Does Free Trade Really Work?

January 22, 2012 By 12 Comments

Ian Fletcher argues “no”:

I am not an economist and never claim any expertise on economic questions whatsoever. I occasionally post interesting theses about economics for your insights, not as a knowledgeable endorsement of any kind. In the case of this video, I was inspired to post it when I saw National Review conservative John Derbyshire give this endorsement of Fletcher’s book Free Trade Doesn’t Work: What Should Replace It and Why:

For sure nearly all economic theoreticians favor absolute free trade: 93 percent, according to Ian Fletcher. His book persuades me they are wrong. Check it out.

Your Thoughts?

Filed Under: Politics, Politics Tagged With: , , 12 Comments
  • http://quoded.wordpress.com quoded

    Most economists tend to just have a blindspot regarding “free” anything. Look at free markets — in order for the free market to work well, economists need equilibrium theory to work, which means that the vast vast majority of them ignore the Sonnenschein-Mantel-Debreu theorem, which proved that a demand curve for a market can have any polynomial shape at all. But we need a smoothly-sloping demand curve for equilibrium to work, which we need for the free market to be ideal…..so [most] economists still use these false models.

    • ‘Tis Himself, OM.

      The Sonnenschein-Mantel-Debreu or SMD Theorem (aka “Anything Goes”) refers to research by neoclassical economists on whether the so-called Law of Demand can be proven for an individual’s demand curve and if it applies to a market demand curve.

      The Law of Demand is the proposition that if a commodity’s price falls the demand for it will rise. That sounds like a reasonable statement at first glance–and it is often be true in the real world. But it’s an article of faith for neoclassical economists that this is always true.

      Ironically, neoclassical economists proved that this is in general not true. Even when you are working with individuals who all individually have what economists call “well behaved” preferences, and for whom individual demand curves can be derived that obey the Law of Demand, the market demand derived by summing these individual demands can have any shape at all.

      If neoclassical economists took this neoclassical result seriously, then they would not draw “downward sloping market demand curves” in microeconomics–-they would instead draw squiggly lines-–and they wouldn’t use equilibrium supply and demand analysis. But not only do they do that, they also model the entire economy as a single individual in what they call “Dynamic Stochastic General Equilibrium” models.

      These absurd models were what led to many neoclassical economists believing that the economy was in great shape, just before it collapsed into the Great Recession.

    • http://quoded.wordpress.com quoded

      Exactly.

      [Note: I wasn't saying they had anything to do with free trade -- nor, in fact, agreeing with the economist in the video (I don't honestly know enough about international trade history or economics) -- just remarking that among some economists there is an ideological attachment to unregulated anything, so much so that they are willing to ignore their own results.]

  • ‘Tis Himself, OM.

    The US standard of living is just too high compared to many other countries. With globalization, some of the differential will disappear. Is this bad? We’re all human beings trying to make a living on this planet. Sure a new form of managed trade will temporarily protect some US jobs. This is the traditional protectionist argument, but most politicians and certain economists always fail to see second order effects. Other countries will engage in their own managed trade. History shows us that this tit-for-tat generally makes everyone a loser. A sharp improvement of the US trade balance will definitely increase US interest rates substantially.

    One problem with protectionism is who controls it. Hand the protectionism tool to politicians and you will not necessarily get smart protectionism but you will get ugly protectionism. During the Great Depression the Smoot-Hawley Tariff was installed to supposedly protect American companies. This charged a high tax for imports thereby leading to less trade between the US and foreign countries along with economic retaliation.

    • minxatlarge

      I had hoped that a meaty economics thread would focus attention on whether we are in a trade war, what the consequences of a trade war might be and what courses of action might be appropriate.

      Are we in a trade war? It’s felt to me that way since the OPEC embargo. Maybe I’ve felt this way even longer than that; my father worked at the Defense Logistics Agency and served in Saudi Arabia in the 60′s, so I’ve heard a particular view about trade and allies. I admit that I might be biased.

      Would globalization produce a more equitable distribution of resources (even if that means a lower standard of living for US citizens)? Fletcher doesn’t seem to address globalization at all, but contrasts ‘Free Market Ideology’ and ‘State Capitalism’. Are you saying that State Capitalism, as practiced by the Chinese (buying US debt, currency manipulation and using corporate stooges to undermine our democracy) will reduce the global differential in standards of living? I hope that was not the conclusion you expected us to draw. I suspect that the situation described by Fletcher will, rather than produce an equitable distribution of resources, leave the plutocrats running the show and that the only way the rest of us would get a break is if our benevolent overlords decided that a healthy, educated and orderly (generally happy enough with bread and circuses) workforce was in their best interests.

      Does anyone agree with Fletcher that other nations are playing a long economic game against the US? If he makes his case, what do you think may be an effective response?

  • ‘Tis Himself, OM.

    Daniel,

    Thank you for providing a thread I can sink my teeth into.

    Quite frankly, your buddy Nietzsche is so confusing and dense he bores me to tears. I understand you think he’s the greatest thing since unsliced bread, but he literally says nothing to me. But as a professional economist I’m more than willing to discuss The Dismal Science™.

    • http://freethoughtblogs.com/camelswithhammers Daniel Fincke

      hahaha, your feelings about Nietzsche are mine about economics. And it’s puzzling to me how our feelings can be so backwards. I always hope my own blogging about Nietzsche makes him less dense and less confusing for readers. I hope to do more of it soon, let me know if it fails to make things clearer.

  • http://www.russellturpin.com/ rturpin

    If a uniform import tax would be better for the nations of the world, why wouldn’t it also be better for the states of this nation? That parallel breaks down in a couple of regards, of course. People are not as free to move and work across national boundaries as state ones.

    But trade policy is one of many issues raised by boundaries. As a particularly hard example, island economies are infamously difficult in the modern world. I doubt any trade policy will help that. The problem is that the people trapped on island economies really are trapped. What they need is the freedom to move about and work elsewhere, not a different trade policy.

  • http://anythingbuttheist.blogspot.com Bret

    Free trade is economic slavery and environmental rape unless protections are applied to production in other countries.

    All we’ve done is move worker exploitation and pollution to other nations while putting our own workers out of work.

  • drlake

    The idea that 93% of economists favor absolute free trade is, excuse my language, horseshit. Radical free market ideas are a fringe philosophy within the economics profession, held only by those of libertarian bent. Thankfully, most economists understand that there is no such thing as an absolutely free market, and that there cannot be any such thing in human society.

  • laurentweppe

    About Laissez-faire
    The laissez-faire is not only on the american side: The EU has an horrendous record when it comes to laissez-faire (althought, as an enfranchised european citizen, I know that it’s still way better to have the EU than to have Europe divided into two dozens tiny irrelevant principalities). But then again, the european situation is different from the US situation: when what would become the European Union was founded in Paris in 1951, the long term goal was already to build an European Republic: laissez-faire was merely the way to drive a wedge between the corporate elite and the nationalistic groups: Now I need to do a little political history about my continent:
    *
    During the XIXth and early XXth century, a fraction of the upper-class allied itself with the far-right to battle a common foe called socialism. After WWII, social-democracy became one of the dominant political force in Western Europe and its two priorities were to start building a politically unified continent and making sure that fascists never came back to power. To reach these priorities, they needed to break down the upper-class/nationalist alliance, but they lacked their communist counterparts lust for righteous bloodshed, so they made a deal with the corporate elite: either they renounced a good chunk of their gilded age privileges, supported the European Construction, and dropped their alliance with the far-right in exchange of which the social-democrats would drop any alliance with the communists and allow many pro-laissez-faire policies, or they kept their alliance with the far-right, in which case they would face an alliance of communists, socialists, and liberals united by their anti-fascism. Now, things were slightly more complicated and the deal was never openly stated as such, but it’s pretty much the idea behind the modus vivendi which ruled in Europe from the end of WWII to the Tatcher-Reagan counter-revolution: in our case, laissez-faire was not an anti-communist tactic, but an anti-fascist one.
    ***
    About State Capitalism
    Fletcher cite Columbus as the beginning of State Capitalism, but frankly, America’s economy during Spain dominance was one of plunder: take as much riches you can from the New World, then uses them to buy dominance over Western Europe.
    *
    The best exemple of pre-industrial State Capitalism is France’s Colbertism. It has a very bad rep in Europe, because Colbert was Louis XIV’s minister and when Louis XIV died, France was pretty much ruined and starving. Part of it came from policy choices made by Louis and not Colbert (too much money went into Vauban’s forts, into roads meant for the fast transit of troops that virtually no one travelled, into Versaille -10% of the state budget taken by the day to day activities of the court-, etc…) but Colbertism was a diplomatic disaster and did hurt the long term economic prospects of France. So one can’t say that State Capitalism, at least in its purest form, was the norm in the Western Hemisphere: when it was tried, it failed to deliver on the long term.
    ***
    About China
    One thing rarely said about China’s brand of Communism is that it is genuinly popular among the upper-class. I know it’s fashionable in the US to say that China is buying off Congress, but the depressing fact is that, for the most part, China does not need to do much lobbying: China’s political system is as its core a platonician aristocratic system: the ruling class has proclaimed itself to be the intellectual elite needed to guide the Republic, and -officially- it reproduces itself by co-optation: the “Wise” members of the ruling class selecting the “best and brightest” of the younger generation as their heirs, while in its practice it’s a corrupt dominion of the corporate shills. It’s a system which will please both the most arrogant (because it flatter their hypertrophied ego) and the most cynical and corrupt (because they see it as a haven of impunity) members of the upper-class.
    ***
    About Free Market
    Fletcher is wrong: the problem does not come from Free Market, but from deregulation. Now, one of the Big Lies of right-wing politicians has been to claim that Free Market and Unfettered Capitalism were the same thing. The goal was to make people think “Free Market is Good, ergo Deregulation is Good”.
    *
    Except Free Market can function properly only as far as the rules are the same to everyone (La liberté des uns s’arrête là où commence celle des autres applies also to economics). The reason the über-capitalistic right defended deregulations in the first place was because they hoped that once facing competition from places where wage slavery was the rule, the american and western european public would either submit themselves to the ways of the gilded age or react by voting for far-right demagogues who would then dismantle democracy, give guns and uniforms to the thugs on their payroll and use their newfound firepower to force the people to submit to the ways of the gilded age: the same thing is happening in Europe: the anti-fascist modus vivendi is gone and we see once again a fraction of the upper-class allying itself with the far-right because they hope that a fascist dictatorship will allow them to have their cake and eat it.

  • lordshipmayhem

    For a wonderful example of free trade functioning as intended, I need go no farther than the last bottle of wine I quaffed, a delicious gamay noir, a Henry of Pelham VQA.

    Back around a quarter-century ago, Canadian wineries were protected from any foreign competition – the markup on non-Canadian wine was incredibly steep, and the foreign wine got roughly the same shelf space as its Canadian counterparts (and wine from other provinces were all but unobtainable, at least to Ontario consumers).

    The results were entirely, tiredly predictable. With no incentive to use more expensive but better-quality grapes, the Canadian wine producers stuck to the native North American Concord grape. Now this variety makes for tasty jams, jellies, juice and preserves, the wine produced from it is quite bad, or “plonk”.

    And then came the Canada-U.S. Free Trade Agreement…

    The Canadian wine producers realized quite quickly as negotiations that (1) they’d lose their protection, (2) the Americans produced much finer wines, using European varietals, and (3) the American wines would mop the floor with their Canadian competition’s products.

    Their response was to form the Vintners’ Quality Alliance. Wines that bear the VQA logo would have to come from either a single (named) varietal, or a blend of varietals (also named, no Concord grapes), and all grown on a particular patch of ground. The year produced would also be loud and proud on the label. The idea was to re-create the French Appellation d’origine contrôlée and its equivalents around the world.

    All over Canada, the vintners did exactly that: they ripped out their Concord grapes, leaving just the roots behind, and grafted European varietals on. They worked very hard in the fields and in the marketing, and now today you can get decent bottles of wine that in blind taste testing match or beat their French and Italian counterparts. And the price per bottle is not that far removed from the undrinkable battery acid being produced from those same fields three decades ago.

    And I can feel all righteous serving a good bottle of wine for dinner, as instead of an overpriced vin ordinare shipped from Europe. I’m buying local, as the Greens are recommending, with all the reduction of greenhouse gas production.

    Free trade works not when you simply dump your regulations willy-nilly, but when the regulations are there to protect consumers and not to protect producers, to encourage competition in the market and not build a wall around it. A handful of us are producers; all of us are consumers, even those who only see themselves as producers. And that is why I raise a glass of wine to that sort of free trade.