We skeptics of free trade are used to being told, "You don't understand economics." In fact, one major reason I wrote the book Free Trade Doesn't Work was simply to expose, once and for all, that there do exist extremely serious and intellectually reputable arguments, within the confines of accepted mainstream economics, which question free trade. And indeed they exist.
But I've noticed something. We skeptics are often not really struggling against real economics at all. When I pick up a copy of the Wall Street Journal, or Forbes, or the New York Times, or turn on Fox TV or MSNBC, or read papers issued by the libertarian Cato Institute or the Peterson Institute for International Economics, I don't even find economic arguments. I find a mischievous substitute for economics we can call "fakeonomics."
What is fakeonomics? It sounds like economics to the uninitiated. It uses the same language, addresses the same issues and fills the same logical hole in the national policy discourse. Most people can't tell the difference. But fakeonomics is not the real thing.
How is fakeonomics fake? It tells a story that goes something like this...
• Free markets are always right, always and everywhere.
• Anyone who doesn't believe this is stupid. Smart people not only understand that free markets are best, they like free markets, because free markets mean opportunities to get rich.
• Or maybe they're corrupt. The opposite of free markets is government. Government is always incompetent. It never does anything right. Ever.
• Or maybe they're evil. Anyone who doesn't believe in perfectly free markets is a Marxist wannabe or a loser jealous of more-successful people.
• Free trade is just free markets applied internationally.
• Therefore all smart, good, successful people must believe in free trade.
Unfortunately, fakeonomics is at best a crude parody of economics. It is often larded with a thick layer of moral hectoring, courtesy of a certain variety of the American Right which seems to think that economics is its exclusive property, a stick given it by God to beat liberals with. There is even a whole class of people, known as "libertarians" who elevate fakeonomics to the level of an all-encompassing moral ideology. (Their fundamentalist sect is the old Ayn Rand cult, who call themselves "objectivists.")
So let's be clear about one thing: real economics does not support the idea that 100 percent pure free markets are best. Not domestically, not internationally. That's why the U.S. has, like every other developed nation, a mixed economy, with government amounting to about 35 percent (pre-2008; it's spiked since then) of our GDP and various laws, from child labor laws to environmental laws and the SEC, regulating much of the rest. It's easy to fulminate against this fact in beautiful after-dinner speeches about economic liberty, but the reality is that when in office, even conservative Republicans grasp the necessity of most of these policies -- whatever adjustments on the margin they may make.
Surveys indeed show that about 90 percent of economists support free trade. But, and this is crucial, only about 70 percent of them support it without reservation. Economists are, in fact, well aware of a number of problems with free trade, like:
• Free trade for America is one-sided, with most major foreign economies practicing managed trade of one kind or another.
• When free trade involves trade deficits, it may be optimal in the short run but is unsustainable over longer time horizons.
• Even if it increases GDP, it has even stronger effects on income distribution and can thus harm many, or even most, of the people in the economy.
• The adjustment costs of declining industries -- from unemployment checks to the rubble of Detroit -- are huge and ongoing.
• It brings us cheap goods today at the price of building up economic rivals who will take markets away from us tomorrow.
• It helps dirty industries move from environmentally-strict jurisdictions to environmentally-lax ones.
• Even if it is efficient in the short run, efficiency per se has little to do with long-term economic growth.
• The theory of comparative advantage -- which supposedly proves that free trade guarantees win-win outcomes -- doesn't hold in the presence of capital mobility between nations.
None of the above is especially new information, though these points are legitimately controversial like anything else. My point here is simply that economics does not grant free trade the blank check many people seem to think it does. Nonetheless, the juggernaut of fakeonomics, which doesn't understand this, rolls on.
The really scary thing about fakeonomics is that it is not just a vulgar version of economics, served up to amuse the audience of Bill O'Reilly's TV show. It is also believed in by people who should know better. Like it or not, fakeonomics is mistaken for real thinking by a disturbingly large number of people with top MBAs, graduate degrees in serious fields, congressional staffers, et cetera. (I know; my job obliges me to talk to these people all the time, and they tell me so.) Perhaps it's just laziness on their part, but people who should be taking their bearings from more serious sources -- people whose careers depend upon the idea that they have genuine expertise -- are drawing their ideas from fakeonomics. These are people who pride themselves on understanding the most sophisticated ideas when it comes to, say, corporate finance, but here they are, relying upon intellectual constructs of a chat-show level of sophistication.
Make no mistake: Fakeonomics matters. For one thing, it is the implied theoretical model of current U.S. trade policy. That is to say, if one looks at American trade policy and asks what picture of the economy one would have to hold in order to believe that these policies make sense, fakeonomics is that picture. So whatever sophisticated version of real economics someone like ex-Harvard professor Larry Summers may have tucked away in his head somewhere, when he acts as economic adviser to President Obama, fakeonomics is what he dishes out.
One can, of course, gin up rationalizations bridging the gap between real economics and fakeonomics on any given issue at will. So there's no point confronting people like Larry Summers with the gap between, say, their own theoretical writings and the policies they support in office. If they weren't bright enough to pull off a piece of minor casuistry like that, they wouldn't be where they are in the first place.
Why are the nominally sophisticated so misguided? Because fakeonomics tells them what they want to hear. At bottom, fakeonomics is the ultimate free lunch story. Its seductive message is that we can consume all we want, right now, and never worry about the consequences. "Free" trade translates as "don't worry about" trade. The market forgives all sins.
Unfortunately for this happy fantasy, fakeonomics can only maintain this fantasy vision by systematically ignoring half of economic reality. It is, for one thing, almost exclusively focused on consumption, ignoring the production side of the economy. So it has plenty to say about how cheap imports provide consumers lower prices, but blithely airbrushes out of the picture the way imports deplete our industrial base. Of course, in the long run, nobody can afford imports, however cheap, without the ability to produce something to exchange for them. But that, of course, is the long run, and fakeonomics is about instant gratification and letting the chickens come home to roost in the next administration.
What does all this mean? It means that there are really two targets, for those of us who would criticize free trade. There is economics per se, which tends to be pro-free trade, but is actually surprisingly well aware of the counterarguments and becoming slowly but inexorably more skeptical. And there is fakeonomics, which is dogmatically pro-free trade, proactively ignorant of the counterarguments, and determined to stick its head in the sand. Shooting at the first target does almost nothing, unfortunately, to hit the latter, which is arguably more important, at least in the short run, for determining real-world policy outcomes. As a result, the first question one must ask when querying some piece of economic reasoning offered as justification for policy is this: is it real?
Or is it fakeonomics?
Ian Fletcher is the author of the Free Trade Doesn't Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.
Richard (RJ) Eskow: After Summers, Which Path Will the President Take?
Bottom line: Economy is not a science, it's just ideology with a layer of complicated math that can't even predict the obvious. Meteorology can predict the weather with good approximation for at least three days, Economy can't predict a catastrophe, on top of that when the catastrophe was unfolding there were plenty of economists deniying reality!
http://en.m.wikipedia.org/wiki/Peter_Schiff?wasRedirected=true
Peter Schiff and other Austrian School economists did.
Basically, he points out the utter fallacy of "pure libertarian" notions of free market. All real economics does- whether they are abridgments in the short-term (like Keynes' insight into deflationary trends), the contribution environmentalism has made by forcing the discussion on externalities and "free riders," or the recognition by working people that labor unions could go a long way to rationalize labor markets. All these are real economics.
To continue to "play pretend" when we put on the economist's cap and wish all these issues away like your friends in the Austrian School do- this can only be a fig leaf for the shameful "wild west" antics of today's corporations. That's "fakeonomics."
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I think most people will have an open mind once they get some the facts. Of course some (see below) don't like to deal with pesky things like facts.
Thanks for bringing this issue into the daylight!
Such a system must always have at its foundation the interests of all its citizens from the bottom-up . No individual or group must be allowed to gain special advantage or egregious wealth no matter the undisputed, uncontested rationale. Such a system is the handiwork of great, modern leadership.
Any other system invites envy, greed, bribery and othe corruption, resentment, universial poverty and , ultimately , revolution and ruin.
(Can anyone tell me how such a comment violates the rules here? I keep getting scrubbed today)
Why is everybody crying "free trade" now that there are already monopolistic monstrosities in effect?
I would beg Scholar Ian Fletcher to reconsider his definition of "mixed economy" which I call "mixed economic system". Mixed economy or economic system refers to private enterprise for products produced and sold by numerous organizations and to natural monopolies that would be economically unjustified if confronted with competition. For example, the distribution of natural gas long distances to homes, factories and businesses must have central govrernment regulation to prevent duplication of pipe lines running side by side by different carriers. It would be absurd to encourage the duplication of lines into cities and customers for the sake of "free enterprise". Some necessary functions are necessarily monopolistic and must be either owned by the public or strictly regulated through fair regulation and control. A mixed economic system is what the Chinese have today.
Our failing economic system ignores the necessity of regulating naturally occurring functions of industry and commerce. It also assumes that money are assets. Assets derive from intelligence and hard work put to producing and originating and building and making the environment a better place.
Back in the 80's I remember getting a C-plus in my Econ class. It just did not make any sense to me.
Where are the human factors???? You know, forces that can influence everything ..... like fear, anxiety, and of course, greed. What about despair and desperation?
Seems to me that these so-called economic models are woefully lacking, at taking into account the humanity of it all.
The thing is, the free market doesn't care. That's why it's Free. It's not there to benefit us or anyone else except the individual who can innovate and deliver the best and lowest cost product. The free market is like nature in evolution. Nature doesn't care who it "selects" to survive. It just does.
All a conservative is saying is that this is the way it is. It's not that you could or couldn't impose additional artificial restrictions, it's just that over time, the free market would sort itself out and you'll probably end up hurting more than helping.
The best way to ensure that you do not get left out as labor globalizes, is to learn skills that can compete globally. If you do not. You deserve to be commodity labor and paid as such. Simple economic Darwinism.
It is important to note that as labor is being paid less due to increased competition, capital is being paid more. Americans do not save and invest enough, we consume too much of other people’s cr*p using other people’s money to do so. The best way to come out ahead on this is to save and invest. In short, to become and owner of capital not just an owner of labor. We Americans brought our subservience to other country’s manufacturing and financed consumption upon ourselves. We spent above our means, we didn’t save, we didn’t enforce the need for stronger education in mathematics, engineering and global hard skills. We became soft and addicted to other people’s money.
The answer is not tariffs or taxes, it is individuals taking responsibility for learning skills that are competitive and for saving and investing. That requires a lifestyle reboot by Americans in general. Hope this crisis is the appropriate wake up call.
Kai
How about in eight when a "virtual person" can take your McD's order better than a high school student ever could, and your legal program can do a better job than a human lawyer? When the X-Ray machine is diagnosing you better than the doctor could?
How about in 10 years when you can't even get a job as a manual laborer, because robots will be so capable that they can replace nearly every human job and will cost less to run and maintain 24 hours a day for a year then it takes to pay a human for a month?
Do you really have the confidence that you can continue to find new job opportunities, or educate yourself faster than a computer can upload a new program?
THERE ARE NO SKILLS THAT CANNOT BE REDUCED DOWN TO A RULES BASED SYSTEM. None. Eventually computers will be able to do anything that a human can do, no matter how "uniquely human" you might fool yourself into thinking it is. Even artistic and creative fields like "art" and "music" follow rules that can be programmed.
So, when you get replaced by a machine, do you plan to simply die? After all, you will be "useless and obsolete" by your Darwinian reasoning. The machines will have simply outcompeted you.