[This review was published in the Summer 2012 issue of The Journal of Social, Political and Economic Studies, pp. 249-257.]

 

Book Review

 

Free Trade Doesn’t Work: What Should Replace It and Why

Ian Fletcher

Coalition for a Prosperous America, 2011 edition

 

          The old labels that squared “Free Trade” off against “Protectionism” hardly seem adequate in today’s context, since old habits of thought about them will incline us toward a far too quick and simple prejudgment of an issue of great intricacy and importance.  As everyone knows, developments in transportation and communication have in recent decades brought into existence the tornadic winds of global competition, exposing nations, firms and workers to rapid displacement by low-cost producers and workers from parts of the world that used to be effectively quite distant.  To those who look only to “economic efficiency,” this is praised as “creative destruction”; but those who focus on a desire of particular peoples or localities to retain or develop industries that will not be nullified by the distant competition will seek ways to prevent their being blown away.  According to nineteenth-century economist David Ricardo’s law of “comparative advantage,” all economic actors are assured “something to do,” but that something may be very different from the aspirations or the long-term capabilities of a given people.

          Ian Fletcher’s Free Trade Doesn’t Work is among the very best books on the subject.  Although the candor of its title, which indicates a clear dissent from the prevailing faith in global markets, may turn many people away, the book is one that everyone, from whatever point of view, will profit from reading.  (We say this on the premise that serious readers realize the intellectual insufficiency of reading only what they already believe.) While immensely informative about economic history, the book’s main strength is in its straight-forward, in-depth discussion of the vitally important conceptual and policy issues that underlie the subject.

          It has become commonplace among those who see the flaws in the Ricardian analysis to praise the brilliance of Ralph Gomory and William Baumol’s Global Trade and Conflicting National Interests (2000).   Fletcher joins in this, his rationale being that “finally, someone has found a way to translate this eminently practical wisdom [of the anti-free trade position] into the abstruse mathematics economists are prepared to consider ‘serious’ economics.”  While we can see from this that the Gomory-Baumol contribution is indeed meaningful, it is a distinct advantage of the Fletcher book, so far as most readers will be concerned, that it eschews the “abstruse mathematics” and confines itself to a serious, albeit eminently readable, discussion in ordinary language. 

          Educated at Columbia and the University of Chicago, Fletcher was a research fellow at the United States Business & Industry Council before becoming senior economist at the Coalition for a Prosperous America.  The book’s first edition, in 2010, was published by the Council, and the revised second edition by the Coalition.

          As one would expect, there is considerable information in Free Trade Doesn’t Work about the United States’ slipping economic condition, which has been marked by a hollowing-out of American industry that began as long ago as the 1960s.  He talks about the loss of what was once a pronounced lead in high technology; about the shift to financialization; about the loss of U.S. jobs, including those in engineering and architecture; and about the deindustrialization.  When he asks “why are we doing this to ourselves?,” he says that there is some free-trade fanaticism, but that the main factor is simply the near-universal naïve belief that economists must be right in their adherence to the Ricardian faith.  This is augmented, he says, by U.S. businesses’ hewing closely to their individual interests, by the political clout of defense contractors, and by such venalities as that “fully half the American trade diplomats who left government service went to work for foreign nations.”  President Obama, he recounts, has played both sides of the free trade/protectionist issue according to what has been politically advantageous from time to time, but since his election has mainly acted according to free trade orthodoxy (such as by not renegotiating NAFTA as he had once stoutly affirmed that he would in a primary election-season debate with Hillary Clinton).   Fundamentally, Obama “appears to know nothing about trade beyond the received Ricardian wisdom.”

          We won’t rehearse Fletcher’s discussion of U.S. slippage or of the neomercantilist measures that many nations use to protect and stimulate their own industries.  Those important subjects receive widespread attention elsewhere.  What is more unique to the book is Fletcher’s analysis of eight (actually, nine) “dubious assumptions” made by the Ricardian comparative advantage/free trade theory.  This discussion goes directly to the heart of the intellectual edifice that so much commands obeisance today despite the disastrous effects of the policy.  The power of ideology is so strong in the contemporary world, and most especially among Americans despite their presumed pragmatism, that the most important single factor in changing policy is to change the prevailing mental fixations.

          The assumptions that Fletcher criticizes are mostly features of the “comparative advantage” concept as an economic model, which, as all such models are, is hedged by all sorts of limiting conditionality.  To those not familiar with the intricacies of that model, those conditions are bound to seem technical.  What Fletcher’s criticisms do is to show that the model’s assumptions differ significantly from the world as it is.  One is that “trade is sustainable,” to which Fletcher responds that resources for a given activity may run out.  Another is that “there are no externalities” (i.e., factors that flow from economic activity but that aren’t added into or subtracted from the price);  Fletcher points out that there are many, such as environmental damage, and that free trade encourages a society’s skimping on them.  A third is that factors of production internal to a country are readily mobile, facilitating the movement of economic activity to what best serves comparative advantage.  This suffers, according to Fletcher, from the relative immobility of people and buildings, the difficulty in relocating workers, and the cost of writing off past investments.  On the other hand, the theory posits that capital isn’t mobile across borders (Ricardo even wrote that an international mobility of capital “would undo his theory”).  With trillions of dollars flowing in global finance in today’s world, this crucial element is clearly not met.  Another assumption is that trade doesn’t increase income inequality, another premise that runs counter to so much present-day experience.  Others that Fletcher rebuts are that trade does not induce adverse productivity growth abroad, and that “there are no scale economies” (the fact that there are major such economies is, in fact, what Gomory and Baumol base their mathematical refutation on).

          When Fletcher recites the theory’s assumption that “short-term efficiency causes long-term growth,” this is an oddly obscure statement of what is perhaps Ricardo’s key assumption – and greatest weakness.  The point needs to be understood, as Ricardo’s theory does not, that what a society does well today is not necessarily a sound basis for concluding that that fixes the “comparative advantage” for all time.  Ricardian analysis is a static snapshot of comparative efficiencies at a particular point in time, and takes no account of the dynamic process of change.  What countries are best at can and will change, and countries can do much to bring that change about.  In part, the change can come from learning to do entirely new things.  Fletcher points out that “it is better to have comparative advantage in some industries than in others,“ since “free trade does not automatically assign nations good industries.”  This reviewer made essentially the same point in his article “A Critique of Free Trade Theory” in this Journal’s  Winter 1998 issue when he wrote that “the dynamic view of comparative advantage – that competitive standing changes over time if some of those who are not the cheapest producer retain their capacity to compete – is a much more sophisticated view of the market than the static view.”[1]

          This relates to what we might consider an eighth “dubious assumption,” which Fletcher discusses but doesn’t include in his list per se.  It is the unrealistic assumption that a people will be content to be existentially defined (i.e., to do and to be) whatever economic efficiency says they should do.  But we can readily see that this subordination of a society’s identity to “economic efficiency” runs counter to a great many values, including many that are non-economic, that a people may cherish.   Eighteenth and nineteenth century Americans, for example, weren’t content simply to be suppliers of resources and agricultural products to the British industrial economy; as Americans look back today, they are glad they adopted policies breaking out of so narrow a channel.  This is a point of vast significance, since it relates to a people’s entire way of life and self-image.

          An arguable weakness in Fletcher’s discussion is his failure to question the idea of “efficiency,” which has become the holy grail of economic thinking.  It is true that a dynamic, rather than static, view of comparative advantage is intended best to serve the desire for productivity and innovation (hence, efficiency).  But the additional point, that there are other values than efficiency for a society to consider important, unmasks the utterly deficient reductionism that comes with putting all our eggs in the “efficiency” basket.  It should be pointed out that the exclusive valuing of efficiency stems from the concept of “an optimal allocation of resources,” which is really the linchpin of the tightly-packed ideology of free market fundamentalism.  This reviewer has explained in the article mentioned above just why it is that the “optimum allocation” idea is a fallacy.  Ironically, while the concept of  “optimum allocation” is central to the thinking of the Austrian School of Economics and was strongly articulated by Ludwig von Mises, one of the School’s leading thinkers, it violates one of Mises’ own most important insights.[2]

          Fletcher’s critique of the assumptions underlying Ricardian theory is augmented by an enlightening discussion, at assorted places in the book, of the many “sophistries” that are used on behalf of free trade theory.  Here is his critique of some of them:

          1.  “It is sometimes claimed that our trade deficit is really a savings problem in disguise.”  Fletcher says that “this implies that trade policy is irrelevant… [and] this analysis depends upon misunderstanding the arithmetic relationship between trade deficits and savings rates as a causal relationship” (his emphasis).

          2.  “It has been repeatedly suggested that the U.S. is on the verge of an export boom that will erase our trade deficit.”  To this, he observes that because of the U.S. “import-driven deindustrialization… we no longer have the productive capacity to balance our trade by exporting more goods.”        

          3.  “A myth that has been promoted for decades to justify American trade concessions to [China]…” is that free trade will democratize China.  Fletcher notes that although the commercial advantages have made a good many Chinese rich, the effect has been that “this authoritarianism now has a huge constituency outside government itself.”

          4.  “Free traders since 19th-century classical liberals like the English Richard Cobden and the French Frederic Bastiat have promised that free trade would bring world peace.”  Fletcher says this “does not survive historical scrutiny,” observing that “Britain, the most freely trading major nation of the 19th century, fought more wars than any other power.”

          5.  “The common plaint that ‘all we want is a level playing field’ is just another way of asking for fair trade.”  This, he says, requires “that nations have the same domestic economic policies.”  The trouble is that “a true level playing field would require America to supervise the domestic policies of foreign nations, which is not feasible” (especially since “there are literally thousands of places in an economy where export subsidies can be hidden”).

          6.  “Another popular half-truth, especially on the left, is that free trade guts government by destroying its ability to tax.”  This is refuted by “the hard fact that over the 1965-2006 period of increasingly free trade, government revenue has simply not fallen in any of the advanced economies.”

          7.  “The ‘notorious’ Smoot-Hawley tariff of 1930 is sometimes blamed for all or part of the Great Depression.”  There are several parts to Fletcher’s response to this: that the argument is “implausible, given that the Depression was already taking hold”; that “it was proved by economist Milton Friedman (at least to the satisfaction of the Nobel Prize committee) that the Depression’s cause was monetary”; and that the tariff did not cause the Depression to spread worldwide, because it was in fact too limited to have that effect (“it only applied to about one-third of America’s trade… [and] our average duty… went from 44.6 to 53.2 percent – hardly a radical change”).     

          8.  “Neither does the myth of a death spiral of retaliation by foreign nations hold water.”  The U.S. State Department reported in 1931 that “with the exception of discriminations in France, the extent of discrimination against American commerce is very slight.”

          9.  It is argued that free trade has reduced global poverty.  Fletcher says in rebuttal that “the World Bank standard for poverty is $2 a day, so ‘moving a million people out of poverty’ can merely consist in moving a million people from incomes of $1.99 a day to $2.01 a day.”  He paraphrases a World Bank report, saying that “the entire net global decline in the number of people living in poverty since 1981 has been in mercantilist China, where free trade is spurned.  Elsewhere, their numbers have grown.”

          10.  Fletcher discusses in detail the assertion that NAFTA and other free trade agreements have been beneficial to the participating nations.  He says that 90 percent of the agreements pertain to other things than free trade, foremost among them being protections of foreign investors from expropriation.  There are, he says, 3,000 American-owned factories comprising “the maquiladora plants along the U.S. border,” and these “employ over a million workers.”  But even though they have the most advanced production technology, these plants “have spawned no industrial revolution” in Mexico.  The agreements, containing a number of secret provisions and sped through the American Congress through a “fast track” method that permits no amendments and only limited debate, are “profoundly antidemocratic,” according to Fletcher.

          There’s no magic in stopping the enumeration at a rounded ten, but we will leave it to readers to glean others from the text.  This review is, of course, no substitute for studying the book itself

          Before we conclude, we should note that a critique, however meritorious, of “free trade versus protection” is by no means a complete discussion of what needs to be considered to meet the economic and social needs of a country like the United States in today’s world.  As Fletcher recommends, the protection of high-tech, high-value products will be essential to the reindustrialization of such a hollowed-out economy as that of the United States.  But the displacement of workers and stagnation of middle class incomes won’t be overcome, in either the medium or long terms, by shielding such an economy from low-cost foreign labor.  The reason is that the radical advance of non-labor-intensive technology continues, and will shift the return of economic activity ever more toward capital and away from remunerated employment.  Massive immigration at both the low-wage and high-tech levels will also continue, unless abated, to undercut jobs and wages for the bulk of the population.  The question will be how to establish the basis for a dynamic, free productive system, on the one hand, and an essential distribution of the wealth created by it to the general population, on the other.  This is why this reviewer has proposed “a shared market economy,” which he explains elsewhere.[3]  Further, what is now known as the Great Recession has demonstrated the continuing need of a capitalistic economic system for a monetary/banking system appropriate to its health and stability.  The lack of such a system has long posed an existential threat to a market economy.  These are all difficult matters that deserve, but don’t seem thus far to be receiving, a radical rethinking.  To read this reviewer’s thoughts on the subject of monetary reform, see his article “Capitalism’s Deepening Crisis: The Imperative of Monetary Reconstruction” in the Fall 2011 issue of this Journal.[4]

          What is essential is that all of these things be considered, with input from many sources.  Fletcher’s book is an ideal place to start.

 

                    Dwight D. Murphey



[1]   This article can be found at www.dwightmurphey-collectedwritings.info as Article 77 (i.e.,  A77).

[2]   For a complete discussion of why the “optimum allocation” argument is fallacious, see  Dwight D. Murphey, “Lead Article and Surrebuttal on ‘Does a Market Economy Optimize the Allocation of Resources,’” in the Journal of Markets & Morality, Vol. 2 (Fall 1999), pp. 271-8 and 290-6.   It may be found, also, at www.dwightmurphey-collectedwritings.info as Article 82 (i.e.,  A82).

[3]   See Dwight D. Murphey, A “Shared Market Economy,” book published in 2009 to his website (see footnotes 1 and 2 for the URL) as Book 12 (i.e.,  B12).  For a brief statement of the proposal, see his article “A ‘Classical Liberal’ Rethinks the Market Economy,” Fall 2009 issue of The Journal of Social, Political and Economic Studies.  The article  may be found on the website as Article 100 (i.e.,  A100).     

[4]   This article may also be found on his website as Article 105 (i.e.,  A105).