I agree wholeheartedly with Steve Verdon’s full-throated defense of free trade and specialization in his post at Outside the Beltway:
I do not get Donald Trump’s (or anyone else’s like Bernie Sanders) argument for protectionism/mercantilism. I do not understand why trade between nations is viewed a fundamentally different than trade between states in the U.S. or even between individuals and firms. To quote Don Boudreaux, I have been running a trade deficit with my grocery store ever since I started shopping for groceries. I always buy from them, but they in turn never buy anything from me. Clearly using the “logic†of these neo-mercantilists I must clearly be worse off with this arrangement. In fact, I would be so much better off if I would stop going to the grocery store and instead produce all the stuff I buy at the grocery store myself. Let me see, I’ll need some cows, some pigs. I’ll have to grow wheat and corn, I’ll need quite a bit more land too….oh yes, this will make me so much more better off. And I can spend all of my time doing this, so I’d better quit my job too.
Some might say, but it is different when it is another country. I’m still waiting for a good explanation of that one. How is it different? They aren’t Americans? So? Why should that matter? That Americans might lose their job? Okay. So what you are saying is that we should keep these people employed at a job that could be done with less cost. How is that different than welfare? It is no less a transfer of some of my income to those workers than if it were a literal cash transfer. Is that it? Are Trump and the neo-mercantilists espousing nothing more than workfare? Keeping people employed at a job that is actually more costly? That is a recipe for economic prosperity? I don’t think so.
However, as Yogi Berra put it in theory there’s no difference between theory and practice; in practice there is.
We don’t have free trade between the United States and any other country. NAFTA and the Trans-Pacific Partnership Agreement are mammoth managed trade agreements, not free trade. You can write a free trade agreement on the back of an envelope. The length alone of these agreements should tell you that they’re not instruments of free trade but carefully constructed to pick winners and losers which is not free trade. They remind me of Adam Smith’s famous remark:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
We don’t even have free trade between the states. Every one of the hundreds of thousands of pages of laws and regulations each state has enacted and which vary from state to state is a barrier to free trade.
In an environment of free trade there would be no restrictions on immigration, no occupational licensing, no subsidies or special tax break paid to businesses, no patents, no copyrights, no tariffs, no statements of country of manufacture, no certificates of need, and no quotas. There would either be a uniform system of laws and regulations or none at all.
Clearly, that’s not the world we live in and I think there are good arguments why we shouldn’t want to live in such a world. But each of those barriers alters the structure of supply and demand, incentivizes investments in some industries while discouraging investment in others, and generally distorts the market.
In David Ricardo’s work on trade there were natural limits to how much one nation could buy from another. In today’s world there are no such limits.
One more point: the United States will not be able to specialize in consumption while other countries specialize in production. It just doesn’t work that way.
As a result of all of the foregoing you can’t justify, for example, the TPP on the basis of free trade. You’ve got to make a reasoned value judgment based upon its net results. Is it of great enough benefit to enough people to justify? Or is it just of substantial benefit to a relative handful of people while hurting a lot more?
Net result is one thing, but distribution is another. In our current system, the Ruling Class has reaped all of the net result, literally all of it. Moreover, they have actually taken income away from both the working class and middle class. The working class has suffered substantial reductions in real income, and the middle has suffered material, if lesser, damage. If you want to support free trade (I do not.), you have to come up with a way to take most of the net result away from the Ruling Class.
First, let’s have Verdon go read about the fallacy of composition. Just because trade is good with my grocery store, it does not necessarily follow that made is good everywhere. His reasoning sucks.
Nonetheless, I think that free trade is a good thing, in the long run. (And assuming it isn’t manipulated as Bob notes to benefit only the wealthy. We should note that libertarians and conservatives really only care about making the wealthy richer, so they won’t really understand or care about this argument.) In the short run, it can be negative for more than it benefits. Too bad for those who are displaced. Pull yourself up by your bootstraps. (As I recall Verdon has an economics background. I have had this discussion with Boudreaux and others. They really do believe that markets are magical, as in they do real magic. Trade always benefits more than it hurts. Time is just not a factor.)
Steve
I think he’s an economist working for a utility out in California. I think I understand the theory of international trade about as well as he does and, as I wrote in the post, I think the theory is sound. The practice is the issue.
How do you calculate the benefits of trade in an environment in which both countries have fiat currencies and one subsidizes its industries and imposes quotas on imports while the other country, at least relatively speaking, does not subsidize its industries or impose import quotas? How do you calculate the benefits of trade when Company A located in Country X has a subsidiary in Country Y (where it does most of its manufacturing) where industries are heavily subsidized and there are strict import quotas and sells its products in Country Z with which Country X has a free trade agreement?
I understand the theory. What happens in practice? What are the empirical results?
I don’t know what is FAIR. As it stands for me now, I’m 63 years of age, made my living by hard work and extremely long hours. I expect that there are many, many Chinese who could say the same. We all tend to look out for our own interests, and I don’t think these Chinese would work as they have unless they were improving their lot in life.
But having said that, I am an American, and I want policies that support myself and my dependents. I want an American President, the Chinese can find their own way, I’m not their daddy.
OK, as far as the macro picture, yes trade is good. But the field is not level in labor. In the third world, no healthcare, vacation, work comp, social security, pensions, we need to take care of our own. And by the way, the margin between production cost in the third world and retail prices is criminal. Blame ourselves, we need to be better stewards of our own money and not buy all that pretty shit.
It’s kind of like world government – in theory, a single planetary government would be awesome in terms of technocratic and policy efficiency. There’d be no war because all disputes would be solved politically. In practice it would be awful and would fail miserably.
There’s a difference, Andy. Free trade is of mutual benefit regardless of preference. World government would fail because of a lack of shared preferences.
BTW, I think that Gray Shambler’s comment above is right on the money.
One more remark. Steve complains that opposing the TPP is mercantilist. I think supporting it is corporatist and that free trade is largely a red herring in the discussion. I’m willing to listen. Since we should be able to agree that the TPP does not effect free trade among its signatories, how do we go about measuring freeness? Does the TPP make trade among its signatories more or less free? I don’t think the answer is obvious.
Two real world anecdotes on trade.
We owned a licensed apparel company. Made the product in Alabama. We did very well with it and eventually sold it. But the winds of change were blowing. Pressures on retail price forced manufacturing to Mexico. That went fine for them for a while. But further price pressures required a move to the Far East. The owners didn’t know how to do it. Contrary to assertions that manufacturers just pocket lower labor costs, profitability declined precipitously with retail price. The company went under and no longer exists.
We owned another manufacturer of consumer products. A product you all would be very familiar with. Probably own. We manufactured in the US for this one too. But private label alternatives became available and our big box customers told us to lower costs, and price, or else. SourcinG quickly migrated to Mexico, then Vietnam Nam and ultimately China. Contrary to assertions, every last nickel got passed through to retail customers. We sold, again doing well, and the buyer did also. The company continues to be a prominent and successful branded consumer product company.
Each of these illustrate examples of issues faced by real live companies. Both had to eliminate US jobs or be put out of business. One couldn’t run fast enough. Both ended up having to do (only) what they did best in the US: design, quality and value engineering, and advertising. Neither reaped excess profits from lower labor costs. Both passed labor benefits on to consumers. I don’t have exact figures, but we are talking on the order of 5-20% per unit. Both were responding to the discipline of consumers ability to choose. (I could go on with examples of companies or product lines, but you get the picture).
Thankfully most of our companies are able to stay here. Injection molders. Hydraulic equipment manufacturers. Lawn and garden equipment. Laboratory equipment. Concrete products. But what would people have companies faced with the issues do? Just let them go under? The consumer is ruthless. You can’t appeal to them to “buy American.” They need the savings. Ever heard of Wal-Mart? So what to do? Build a, ahem, wall? Demand that China or India behave the way we want or shut them out? Tariffs? Good luck with that. And just wait for the trade war. The US sells a lot of stuff abroad. And Dave is correct on this – it’s managed trade, not free trade. Let the corporate and union lobbyists loose with schemes and all you will do is benefit the connected. And those certainly aren’t the companies in my world.
This trade issue is a real problem. Apple was invoked recently. I’ll bet their cost structure and value add is almost all in features, design, advertising, and brand building activities like retail stores. Manufacturing is an afterthought, unless theynreallynare in a death struggle with, say, Samsung on manufacturing cost. Could be, but I doubt it. Not if that 1-2% price reduction stat is true. Their China initiatives probably reflect Jobs darker side despite his cult status. Bad on them. But that’s not the blood and guts manufacturing that used to dominate the small towns all over America. That’s not the poster boy for the trade issue. The fundamental problem is the speed with which the economic dislocation in a global environment occurs. Damned if I know what to do about it except quit making it harder and harder to manufacture here with all the crap coming out of national and local government.
There are two things that I hope are not lost on American managers. Production engineering inevitably follows production. Much of that has happened already. Just as inevitably design engineering will follow production engineering.
Management will follow production and design.
The other thing is senior engineers do not spring full-grown from the brow of Zeus. Junior engineers become senior engineers. When all of the junior engineers are in Taiwan or India, eventually all of the senior engineers will be, too.
Americans are savvy consumers including consumers of education. If there doesn’t appear to be any future in science, engineering, or math, Americans won’t study it.
Heh. This certainly touches on a number of topical points. No answers, but things to contemplate.
http://www.newgeography.com/content/005354-today-s-tech-oligarchs-are-worse-than-robber-barons
“Production engineering inevitably follows production.” Etc.
You bet. I spent six years as a process engineer. Quality, cost, productivity – every day. I commercialized an HSLA hot rolled product to make trailing axles for cars. From taking out the fatigue crack producing inclusions to the hot strip cooling practices. Converted a steel bar to a formed channel at a fraction of the weight. And we perfected Paint-Tite, a galvanized sheet steel suitable for painting now used in all auto bodies and in appliances. Note they don’t rust out any more. That’s blood and guts shop floor engineering. The degrees were nice. The apprenticeship is where the action was.
Maybe because we own almost exclusively manufacturers and I see first hand the manufacturing engineering talent in the companies I’m a bit more sanguine than you. But I take your point.
I still have the same question, though. The consumer will tell any interviewer they will pay for American made, or for quality. And then they will march right out and buy on price, made anywhere. It’s a fact. Those who won’t reside only in the top tip of the market pyramid. I’m largely in agreement with Verdon, and have even used his cross state example. Can you imagine boycotting Iowa corn just because you live in Illinois?
So what do we do about the trade fallout? People can blame short sighted management if they like. Partially true. But the consumer is king. Overwealmingly powerful. Ignore it at your peril, and at odds with your fiduciary duty.
steve,
The problem for you is that it is very much analogous. You say that my reasoning fails in regards to fallacy of composition but you fail to show how that is so. Your claim is mere assertion and is totally lacking in any substance at all.
And are we to also conclude you actually agree with Donald Trump?
Further, give your limited understanding of economics my claim is actually more substantive than you realize. In economics, theorists caution against using the various national accounting identities in terms of deriving theories, but that any theory should adhere to the national accounting identities. I am explicitly attacking the latter claim as it seems to result in views that are patently nonsense.
But hey, free trade and people losing their jobs, lets go with what makes you feel good over what is actually going on and pointing to the problems of those displaced by foreign competition, ignoring that domestic competition can also displace workers. That is part of my objection to the new mercantilism. That the very things people protest about can happen even</b without international trade.
…We should note that libertarians and conservatives really only care about making the wealthy richer…
I think this has got to be the stupidest thing I have ever seen your write steve. Yeah, I care about making other people rich.
Are you completely f**king stupid?
Don’t answer, I already know the answer is “Yes!”
S**t head.
Just read the New Geography post, very humbling. I guess that’s the way the world works. Google’s “do no evil” is just consumer propaganda in the end. People have this problem of having been born so young, we keep falling for the same old line,”I care about you”. By our would be leaders. We all need to shake that off, it’s always bull.
I, at least have yet to buy a smartphone and probably never will. That won’t cripple Apple but it does help me a little bit which is all I can do. Little bitty bits, one after the other. Remember, Jobs may be rich, but he’s still dead. Yes, it’s true. capital chases profit and complaining about it is like crying into the wind. Save your breath and get to work
The purpose of an economy is the allocation of resources.
The purpose of a government is to provide safety and protection for persons and property, as well as supply social goods. The most successful governments these days have been democratic nation states, governments instituted by the people, for the people. These governments can provide guns and butter to foreign lands, but always subject to the limitation that doing so is seen as in the self-interest of “the people” or of minor impact.
The people’s first-order preference is for job security over cheaper goods. This is entirely logical, without a job, there is no guarantee that cheaper goods will be available. The U.S. provides little social safety-net for lost jobs, and periods of mass job losses permanently damage lifetime earnings for even those that did not lose theirs. Community-wide job losses increase crimes against person and property, and reduce economic activity in the community and housing values. Democratically elected officials will be voted out of office, socialist governments will enact policies to “rationalize” the allocation of resources and jobs, and in extreme cases, governments will fail because they will have failed the social contract.
“There’s a difference, Andy. Free trade is of mutual benefit regardless of preference. World government would fail because of a lack of shared preferences.”
Free trade doesn’t exist in practice, neither does world government, both for very similar reasons. Plus, the only places where you get something close to theoretical free trade is when there is a unified government as is the case in the USA.
“You say that my reasoning fails in regards to fallacy of composition but you fail to show how that is so.”
You made the original claim that because it works when buying groceries, it will work with trade. Burden of proof is on you, which you failed to support here and in both of your articles at OTB.
“And are we to also conclude you actually agree with Donald Trump?”
Uhh, I said I think free trade is good in the long run. I don’t think that is Trump’s position. What I point out is just because it is good in the long run does not mean it can’t be bad in the short run. As I would hope you would have noticed by now, your profession, especially writers like Rothbard, and academics like Boudreaux completely ignore time as a factor.
“I think this has got to be the stupidest thing I have ever seen your write steve. Yeah, I care about making other people rich.”
In theory, libertarians care about more than the wealthy. In theory they oppose crony capitalism. In practice? It is near impossible to find a libertarian supporting politicians and/or policies that might be harmful to the rich folks. I have read Boudreaux almost daily for years, Even tried participating with the cesspool he calls commentators. Most libertarians really are just conservatives who want to smoke pot, but I think Don is the real thing (his commenters almost thought the Iraq War was a great thing, torture was spiffy too). What you get is piece after piece talking about how wonderful rich people are and how we owe them everything. When he does comment upon policy, somehow it always ends up supporting the interests of the wealthy. So in theory, a libertarian, in practice, just another shill for the wealthy.
That said, if you are writing again I will look to see if you ever write anything that could be harmful to our rich folks.
Steve
Heh. Democrats clearly helping the Average Joe, unlike those nasty libertarians cheering on the rich…………..not.
http://www.zerohedge.com/news/2016-08-14/heres-why-wages-have-stagnated-and-will-continue-stagnate
My comments are mostly the same as our host, @Dave Schuler.
I at one time was in the free-trader camp, but things were not adding up (actually not adding up). The classical economists should have been right, but they were/are not. In a sound money economy, there can be no endless trade imbalance. At some point, the asset backing your currency will be depleted, and nobody will trade with you anymore.
This is the unmentioned premises of their theories. If you remove this requirement, you can run trade deficits as long as somebody will accept your credit backed currency. When all your trading partners are doing the same thing, you will never reach infinity.
Free-traders never talk about trade except in reference to a trade war that the US is losing already. The US purchases more than it sells, and if it stopped buying, a lot of producers would lose more money than the US would in exports.
In a credit based financial system, the rules of simple arithmetic do not constrain the balance sheets of the financial industry including the central bank, and when all countries are doing the same thing with financial transactions freely moving between countries, the only free trade possible is financial free trade.
Any free trader who takes an honest look at the system will find this is exactly is what is occurring, and this is why the 1% or 0.01% or 0.001% or whatever keep getting richer. Even more bizarre is that few of them actually understand how the system works. They are like Medieval doctors who happen upon cures but have no idea how the cure works. They can explain the reason. They believe the reason, but it is wrong.
The problem is that in order to accept my explanation you need to make a break with much of what is being taught by all sides. I am not the only one with these ideas, but I have mostly worked it out for myself. I have found more knowledgeable people who have validated these ideas with the requisite charts, graphs, tables, and terminology.
The previous ZeroHedge link provided by @Drew has a list item about debt, and they state, “debt is nothing but future spending brought forward.” This is a sound money concept. In a credit backed monetary system, money is mostly created through credit creation, and as long as the system does not collapse or credit cannot be created, the future never arrives.
All debt can be written down or off, but it cannot be done due to the system collapsing. All that is required is that the financial system be increasing faster than credit is being paid down, written down, or written off. It is a Ponzi scheme, and as long as it keeps going, all is well.
The $24,000 question is: can it keep going forever, or is this the beginning of the end? If it is the beginning of the end, will it occur simultaneously for every country, and if not, who will be last? Could the last country(s) stave-off their collapse by enough people shifting their remaining hard assets into that country’s financial system?
I would make most libertarians run screaming into the arms of the nearest socialist, but I recognize that few people would accept living in my world. Can a credit based financial system keep expanding forever, yes within certain limits. The most basic is that the expansion has to be slow. Slow as in “frog boiling slow”, but in this case, the economy’s “overheating temperature” will continue to increase with the system.
There will be an Economic Theory of Relativity, but as opposed to the physics version, the limits are not known at this time. It might be possible to determine a mathematical (computer) model, but until then, the central bank would be on the honor system. Unfortunately, the honor system and a refusal to acknowledge ignorance has brought us to this point.
In regard to @Drew’s earlier link, I did not read the entire thing, but the record industry was being put out-of-business by mp3’s and their refusal to address them with anything other than lawsuits. In addition, record companies refused to sell anything less than an entire CD.
Without iTunes, mp3’s are not going away. Instead, there will be more piracy, and they will go out-of-business faster. Somebody or something will come along to replace them. All media has had the same problem, and old time box software applications are having trouble.
In software, $0.99 apps and subscriptions are less and less slowly replacing the old model. Times change whether I like it or not. I had to get used to that damn Steam, and now I buy crap all the time. I hate being tied to them, but my step-son thinks it is great. If they go out-of-business or start charging a service fee, he might change his mind.
If free trade, as practiced today, were the way to increase the standard of living for those at the lower end, it should be applied to the poorest countries, and they would be able to lift themselves right out of poverty. Of course, it will not, and the free traders know it. Otherwise, Greece would be a shining example of producing little and importing a lot.
Free-market non-crony capitalist principles with a well regulated financial system will increase a poor country’s standard of living. There are other requirements, but the successes are numerous. Many of the latest failures are due to their financial systems collapsing.
Like I tell the socialists, put your plan into effect in Venezuela.
Thanks Drew. I now know we aren’t doing well because of our massive inflation.
Steve