From the meetup: Free trade and its flaws

(This is going to be one of several posts in a series dealing with my thoughts on various topics that came up during our Singapore meetup late last year. I haven't forgotten about what we discussed, it's just been a busy few weeks since I got back. Since I am far more articulate in the written rather than the spoken word, these should serve to clarify a few things and expand upon a few ideas. Comments and criticism are of course welcomed, especially from the guys who were there.)

One of the most doctrinaire assumptions of the libertarian creed is that placing artificial constraints upon voluntary exchange is harmful. The axiom of human action argues that Man acts, at all times to better his life and his means, and it would be sensible and consistent to argue that free trade between individuals is simply another expression of that very human action. The good of the individual is maximised by voluntary and free trade between himself and other individuals. And indeed, logic, reason, and empirical evidence all bear out this line of thought. Your productivity, your ability to create things that others want, can be exchanged, through the transmission mechanism of money, for goods and services that you desire- things that are produced by the productivity and the skills of others. Logically, therefore, no external party should ever attempt to stifle these interactions.


It is tempting to take this line of logical computation to its extreme and argue that there should thus be no barriers whatsoever to trade between nations. And indeed that is very much what the economist David Ricardo argued when he wrote his seminal work, On the Principles of Political Economy and Taxation. His basic argument stemmed from the notion of comparative advantage- the idea that if the butcher specialises in his chosen area of expertise, and the tailor specialises in his, then the two can engage in mutually beneficial trade that makes each better off. Ricardo extrapolated this thought experiment unto entire nations by arguing that if two nations each specialise in their own particular areas of competence and then engage in unlimited trade with each other, the results are inarguably superior to the mercantilist, protectionist, and outright corporatist attempts of the time to manage trade flows and business cycles.

Ricardo came to these conclusions by essentially using the same (in)famous ceteris paribus argument that is taught to every single modern student of economics: holding everything else equal, let us control the movements of two or three very specific variables in an economy and therefore come to conclusions derived from such thought experiments. (To their great credit, most Austrian economists reject this method of inquiry, since they know full well just how flawed it is.)

There is, of course, a gigantic methodological problem with this approach, which Vox Day outlined superbly in his excellent book, The Return of the Great Depression. It centres around an idea known as the Three-Body Problem. The idea is simple enough. When the legendary mathematician Sir Isaac Newton came up with his theories of classical mechanics, he was able to figure out and quantify the gravitational interactions between two large masses in space and thereby derived his famous Law of Universal Gravitation. (Given what we know of quantum physics, it is perhaps more accurate these days to follow David Berlinski and argue that the "laws" of physics are really at best "guidelines" for understanding a wondrously complex Universe.) The problem with Newton's law of gravitation was that it only really worked if you considered two bodies in complete isolation. In reality, empirical observations showed up severe flaws in Newton's laws- and interestingly enough, Newton was fully aware of them. He simply couldn't do anything about it; even a mathematician as brilliant as he was, with his towering intellect and formidable talents, could not extend his observations about two-body interactions to three or more interacting bodies.

The exact same problem afflicts the standard Ricardian argument of comparative advantage. By reducing the incalculably complex interactions between individuals that comprise nation-states into overly simplistic two-body problems involving nations specialising only in the production of corn versus the production of wheat, Ricardo was able to demonstrate that both nations would be better off if the corn-producing nation sold its produce to the wheat-producing nation, and vice versa. However, the moment you unfreeze the interactions of all of the innumerable actors in between, the entire argument falls to pieces.

It doesn't take much to realise why. Consider the case of the United States of America versus China. The USA is unquestionably far superior at high-end manufacturing than China is- or anyone else, for that matter. In fact, over the last 5 years, high-end manufacturing has been experiencing a bit of a boom here in the US, as companies realise full well that countries like China simply don't have the talent, the legal regime, the property protections, or the R&D environment required to create a world-beating high-tech manufacturing industry. Does that mean that the USA is unquestionably better off by concentrating only on high-end manufacturing while China concentrates only on low-end manufacturing? This is, of course, a completely absurd argument; there are many things besides relative skill that need to be taken into account. One of them is China's worrying penchant for making cheap products of atrociously poor quality. A bar of soap or a stick of deodorant may well cost three to five times more when manufactured in the USA rather than in China, but it would also be thirty to fifty times less likely to contain carcinogenic chemicals. It would also be rather less likely to fall apart on you within a few months of purchase, because Chinese companies, in pursuit of notoriously short-term goals, have a distressing tendency to throw such antiquated notions as "quality control" and "extensive testing" straight out the window.

The argument in favour of unrestricted free trade then falls apart completely once you realise its most crucial implication: total free trade must by definition mean total freedom of movement of human capital. And this is precisely where Austrian economics runs into its most severe limitations.

One of the points that I brought up in our discussions during the meetup is the fact that Austrolibertarian thought, which does so much to debunk the extremely irritating tendency of modern economics and sociology to assume the existence of a can-opener, does precisely that when it comes to human nature. In order for the completely laissez-faire approach of the Austrian to work without exception, everyone, both within and without the society, would have to be more or less equally committed to the ideals of non-aggression and free trade. In other words, everyone would have to have a minimum IQ of at least 120. Reality is, of course, quite different.

It is an observable fact, an absolute and ironclad reality of life, that different races and different societies place different values on freedom. It is precisely for this reason that black Africans cannot seem to maintain civilisation no matter where they go, while white Europeans and at least three different types of Asians seem wired to do the exact opposite. Because of these observable realities, which conflict so radically with the clean and beautiful logic of a priori logical deductions from axiomatic first principles, opening up a country's borders to complete and unrestricted free trade would by definition mean letting in all manner of barbarians, whose very high time preferences would in very short order set about completely destroying the host society's carefully accumulated stores of capital and production.

We have seen this precise phenomenon in action in nations which have permitted the most unrestricted free trade. Western Europe has permitted virtually totally free immigration between member states; the inevitable end result has been that races with high time preferences have invaded nations with low time preferences, taking advantage of the highly civilised societies that were built so painstakingly over the past thousand years, and reducing those same societies to atomised shells of their former selves in less than two generations. In the USA, the massive influx of poorly educated Churchians from down south in Mexico has resulted in sweeping demographic changes that have tilted the balance of political power completely, and permanently, in the direction of ever-bigger government and ever more confiscatory government policies. In Singapore, as I have written numerous times before, the "growth through trade" strategy is running into serious problems as the government finally confronts the reality that mainland Chinese, subcontinental Indians, and pure-blooded Filipinos will never really be Singaporean and will never hold their new home in quite the same regard as those who were actually born and brought up there.

Now before we get on to an actual prescription regarding the best way to handle trade, it is vital to remember that going in the other direction is also a gigantic mistake. In this regard there is no better example than the opium trade used by the British Empire to force open Chinese markets in the mid-19th Century. For those who aren't familiar with that particularly sordid episode, the CliffNotes go something like this: when Britain first came to China and attempted to establish trade with the Middle Kingdom, the Chinese laughed at the "red-nosed barbarians" (the Chinese term, gwai-lo, is rather more expressive than this- something more in line with "white pig", I believe) and refused to trade with them unless they paid in gold and silver. Because demand for Chinese tea and silks was extraordinarily high in Britain, the resulting drain on the British treasury was simply not acceptable. So the British came up with a rather cunning solution: they would use China's own insistence on trading only in gold and silver to their advantage by growing opium in India, an extremely addictive drug (which also happens to be used for seasoning in some Indian cooking, by the way- it's an interesting country) that could be sold to the Chinese. They would then turn around and use Chinese gold and silver to buy the very goods that China was so jealously guarding.

It was a devilishly clever strategy. It worked brilliantly- from the British point of view, anyway- and the resulting massive outflows of gold and silver crippled China economically almost as badly as skyrocketing rates of opium addiction crippled it spiritually and morally. China was in no position to fight back, because after all its own rules were being used against it. The British were ascendant for decades, but their empire eventually paid the price for their own overweening arrogance and overreach. The lesson from this little detour into history is simple: mercantilism certainly pays off in the short term, but ultimately it destroys the very prosperity that it is trying to promote. The Chinese are (re-)discovering this to their own great detriment right now, in fact.

What, then, is the correct course of action? It should be clear by now that unlimited free trade is indefensible on empirical and logical grounds. It should also be equally clear from historical example that mercantilism is a costly and dangerous policy which leads to epic misallocations of resources by overambitious governments and their know-it-all central planners- just ask India, which tried to use mercantilism and government planning to run its economy for 40 years and failed in epic fashion until neoliberalisation began in the 1990s. (More on that in a future post- it's a symptom of a rather interesting disease.)

The answer is to impose low, universal tariffs on ALL goods and services as a means of revenue generation, while maintaining strict and absolute controls over national borders. It has been said elsewhere that any country has three possible courses- open borders, a welfare state, and economic prosperity- and can pick at most exactly two at a time. It cannot be stated clearly enough that unlimited free trade is completely incompatible with both national sovereignty and a welfare state. Since I am a paleolibertarian, I have no patience whatsoever for the welfare state- but I have endless patience for the idea of national sovereignty, and since unrestricted free trade destroys that concept, it is incompatible with the libertarian ideal of achieving the ultimate in individual freedom consistent with law and order.

The devil, of course, lies very much in the details. Some nations (such as Singapore) choose to tax the bejeezus out of specific goods- cars, alcohol, cigarettes, and a variety of other "luxury" goods, for instance- while heavily subsidising others (food, in Singapore's case). Others choose to do very little of anything by way of specific tariffs, while maintaining strict control over their own borders. (I could be quite wrong, but I think the Swiss fall into the latter category.) All share a common predicament- how to maximise the wealth and economic prosperity that comes from relatively unrestricted trade without destroying national identities?

The only logical answer is one that the West has long since forgotten. Close off the borders to all but those that actually earn the right to enter. Do whatever is required to ensure that the population remains as homogeneous as possible, as dedicated to the ideals that founded it as possible. Do everything possible to maintain the flow of capital and investment that comes from low time preferences- which are realistically only possible in a relatively homogeneous, relatively stable society with very little by way of immigration. Let people work there without too many restrictions- but never give them the right to vote unless they prove worthy of it, never let them forget that they are guests in a host nation, and never forget that total free trade is poison to any healthy society.

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