The Economists' Dirty Little Secret

My colleagues in economics (and many others, including quite a few liberal ones) tend to scoff at the majority of the public that is troubled by globalization. Never mind the false medications, poisoned toys, and pirated goods, you just don't understand -- these economists say -- free trade is good for you, me, and the man behind the tree. Economists are quick to argue that free trade reduces the costs to consumers and thus ensures an ever higher standard of living. Citizens of nations like the United States that are losing jobs to India and China (and scores of other nations) are told to not fret, that these are menial jobs, that off-shoring allows more Americans to specialize in high tech, well-paying, "clean" work. Often disregarded is that neither God nor anyone else set aside these choice jobs for Americans, and that Indians, Chinese, Finns, and Israelis -- among others -- can do these jobs too, and often for a fraction of what Americans charge. (One economist, Alan Blinder, suggests that hence Americans should specialize in those jobs that are hard to ship overseas -- cutting hair, policing the streets, and flipping hamburgers. How many such service jobs there are, and how well they pay, remains to be determined).

There is a dirty secret that economists carefully keep to themselves, especially when testifying before Congress, writing op-eds, or teaching economics to hundreds of thousands of impressionable college students year after year: namely -- that free trade has never been achieved by any nation, in any market, any time, any place! It exists only in the dreamland of economists, in their mathematical models. Furthermore, all the goodies promised by free trade (trade without any barriers) are often simply not available when one moves merely from more to less managed trade, which is all that one can do. (For a short and relatively accessible early discussion of this point, see R. G. Lipsey and Kelvin Lancaster's "The General Theory of Second Best").

True free trade is as elusive as the horizon for numerous reasons. Most important are the moral and social values that we cherish. Thus, no one in his right mind (and even many who are not) would bring back trade in people (i.e. slavery), a limitation that hampers the free market. Civilized societies will not and should not tolerate child labor nor the rape of the environment, should provide basic safety for workers and consumers, and so on. Security requires that we limit the trade in nuclear reactors, uranium, missiles and several kinds of computers.

Some economists would do away with the protection of copyrights, to allow for free trade in intellectual properties. However, those who understand that large investments must be made to come up with a new drug or a new communication technology (and numerous other innovations), understand that those who make these investments must be rewarded for the risks they undertake and cannot be allowed to be robbed in the name of free trade. The same business people who vote for politicians who promote free trade are the first to object to what they call "unfair" or "cut-throat" competition-- for instance, when someone opens a shop nearby which peddles the same goods as theirs.

All these limits on free trade have one common element: they hinder the "efficient" allocation of resources that true free trade requires.

True, there are some silly, unnecessary regulations. The French slowed down (for a while) the importation of video players by insisting that they all must be examined by a single customs office, located somewhere on top of a mountain along the Spanish border. American economists love to point to a particular couple of regulations: one requires machines that overheat to sound a bell; the other, that those who work with the same machine must wear heavy duty ear mufflers to block out noise.

We need an honest debate about trade which disregards the illusion of free trade. Instead we should ask: which regulations make sense? Should trade be a bit less or a bit more managed? Such a debate would best be conducted regarding one area at a time: stronger regulation of imported drugs? You bet. More scrutiny of imported toys? For sure. Penalties for those who pirate our products? Essential. But limiting imports to protect managements who refuse to adjust to changing technologies and economic needs (our car makers)? Probably not. Nor should we block fair competition from nations that abide by the environmental and labor standards of a decent society, say European airlines. But, we should reject the calls to choose between free and managed trade, because in effect these are calls to give up the benefits some regulation of trade provides -- in the name of a promised land that does not exist and can not be brought about.

Some of the presidential candidates have raised this issue. One does not necessarily have to vote for these candidates, as they may fall short on other fronts. But they should not be dumped upon because they refuse to worship at the altar of a false god: the economists' free trade illusion.

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Micro-blog: The libertarian Economist is upset because Texas is introducing a "pole" tax on the customers of strip clubs. The Economist fears that some people will not be able or willing to "pony up the five measly dollars," a possibility which the magazine finds "depressing." Some of us find this problem rather low on the totem pole of depressing developments.

Amitai Etzioni is a University Professor at George Washington University and the author of The Moral Dimension: Toward a New Economics.

Comments

[IMD]

The auto industry did it to themselves, and now they want special consideration for throwing those people into despair, and they use the trade agreements they supported as the demon.

The only thing free about free trade is the freedom from responsibility it brings to those who don't want any part of looking out for the other guy.

I noticed during the Michigan coverage last night that the GOP's new catch phrase is "legacy costs" in lieu of pensions and healthcare. Makes it sound like a burden instead of a responsibility.

[Justis]

America's industrial revolution was fueled by a high protective tariff, which conservative capitalists loudly championed for decades. Once the money was in letting underpaid overseas workers make your stuff for peanuts, the rich sing the praises of the free market. The rhetoric always follows the money. You don't need a Ph.D. to see how blatently self-serving this is.

When social darwinism was the rage, that was reason enough to abolish social spending. Now that it's no longer quite nice to be so openly hateful, we get economic models showing why it's better for everyone to let the poor rot.

The more it changes, the more it stays the same.

[niikeb]

Free trade is a great idea, just like communism. But both only work if everyone plays by the rules. Neither work in this imperfect world.

[flanardiente]

Communism should have created Utopia on Earth, but the theory ignored human nature. The only place it came close to succeeding was here, see John Steinbeck in "The Short Reign of Pippin IV". Free trade would work economic wonders if that's what it was, but it leaves out human nature too. Communism ignored the competitive nature of mankind, the desire of the individual to excel. Free trade assumes that mercantile interests, like rednecks at a swap meet, would lay out their goods on a card table and abide by the invisible hand. It's the first century in the third millennium and it might be time to abandon the fairy tales of our youth, if we could find a politician or even an economist who understood that it IS a fairy tale.

I'm reminded these days of Bob Dole, bless his heart, in 1965, roaring around the Senate about Medicare, socialized medicine, with the full knowledge that he enjoyed full coverage of what was probably the finest socialized medicine of its day.

When you deal with politicians or ideologues or social and political theorists, you just about have to treat them like spoiled brats, don't turn your back on them, and make sure there's a grown-up to check out what they do. Back in the day the grown-up was the government. Not any more, the infection's spread. It may be that the only redress is the ancient one. I don't know whether I'm to be glad I'm probably too old to be around for it or sorry I'm going to miss it.

If everybody would take the "ism" off the end of their words and learn a little common sense. Yeah, and if pigs could fly.

[Spookcatcher]

"Free trade" is only part of the sentence which framed the Agenda of the the New Wrld Order that elitists and supremists agreed must take place between themselves in their conquests as they achieve Global Domination. the word "free" in any context for these interests is by its very mention is so offensive, almost anyone who mentions it in conversation outside the context of a political or nonprofit function speech is destined to be blackballed from inclusion of any further social attendance.

[The Collinbrandt]

Our great capitalist overlords have long ago determined that by moving the production of goods outside the prying eyes of good people, that great savings can be had by making poor quality unsafe items by very poorly paid, sometimes enslaved, workers. Everyone knows this to be a fact. All academics, all politicians, all business people and, every religious leader, understands the very sinister motives behind free trade. Those that deny these motives, are liars.

Besides, free trade has never really existed in our own country in any industry for any length of time. In the end, the richest individuals use the govenment to eliminate their poorer competitors (even if the poorer competitor has a better idea or item), and forge aliances with the other super elites. This is not even survival of the fittest. The sad fact of capitalizm is: the super elite often don't have the best idea but, theirs is the only one that counts. In regards to free trade, theirs is the only morality (or lack thereof) that counts.

[outnow]

The neoliberal agenda was to deregulate the free flow of capital internationally while exploiting cheap labor confined within borders. The social contract does not extend beyond the borders. The result is that wages go down world wide.

The system also assumes that resources are unlimited and that growth will continue indefinitely.

There must be regulations on trade. The question becomes how much. Rather than seeing trade as commerce, it has been elevated as a religion. We must engage in economic nationalism. The presidents whose faces appear on Mount Rushmore knew this fact.

The US is pursuing an empire and policing the world. We are a debtor nation. When the British engaged in free trade, they lost their empire and they were a creditor nation.

Just look at the upward shift of money in our society and the contraction of the value of the dollar. Real wages are falling for the rank-and-file worker, as adjusted for inflation. The verdict is in on free trade - our manufacturing sector is doomed, except for big weapon systems. With no manufacturing here and with oil being imported, we could not fight a war like WW II.

FDR went straight to Saudi Arabia after the Yalta Conference and met with King Saud to ask for oil. He arrived and made a deal before Winston Churchill could make his trip to meet with the king. In WW II the US blew through its oil reserves and is dependent on a non-renewable fuel. The Germans lost the war at Stalingrad when the route to the Caspian Sea was blocked. Later the synthetic oil and gas manufacturing center was bombed.

It is a fiction that the market works with an invisible hand to guide human affairs. Do you see God doing that? We must protect the middle class and the manufacturing sector or the nation will pass into second-class status.

[leftLibertarian]

Even so called progressives like Naomi Klein and Barbara Ehrenreich fall into this trap.

They also confuse Capitalism with the Free Market.

See Gabriel Kolko's "The Triumph Of Conservatism", which shows how big business and big government wrote regulations during the 'Progressive Era' in order to stifle competition.

[LeftRight]

So, wait. You're saying that those of us who have complained about "free" trade have been correct all along?! I'm shocked! Oh, wait, I forgot. Common sense shows that "free" trade agreements aren't really free, and that they violate the basic principals that they are supposed to stand for.

[BillZBubb]

The free trade illusion (myth, delusion, naivette, foolishness, etc) has the US firmly in its grasp. It's right in there with nonsense like "tax cuts pay for themselves" and "deficits don't matter" as the cornerstones of America's sinking economic position.

[Sundialsvc4]

In the computer sciences business, people spend a lot of time thinking about a little something called "redundancy." Redundancy, among other things, is what gives a complex computer system the reliability, availability, and serviceability that the real world requires. Redundancy, for example, is what creates an Internet that is never completely "down" at any give time or at any given place.

The real world of the global marketplace also demands redundancy, alternate sources, "fallback positions," for the very same reasons that the Internet has these features built-in. Without these, the system falls-down and can't get up.

Per contra, the notion of "free trade" (as I see it) treats every source as equal, every situation the same, the lowest-price preferable above all. A straight-dive bid for the bottom. Then, reality sets in. Fuel prices go up. Political unrest shakes a particular country. "Just in time" cannot be achieved. "Where is your 'Plan B' now?"

Finally, I believe that "free trade" ignores the complexities inherent in the actual flow of money. It isn't a simple flow; it isn't a pipe. It's chaotic. As the web-site 'wheresgeorge.com' has revealed, sometimes dollar-bills spend their entire lives only a few miles from the bank that originally issued them, and sometimes dollars go around the world. (Of course, only paper-money is tracked; it can't tell when cash is used to buy, say, a money-order.)

Nevertheless, this is why I think that "free trade" is neither the panacea that politicians would like it to be, nor is it really ever going to be a workable system. Trade is actually a chaotic system that demands considerable redundancy.