Economic Sophisms Revisited

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Once again, an article on matters of trade, one which merely rehearses the sound thinking of the classic liberal tradition of Say, Bastiat, Cobden, and Bright — as well as that of the Austrians, of course — and illuminates it with a few modern examples, has set off a barrage of largely polite, but nonetheless impassioned attempts at refutation.

With due respect to my correspondents, Lew himself chuckled at the replies I copied him, remarking drolly that, hard though it was to believe, it seemed there were "more Trade cranks than Monetary ones out there"!

What is indisputable is that there is something shamanistic in a border, that mere coloured line on a map which marks the need to render one’s exactions to one parasitical ruling apparatus in place of another, or to exchange one overissued paper portrait of an overlord for one bearing a different mugshot, which acts so effectively to befuddle the critical faculties of otherwise sensible men and women!

As an example, the article reignited a previous exchange with one worthy, who seems to think that selling new products — still offered in low volumes and thus at high prices — to a walled-off "high wage" populace, is the only way to ensure that technological innovation translates into material progress.

What this "infant industry" argument — the resort of all sorts of rent-seeking scoundrels and blind chauvinists throughout history — misses, among its many other failings, is that the forced inability to acquire little other than a limited range of home-produced, highly-priced goods means the supposedly "high wages" are little more than an example of "money illusion" — another instance of the all-too prevalent confusion of money with wealth which so plagues economic understanding everywhere.

Below is a sustained extract from this debate, which encapsulates many of the arguments rehearsed by those who think the Chinese are out to steal our jobs and that our ever-benevolent State should "do something" about it.

One thing you fail to mention is that in a free trade zone, all factors of production will tend to go to the same level. Just between India and China, you have about 300 M. people working for subsistence wages. Before the rest of the world can really improve its standard of living, we must first level off the wages in the free trade world. This will mean that wages will tend to go down in the developed countries while wages will rise slightly in the under developed countries. In the developed countries, the lower prices will not off set the loss of wages.

But my argument is that this last is precisely what will happen if we are to obtain an equilibrium under free market conditions.

In the US, free trade is resulting in the concentration of wealth in the top few percent of the people. In 1975, the top 1% controlled about 25% of the wealth. Today they control 45% of the total wealth and it continues to increase. If this trend towards concentration of wealth continues, we will have a situation which approaches the division of wealth last seen in the Middle Ages.

Agreed: paper money, government interventionism, and corporate cronyism (largely to the benefit of the financiers) are destroying the middle class bedrock of the free commonwealth — as has been its fate in most empires in history — but that’s hardly the fault of "free" trade, since we don’t ever practice it.

While much has been made of the growth of the US economy under the “free trade” policies of the last 30 years, in truth, it has been the worst 30-year period in our economic history. Our economy grew faster in the 30-year period that ended at the depth of the Great Depression.

"Growth" is a difficult subject to deal with in one or two lines, but it would be better to say our Casino economy — with a pawn shop next to every craps table — has, especially in the past 20 years, replaced the Machine Shop economy — which had a savings bank on every corner of Main Street – but, again, “free” markets are hardly to blame for the swelling State, the incontinent Fed, and the vulturine lawyers.

In the 70′s, the largest single employer in the US, General Motors, paid wages well above average. Today, the largest single employer in the US, Wal-Mart, pays wages, which are lower in real terms, than the minimum wage of the 70′s.

And, in the process, GM and the rest of Motown effectively destroyed themselves. Today they still struggle with the legacy of policies which padded the lot of their unionized employees right up to their final resting place, at the expense of their customers and hence their owners.

Whose fault was that — not those who promote "free trade", surely?

As for Wal-Mart, I know only that this firm is so demonized in the popular press that I am suspicious it might not be such an unmitigated evil after all!

I do know that it provides lower-income urban consumers with a range and a quality of goods at prices to which they could previously not have expected to have access.

True, Mom’n'Pop can’t now hope to earn their own basket of goods by running a well-meaning, but economically inefficient, corner store; but, then, Pop’s granddad probably hated it when Nikola Tesla and Thomas Edison made him quit the gas lighting business, too.

Perhaps you could explain to your readers how wages will not equalize in the free trade world. And don’t say that the developed world will continue to command high wages because of their higher productivity, because the productivity is just as high, if not higher, in the modern facilities in the under developed countries.

Two points: firstly, it’s very unlikely that ALL the 300 million Indians and Chinese will become as productive as we Westerners since there will not be enough of the required capital with which to furnish them (real capital — produced factors of production — is meant here, not just bank loans) for some considerable time — possibly forever, if we insist on consuming it at the rate we do! To say otherwise is to argue a Land of Milk and Honey scenario.

Conversely, why should any equalization necessarily be such a bad thing? The international division of labour would be heightened, more brainpower and more entrepreneurialism would be unleashed: if this were to occur it is hardly something which would inevitably redound to ourdetriment.

Besides, while it is true our real wages would decline relatively (unless we scramble rapidly up the added-value chain), this harnessing of such a vast and untapped resource of would-be producers — people who will, of course, also act in turn as a vast new consumer market for goods and services, both theirs and ours — could mean that there is not only no absolute decline, but, in fact, an absolute rise, in overall wealth.

If you doubt this, tell me why the immigration into the virgin territories of North America and that land’s subsequent industrialization in the 19th century was such a generalized boon, then, but why the modernization and increased freedom being granted the masses of China and India today supposedly is not?

After all, the first, while geographically separated, was a process of giving the (economically) backward poor of Europe the tools, the property and the incentives to profit by their use and so was directly analogous to what is happening — in a still all-too limited fashion — to the masses in China and India (minus the ocean passage) today.

No, sir, free trade — should it ever be allowed by envious socialists, or by self-serving economic royalists and their illiterate political stooges — would greatly advance the cause of us all.

What a shame we are more likely to end up with protectionism, resource conflicts, autarky and war instead

My next correspondent rightly bemoaned the hounding unto destruction of the honest bourgeois — always a sign of a senescent Empire — and then gave me a Buchananite bromide against free trade—supported "sweatshops".

I read your column in with much interest. But I must say that you had no words about the foreign and, I know, American “sweatshops.”

Just as Ross Perot predicted, there has been a giant swishing sound of manufacturers moving to Mexico and other foreign countries. As a result of this… these corporations have left and continue to leave an enormous gap in American jobs — the middle class is disappearing!

How can anyone expect a family to do other than to just exist on a pay check from McDonalds, Wal-Mart, etc.

How can you consider that the jobs that have been moved to other countries, with barely-subsistent wages, horrible working conditions, even children working at these places that are owned by persons or corporations that are consumed by greed, are somehow great!

The great majority of the American public are enraged. These disenchanted persons should not be taken lightly. They are capable of rebellion!

When parents of children and elderly parents continue to see their families, neighbours, and friends abused, yes abused, in this fashion, you can see the seeds of indignation and rebellion.

These feelings should not be taken lightly. There is a great anger rising out here in the heartland as “W” calls us. Somebody needs to do something for these people!

I replied as follows:

I agree the Middle Class is sadly being destroyed — but not by China!

Rather this has been brought about through the insidious moral corruption — with its associated and widespread financial distortions — which has replaced our grandparents’ thrift and hard work with today’s credit-backed, "I want it NOW", consumer society

China and Mexico would have no-one to sell to — without taking a due proportion of our exports in return — if US (and other Western citizens) were not happy to buy everything on the never-never and THEY would be unable to give into such an understandable temptation if we had honest money (thus limiting the supply of credit to what was voluntarily saved) and if we did not foster the illusion that we are "wealthier" because of the false equation of higher (monetary) stock and home prices with genuine prosperity and economic well-being.

As for "sweatshops", that is a WHOLE other issue, but, briefly, please recognise that workers can never be paid more than the marginal value of the product to which they contribute, just as surely as you cannot pay to burn more coal, or to use up more scrap iron, in making a car than it will ultimately realise in the showroom!

In the end, the real answer to the distress and disquiet to which you allude — and which I agree has very real roots — is not to increase minimum wages, to adopt protective measures, to lower interest rates, to have government spend more, or to employ any of the other harmful socialistic methods of intervention which have led them to their present pass, but rather to educate the people that their woes lie at the heart of the political, legal, monetary, and ethical degeneration into which they have been led over the past 70 years or so of paper money and oligarchy, as America has been turned from a quasi-republic to a new Rome.

To the extent my article has provoked a debate on these issues, I feel happy that I have made some minuscule contribution to that vital cause.

Yet another previous protagonist took up the cudgels once more, twitting me this time on my contentions about how the recent expansion of the EU would pan out for the more highly-paid (and, sadly, the social welfare—stupefied) Germans and their ilk.

In this, I had argued that the former customers of those Germans made redundant by their Eastern neighbours would now spend less on what was formerly made in the Heimat and so would have more free income at their disposal to devote to other things.

Since, the logic ran, the newly-hired Polish and Czech factory workers would also enjoy better wages than in the past, these two unspent sources of income would quickly provide a market opportunity for those displaced to find a new livelihood by offering different and novel goods and services to the owners of such monies.

I had thought this chain of reasoning — hardly a novel one — would be fairly uncontroversial, but I was wrong: the Yellow Peril intruded again…

Do I understand you correctly, I was asked, in that you expect the displaced factory workers in Heimat to “find a new livelihood offering different and novel goods and services?”

If so, then please explain how this would be accomplished if, instead of outsourcing to the Poles and Czechs, the outsourcing would have been to the Chinese, who, with their vast numbers of potential factory workers, will probably maintain extremely low labour costs for decades to come.

So, like Don Quixote, tilting at these windmills of the mind, I tried again:

What’s the difference whether they’re Czech or Chinese?

Might they not want German beer; German banking; German insurance; German shipping; German warehousing and distribution; German architects to design their new homes; German engineers to build them cars; German capital goods to equip their factories; German tools to maintain them; German ad-men to sell their wares; German music to listen to; German fashions to wear; German novels to read (God help them on these three!); might they not want to visit German spas in their leisure time, flying on a German airline to get there, etc., etc., etc. …

Moreover, the Chinese cannot replicate everything more cheaply and more efficiently than the Europeans and — even if they could — they would inevitably exceed less far in some things than in others.

Thus, the Germans could then offer to perform these tasks (where the new inferiority is the lesser) instead, so that the Chinese might specialize further by concentrating on what it is they exceed most at (a process long known to economists as "comparative advantage").

Nobody said this is going to be easy: but life in a free republic is not guaranteed to be easy, Sir, merely free.

Thankfully, however, opportunities for enterprise are never exhausted and a people who once rebuilt so marvellously after the devastation of WWII will surely rediscover their skills amid adversity.

Perhaps the Chinese and Czechs will even accelerate the change, assisting the Germans (and others of us) by collapsing the cloying welfare state socialism in which they and we have submerged our undoubted abilities for far too long.

Of all the mails I did receive, perhaps the least courteous — and perhaps also the one displaying the most deranged thought processes on this vexed issue — emanated from what, back in the days when there still remained a distinction between a high-class Madame and a street corner pimp, used to be called a "White Shoe" investment bank.

I’m afraid I was tempted into a show of scorn myself in reply to this gentleman, who was, sadly yet another Listian Sinophobe:

Sir,

In your attack on my article, you wrote of "a government-funded crusade against small business and labour that is being desperately fought with protectionism…".

Run this by me again?

Do you mean that one arm of government is actively trying to destroy small business and labour (which must be a real bummer at the hustings) while, at the same time, another arm of government is heroically defending the free market using protectionism?

Misesians will hardly be surprised that the failed attempt at Collectivist intervention can only call forth more such harmful meddling, but this idea of its energetic simultaneity seems to imply that the State must now find itself in an advanced state of psychosis, indeed!

I also like the idea that we can save the free market by erecting tariff barriers: a similar kind of logic perhaps to the Neo-Con faith that applying the Yankee Cavalry doctrine of the "only good Injun is a dead one" might actually work in persuading the inhabitants of Fallujah that ours really is the only path to peace and freedom.

But, hearteningly, my mail box was not all gloom and doom, nor was it exclusively a sincere, but nonetheless misguided, rehearsal of the fallacies of the Malthusians and Mercantilists.

One fine lady saw the positive gleam of gold amid the dross of populist rhetoric.

She wrote:

Can all the outsourcing that’s going on around the world right now eventually end the socialist mind-set of our governments, given that they would not dare, having the Russian example to learn from, entirely to eliminate the markets?

Can businesses so circumvent the governments that they, the governments, will eventually have to leave them alone or suffer the consequences of being thrown out of office?

I wrote back:

That IS a cheery thought! But America’s own rhetoric on this (to be followed by action after November?) does not bode well for it to come about.

Unfortunately, it does also rather beg the question of the whole problem of "corporate welfare" (if we are being euphemistic) — or "economic fascism" (if we are not and we adopt the plain words of Ron Paul) — whereby many of these established companies only thrive thanks to their complex symbiosis with the armed State, needing its reciprocated assistance to help them go about their business with as little genuine competition from other, newer, entrepreneurs as possible.

However, it is undeniable that the more dispersed the means of production are, the less control any one polity can exert.

If socialism leads to autarky leads to war, then perhaps outsourcing leads to mutual interdependence leads to international amity.

For that reason alone, we should seek to embrace it, not succumb to the weasel words of the threatened interest groups who would have us eschew it.

That might be as good a place as any to let the matter rest for now. After all, my inbox is cluttered enough as it is and it was so hard to scrub off all that green ink the last time…

Sean Corrigan [send him mail] writes from London.

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