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Monthly articles (English and French) on the theme "Querying economic orthodoxy"
No. 6 - June 2006
Is Free Trade sacred?
ANGUS SIBLEY
Having the feeling I have of the sacredness of the principle [of free trade], I say that I can never agree to tamper with it.
Richard Cobden (1) , speech in the Free Trade Hall, Manchester, 15 January 1846Free trade is not passé, but it is an idea that has irretrievably lost its innocence. Its status has shifted from optimum to reasonable rule of thumb....it can never again be asserted as the policy that economic theory tells us is always right.
Paul Krugman (2), Is Free Trade Passé? in Journal of Economic Perspectives, autumn 1987Conventional economic theory is prolix on the social costs of protectionism, but singularly dumb on those of free trade.
Jacques Généreux (3), Les vraies lois de l'économie (Editions du Seuil, Paris 2005) p 290Free-marketeers.....are basically hostile to the notion that the community has any claims upon the individual.
Is God a free-marketeer?
Free-trade enthusiasts have never been modest. They have always been an arrogant tribe, convinced that they are fighting for a sacred principle; sure that, despite the dissent of leading theologians from St Thomas Aquinas (4) onwards, they have God on their side. For them, free trade is not an economic policy that may or may not be suitable for any particular country at any given time. It is a quasi-religious dogma. Those who reject it are not just bad economists or misguided politicians. They are damnable sinners.
Never mind the history books that tell us that countries have preached and practised free trade mainly at times when conditions happened to be such that free trade suited their interests. That embarrassing fact we shall leave for a later article. For the moment, let us simply examine the so-called sanctity of free trade, which is in itself quite a big enough topic for one post.
Free traders hold that all restrictions on international trade are fundamentally wrong. They argue from their belief that there is no good reason why any human being should not be free to strike a deal with any other human being. This principle is seen as a basic natural or moral law; as Cobden put it, free trade is the international law of God. Such a law, of course, applies not only to trade between nations but likewise to transactions between parties within the same nation. It is the basis of the economic doctrine of laisser faire. But here we are concerned mainly with its implications for international trade.
The free trade proposition seems, on the face of it, simple, natural, and obvious. What are the arguments against it? Here are three.
Individual and Community
The basic principle invoked by free traders is the freedom of any individual to contract with any other individual. The problem here is that the individual has duties to his own community as well as the right to strike whatever deal best suits him personally. For example, a British citizen may feel that he has a certain duty to support the industries of the town he lives in, or more generally those of Britain as a whole. And as a European he may feel that he has some obligation to support European industries rather than buy cheaper Asiatic imports.
He may hold the economically-incorrect view that it is unwise for Europe to become overdependent on the Far East for its manufactured goods, just as he might argue that we have been imprudent in becoming overdependent on the Middle East for our energy. To many economists, such notions are heretical. But heresies exist, and sometimes they are eventually proved right.
Local preference, patriotisme économique as the French call it, may be exercised by individuals choosing personally to buy home-produced rather than imported goods. Or it may be enforced by government through import controls or tariffs. In the second case there is clearly an interference with freedom of trade. In the first case, it may be argued that there is no encroachment upon freedom, since the individual buyer freely makes his own choice. But insofar as it is felt that duty to one's own community requires one sometimes to refrain from buying elsewhere, one may say that this duty overrides or limits one's freedom of trading.
Adam Smith himself was rather more communitarian than many of those who claim to follow him. He wrote (5) that the wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He also argued that it could be legitimate for government to protect industries (6) that are vital for the defence of the nation, and also (7) those that are "in the nursery". Furthermore, he argued (8) against over-hasty moves towards free trade in cases where this could cause severe unemployment.
All these arguments boil down to this: individual persons or firms may have a duty to refrain, and government may legitimately require or encourage them to refrain, from buying outside their own community where this is manifestly in the best interests of that community. For the needs of one's own society or nation may, in some circumstances, override the individual's liberty to trade wherever he finds it most advantageous for himself.
Free-marketeers abhor this argument because they are basically hostile to the notion that the community has any claims upon the individual. For these thinkers, individual liberty is absolutely paramount. They find it unacceptable that one should have any sense of belonging to a community to which one has distinct obligations; for such obligations intrude upon personal freedom. There is no such thing as a free community wrote Adrian Wooldridge (9) of The Economist. Friedrich von Hayek put it even more bluntly. He argued (10) that, in the ideal libertarian world, people gain from not treating one another as neighbours. What an enchanting vision of the free-market paradise!
The freedom of unfair contract
I turn to my second argument. Free traders demand untrammelled freedom for any legal person (individual or company) to agree terms of business with any other. This implies that there can be no objection to the setting up of contracts which, though technically they are freely agreed by both parties, are in fact unfair and unequal.
This problem became prominent during the Industrial Revolution as vast numbers of country folk moved into the expanding industrial towns to take jobs in factories. The contract between an industrialist and a redundant farm hand newly arrived from the country is unbalanced in various ways: one party is rich and the other very poor; one is experienced in the ways of industrial life while the other is a novice; one needs work at once in order to survive, the other can wait, or can choose between a number of applicants for the job.
To mitigate the consequent injustices, nineteenth-century workers combined to form trade unions for mutual help and support, while governments gradually imposed regulations on working conditions. Not surprisingly, these developments were strenuously opposed by many employers. But they met equally vehement resistance from others who lacked the excuse of pecuniary motives: the free-market economists, who objected on principle to any interference with freedom of contract. The unfortunate workers faced two distinct enemies, low greed and high ideology; who shall say which was the more fearsome?
The economists, those allegedly enlightened thinkers, could not or would not see that the "freedom" to set up inequitable contracts is a freedom that needs limitation and regulation. They held, and their successors still hold, that such freedom is "sacred", that any infringement of it is a sacrilege.
How does all this relate to free trade in the twenty-first century? Those in the developed world who buy cheap manufactures from developing countries are often buying from industrial purgatories comparable with those lambasted by Dickens in England and by Zola in France. Economists argue that if we did not import from those countries, their workers would remain stuck in their native villages, where they would be even poorer.
Yet there is a middle way between importing from degrading sweatshops and not importing at all. It is possible in principle, though not so simple in practice, to refuse to import except from producers who observe certain minimum labour, health and environmental standards. This strategy has two advantages. It encourages the development of better working conditions in the third world. And it raises the cost of imports, thus giving some protection to our own manufacturers.
Here is a red rag to the free-trading bull, who wants ever-cheaper imports, just as he wants ever-cheaper everything else. He indentifies exclusively with the greedy shopper who buys only at bargain-basement prices. His unspoken motto is: pander to the consumer, **** the producer. But hush! for God is on his side; we had better not be heard arguing against God.
The global common good
We reach my third and last argument. There is a fundamental paradox concerning economic development. On the one hand, we clearly need it, since many countries in the less-developed world, and parts of the rich world too, still languish in miserable poverty, whether because people are working hard but earning inadequate wages, or because they lack opportunity to work. The International Labour Organisation estimates global unemployment at nearly 200 million people; that does not include the under-employed.
Yet development generally leads to increasing pollution and exhaustion of natural resources. For example, stocks of fish are under pressure virtually everywhere, and some once-abundant fishing grounds, such as Newfoundland, have had to be declared out of bounds to commercial fishermen. Known reserves of oil, gas and uranium have severely limited lives on the basis of current patterns of energy use. Worst of all, global warming threatens potential catastrophe within the forseeable future.
Thus, economic development, though clearly necessary, increasingly clashes with the common good of humanity in general. The free market alone, which basically responds to consumer demand for ever-increasing output of goods and services, and investor demand for rising returns on increasing stocks of capital, does not contain within itself the necessary incentives to regulate economic activity so as to reduce its destructive effects.
Indeed, free-market economics rules out in principle any conscious purposeful efforts to solve these problems. For such efforts demand initiatives conceived for the general good rather than to satisfy the personal wishes of free individuals and the financial appetites of entrepreneurs. But free-market doctrine objects fundamentally to the whole notion of economic planning to satisfy common rather than private needs. For this entails what Hayek calls (11) coercion of individuals to serve common ends rather than to pursue their own personal desires and ambitions. The libertarians want none of that.
Yet to avoid future disasters resulting from the unplanned economic development that free-marketeers desire, we shall need some fairly drastic forms of central planning, presumably by international and supranational organisations. This will mean serious limitations on the freedom of anyone to strike whatever deal he fancies with anyone else. Acceptance of the need for these limitations will undermine the very basis of free trade dogma.
The pseudo-religiosity that surrounds free trade is a nonsense with which we can no longer live. Paul Krugman, in the quotation at the head of this piece, said what needs to be said nearly twenty years ago. But one need only glance at any of the countless libertarian websites in America and elsewhere to see that many people have still not picked up his message.
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References
(1) Richard Cobden (1804-1865), English textile manufacturer, member of Parliament and free trade propagandist, was a leading campaigner for the repeal (in 1846) of the Corn Laws, which imposed tariffs on British imports of grain. See http://www.econlib.org/library/YPDBooks/Cobden/cbdSPP20.html
(2) Paul Krugman is professor of economics and international affairs at Princeton University. He is generally in favour of free trade but, like Adam Smith, recognizes that it is not an infallible principle that provides the right answer in all circumstances.
(3) Jacques Généreux is a professor at the Fondation Nationale des Sciences Politiques ("Sciences Po"), one of the leading French grandes écoles.
(4) St Thomas held that everything tradeable has its just or fair price, generally established by common consent, and that to sell at more, or buy at less, than the just price is inherently wrong: carius vendere vel vilius emere rem quam valeat, est secundum se injustum et illicitum. This clearly contradicts the free-market notion that one should always strive to buy as cheaply, and sell as dearly, as one can. See Summa Theologica, part 2, section 2, question 77, art. 1
(5) Adam Smith, Theory of Moral Sentiments (1759), part 6, sect. 3, chap. 3
The following three quotations are from Adam Smith's The Wealth of Nations (1776) book 4, chap. 2:
(6) The defence of Great Britain ....depends very much upon the number of its sailors and shipping. The Act of Navigation therefore very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country, in some cases by absolute prohibitions, and in others by heavy burdens upon the shipping of foreign countries.
(7) By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country.
(8) ....when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of circumspection.
(9) Adrian Wooldridge, Meritocracy and the Classless Society (Social Market Foundation, London 1995), page 18
(10) Friedrich von Hayek, The Fatal Conceit (Routledge, London 1988) chap. 1
(11) Hayek, The Constitution of Liberty (Routledge & Kegan Paul, London 1960) chap. 1 passim