[This review appeared in the Conservative Review, September/October 1997, pp. 38-40.] 


Book Review

How Nations Grow Rich: The Case for Free Trade

Melvyn Krauss

Oxford University Press, New York, 1997


Reviewed by Dwight D. Murphey


            Melvyn Krauss's credentials are solid as an economist and supporter of the free market. Emeritus as a professor of economics at New York University, he is now a senior fellow at the Hoover Institution. The book was written with the support of the John M. Olin Foundation, which backs many worthy causes agreeable to the outlook of Conservative Review.

            A "case for free trade" is fully in keeping with a major thrust of much thinking on both left and right today. The predominant public philosophy of established opinion throughout the world now supports "the global marketplace." (It is possible to say this despite most nations' and regions' throwing up trade barriers of one type or another as they seek to serve their local interests. The prevailing ideology leads, at least, to a ubiquitous lipservice supporting free trade.) This book is an excellent primer summarizing the free trade position.

Nevertheless, there is much to criticize:

            1. The argumentation is ideological rather than reflective.

            2. Little respect is given to opposing views.

            3. Although Krauss argues that economic science and value judgments are to be kept separate, he nevertheless draws a good many value judgments, all of them making "the consumer" the sole standard and willing to sacrifice other values such as a given nation's well-being or the economic viability of millions of people within a given country (most notably, for our purposes, the United States).

            4. Much of his case is out of date, or soon will be, in light of rapidly emerging world realities.

            Let's look at each:

Ideological Argumentation

            Krauss's text is true to its name, "the case for...." It is essentially similar to a lawyer's brief for a client, in that thoughts are marshalled for their supportive value rather than as concepts to be objectively considered. This makes the book a polemic rather than a scholarly discussion. There is, of course, room in the world for polemics; but it is vitally important to realize the distinction between polemics and scholarship.

            An example comes when Krauss defends the Japanese acquisition of U.S. assets with a non sequitur. His sought-for conclusion is that foreign ownership is no threat. In support of this, he tells how those investments have been unprofitable to the Japanese themselves. But this is inappropriate evidence for his conclusion, since unprofitability at any given time tells us nothing about foreign-owned assets' profitability in general.

            A similar opportunistic marshalling of arguments is evident when he seeks support for his position that the North American Free Trade Agreement (NAFTA) is not causing the United States to lower its environmental standards. His supporting premise: that, under NAFTA, the United States is "exporting" its pollution-creating industries to Mexico. No one concerned about the environment would consider that a plus, but the idea that polluters are moving from the United States to Mexico (because of its lower standards) allows Krauss to bolster his main point. Here, he is willing to support an argument by undergirding it with something quite ridiculous.

            He does the same thing when he argues that NAFTA will help curtail the flow of illegal Mexican immigrants to the United States. "Oh, good!," conservatives will be inclined to say. But how is the flow to be stanched? By the wages of unskilled workers in the United States being bid downward and those of unskilled workers in Mexico upward! As in the expression "any port in a storm," Krauss seems ready to use any argument to support a desired conclusion.

Lack of Respect for Opposing Views

            As with so much free-trade literature, opposing views are demonized, eliminating the need to discuss them seriously. Thus, "protectionists are master spinmeisters" who engage in "the big lie." Most specifically, the points that Pat Buchanan made during his 1996 campaign are written off with a reference to "the Buchanan know-nothing Right." "Reason...may not be Pat Buchanan's forte." None of this is conducive to reasoned discussion.

The Confusion of Science and Value Judgments -- Combined With a Damaging Truncation of the Judgments that are Made


            Krauss holds to a view that neo-classical economics embraces generally--that economics is a descriptive science studying certain human activities and relationships, and as such cannot itself make "value judgments."


            This distinction is sound and is important in theory, but is in no sense descriptive of what most market theorists do. They make value judgments continuously, as does Krauss. They make no clear separation, as they should, between economics-as-a-descriptive science and classical liberalism as the philosophy of a free society centered on a market economy. Since this separation isn't maintained, the philosophy often becomes clothed with the pretension that its conclusions are themselves "science." (This reviewer is a classical liberal, but has always felt that the philosophy's position must be on intellectually solid ground.)


            An additional problem is that the value judgments that proponents of global free trade make are poorly chosen in relation to the needs of classical liberalism as an overall philosophy of a free society. Everything is seen simply from the perspective of "the consumer," without regard to the fact that people wear several hats, of which "consumer" is just one, and can hardly participate "as consumers" unless they are successful as earners. "In a free market economy," Krauss says, "the private consumer, and not the producer and not the government, is king. Accordingly, a consumer-based equity standard is the only relevant one." (Note, apropos the preceding paragraph here, that this is very much a value judgment and not a matter of science.) That "the consumer is king" becomes an article of faith in the prevailing free trade ideology. Since it is an article of faith, it doesn't matter to the proponent what the consequences of it may be. Millions in the United States may be displaced and impoverished by global free trade, but that doesn't count, since to notice that is to look at them (as is forbidden) from their "producer" side. Speaking of NAFTA, Krauss frankly admits that "one U.S. group likely to lose from the trade agreement is unskilled labor" and that "the resultant unemployment of unskilled workers can be mitigated only if their wages are reduced." When we recall that in any given population 50% of the public are below 100 I.Q. and have little prospect of becoming "high-skilled," Krauss's willing acceptance of a "wage convergence" between U.S. unskilled workers and those of Mexico (and, we might add, those of the rest of the world, including great masses of poverty-stricken peasants throughout the Third World, such as in the slums of Rio de Janeiro) is tantamount to an acceptance, in the name of his ideology, of vast personal and social distress in the United States. Market ideology as currently proclaimed cares nothing about specific people or specific nations, including the United States, except to the extent that "consumer well-being" (without considering what it takes to become consumers) may redound to their benefit. The pressing question is: Is this the best formulation of classical liberal philosophy? Does it look to the overall mix that must make up a free society?

The Rapid Obsolescence of the Global-Market Ideology

            For well over a century and a half, the intellectual proponents of the market economy have been a valiant remnant manning the barricades to defend individual liberty against the attacks by a predominant alienated, socialist intellectual culture. They deserve all the credit and honor we can bestow upon them. And that is true of Melvyn Krauss and other proponents of free market ideology today.

            Changing conditions are, though, introducing an immense "however." It is becoming clear that the intellectual defense of liberty that was imperative in the nineteenth and twentieth centuries will no longer be adequate in the years to come.

            Why? Global communications and transportation are rapidly placing everyone, throughout the world, into competition with everyone else. It isn't just low-skilled American workers who are to be brought down to size by competition from low-skilled Third World workers; even high-skilled American workers will also find their wages undercut by competition from high-skilled, but lowly-paid, workers in other regions of the world. All American workers will feel the impact. Moreover, "computer-integrated technology" (CIT), which will need relatively little labor of any kind once it is installed, is in the process (though it is just beginning) of making obsolete the vast majority of labor, whether it be high-skilled, low-skilled, high-paid or low-paid. There is an impending crisis of distribution on the "producer" end of things. This raises the question of how all these good folks are going to become "consumers." In other words, the old "purchasing power" nemesis, which for the most part has been a socialists' hobgoblin thusfar in the history of capitalism, is becoming real, and must be addressed not only by the socialists who love to see "contradictions in capitalism" but also by the most devout supporter of a market economy.

            But Krauss and indeed the entire "global free trade" orthodoxy see none of this. Their arguments are all predicated on more and more business-as-usual, with no perceived gap between those who will continue to be able to earn income and those who increasingly will not. Krauss argues, for example, that it is a good thing that "high-cost unskilled American labor cannot compete with low-cost unskilled Mexican labor," because this simply causes the United States' economy to shift "from lower to higher skill tasks." He doesn't see that, even now, high-skill tasks are coming under competition from high-skilled people (such as designers, engineers and computer programers) all over the world, and that those people live well in their own countries on one-fourth to one-third of the pay our high-skilled workers must receive in order to count among even the "middle class" in the United States. Nor does he see, as we have said before, that tens of millions of Americans are not capable of becoming high-skilled (even if our educational system were to snap to, which is much to be wished for, but which is also often looked to unjustifiably as a panacea to solve the earnings dilemma).

            Melvyn Krauss is a fine economist and excellent writer who supports the central institution of a free society, the market economy. The time has come, however, when all such thinkers must look at the emerging realities and ask themselves how classical liberalism, as the philosophy of individual liberty, can best be served by economic theory. If tens or even hundreds of millions of people come to be displaced within a global free market, they will no doubt adopt a "throw the bums out" posture toward those who serve as apologists for that system. Both the system and the apologists will then be repudiated. Is that what the apostles of free trade theory want? Or is it time to formulate an economic theory more appropriate to a free society under the on-rushing conditions?