smith’s understanding:
It is the highest impertinence of kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will....
        To give the monopoly of the home market to the produce of domestic industry ... must, in almost all cases be either a useless or a hurtful regulation. If the produce of domestic industry can be bought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.
        It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of a shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it in their interests to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom....
        That it was the spirit of monopoly which originally both invented and propagated this [protectionist] doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.
       The “sophistry” of which Smith speaks is in essence that being advanced today by protectionists: “The U.S. is a high-wage country; its industry is unable to compete with that in low-wage countries; imports are increasing, and unless remedial measures are adopted, our industries will be destroyed and large-scale unemployment will ensue.”
       But fortunately, we have the rationale and arguments for free trade.
       We trade to obtain goods that are either unobtainable domestically, such as chrome ore, diamonds, and teak wood, or that can be obtained more cheaply abroad, such as baseball gloves or textiles.
       And free trade raises wages! Trade between individuals, between states, between nations is beneficial, and far from reducing the living standards of the participants, greatly improves them. And the country with the freest trade policy enjoys the maximum advantage.
       I repeat: free trade raises wages! Those who think otherwise fail to understand that wages in the U.S. are the world’s highest for a reason- American industry has the world’s highest average capital investment per worker ($125,000) and, therefore, has the highest average productivity per worker. And while we have high wages, because of the multiplier—tools, we also have low labor costs!
        Certainly, labor-intensive industries, i.e., textiles, find it difficult to compete inside a capital-intensive country. After all, a Chinese worker with minimal capital—a needle—and working for $20 a week, will produce handmade lace at a lower cost than an American worker using the same needle and receiving $200 a week. While their productivity will be the same, the Chinese labor cost will be one-tenth of the U.S. cost.
But give the American worker a giant mechanical shovel and, at the world’s highest wage, he will produce the world’s cheapest coal. With advanced technology, workers will produce the lowest-cost coal, wheat, jet aircraft and countless other goods. And so, we import lace and ball gloves and petroleum, and we export jet planes and wheat and chemicals. To attempt to “retaliate” against lower costs in certain foreign industries is an exercise in folly.
        Moreover, contrary to popular belief, imports don’t cause unemployment, nor do immigration or automation. Unemployment exists only when money wages are arbitrarily raised or held above the market price.
        The Great Depression is the classic case of “iatrogenic” unemployment, i.e., induced by the economic doctor. For example, when the stock market crashed in 1929, it precipitated a deflation and concomitant lowering of all prices. Presidents Hoover and Roosevelt, believing in the so-called “purchasing power theory,” cooperated with major industrialists and union leaders to do everything in their power to prevent wages from falling—even though prices in general had dropped by one-third from 1929 to 1932! The result was that twenty-five to thirty percent of the work force was unemployed. The situation was not ameliorated until 1941 when the government printed massive amounts of money to support the war effort; and instead of trying to support wages, the government took the opposite position and introduced controls to hold wages down. Unemployment soon disappeared and industry expanded.
        Unfortunately, a false lesson was learned that war is the health of the economy. (James Baker, secretary of state during the Bush administration, reflected this when he explained why the U.S. government was intervening in the Middle East after the Iraqi invasion of Kuwait: “If you want to sum it up in one word, it’s jobs.”) The truth, of course, is that war is actually the enemy of prosperity (and freedom) and that full employment is actually the normal condition of a truly free economy.
        Protectionism is the age-old road to reduced exports, increased unemployment, lower standards of living, war, and so many other problems associated with government intervention in economic activity. Free trade, on the other hand, is the way to increased exports, full employment, higher standards of living, peace, and so many other benefits associated with economic freedom.

Chapter 2