Why Do We Have to Argue the Case for Free Trade?

I gave the following presentation at a fringe event during the Conservative conference in Birmingham.

Human Co-operation and the Universal Division of Labour

Adam Smith showed us, and it is not disputed internally within the nation, that specialisation in tasks has led to the explosion of the population and material prosperity.  One person the farmer, one the hunter, one the gatherer, one the home maker, etc., with the specialisation always geared to who is best at doing the task.

This is accepted by all rational people.

Ricardo showed us that what applies to the individuals in the nation should also apply to the free trade between the nations of the world.  It is always advantageous for each nation to concentrate all its efforts to produce things it is best at, even if it could produce some other lesser goods better than the next best producer.

So why does this idea meet such resistance? Why do we allow crony capitalists and other vested interests to get a privileged, protected position — such as the European Union farmers when they argue for the Common Agriculture Policy (CAP) — that allows them to push up the prices of their goods and services at the expense of you and me, the consumer?

The Irrefutable Case for Free Trade

David Beckham is a super star football player, who also learned the skills of his father the gas fitter.

His father, Beckham senior is a gas fitter who wanted to be a superstar football player

Let’s say that David can hire a gas fitter for £20 per hour. With a little practice, he could be twice as efficient as his father. We will imagine that he could market his own gas fitting services for £40 per hour.

By playing football, we will suppose that Beckham  can earn £10,000 per hour. Meanwhile, his father the gas fitter couldn’t make more than £1 an hour playing football.

Beckham Jnr has a 2-to-1 advantage as a gas fitter, but a 10,000-to-1 advantage football star.

If he divides his time equally between gas fitting his own house and playing football, his total output for the week can be valued at:

10 hours gas fitting  x £40 per hour = £400

10 hours football x £10,000 per hour = £100,000

Total output: £100,400

If David’s father divides his time the same way we could value his production as follows:

10 hours gas fitting  x £20 per hour = £200

10 hours football x £1 per hour = £10

Total output: £210

Between them, David and father have produced £100,610 worth of output.

The Law of Association (Mises) or the Law of Comparative Advantage (Ricardo)

Now let’s examine the situation if, as we expect, David hires his father. David’s production can now be valued at:

20 hours football x £10,000 per hour = £200,000

Total output: £200,000

And his father’s at:

20 hours gas fitting x £20 per hour = £400

Total output: £400

Their total output has risen to £200,400.

The Greatest Protectionist Block in European History: The European Union

With this case proven, our politicians should use the irrefutable law of association to call for the dismantling of fortress Europe as it price gouges its hapless taxpayers.

The Taxpayers Alliance report “Food for Thought” by Dr Lee Rotherham shows us that the EU protectionist food policies costs the UK £10.3 bn per year or £400 of net disposable income per household.

CAP is one aspect of the protectionism sponsored by the EU depriving us of a higher living standard; the real cost of all their interventions is many thousands of pounds per year for the EU taxpayer.

Cobden and Peel

For those interested in free trade, one of Cobden’s finest orations was delivered in the House of Commons on March 13, 1845, and described by John Morley as “probably the most powerful speech he ever made:

Men on the Tory benches whispered to one another, “Peel must answer this.” But Peel crushed in his hand the notes he had made and remarked, “Those may answer him who can.”

The Corn Laws were abolished by persuasive, clear, rational and logical argument. I hope some of the politicians here today will be able to do the same with the protectionist EU, and have that abolished.

4 Comments

  • Lord Keynes says:

    You say:

    Ricardo showed us that what applies to the individuals in the nation should also apply to the free trade between the nations of the world.

    Unfortunately, only when certain conditions apply would comparative advantage work.

    Comparative advantage requires 2 conditions to work properly:

    (1) The domestic capital and labor in one country will gravitate to the sector/sectors where its comparative advantage lies.

    (2) The country’s capital and labor are not internationally mobile to significant degree.

    But today it is the case that capital is very mobile so that (1) is not necessarily true. Once capital becomes extremely mobile internationally, you don’t have comparative advantage, you have “absolute advantage”. It is not at all clear that free trade under “absolute advantage” is beneficial. In Ricardo’s day, internationally mobile capital was not that significant. Ricardo himself noted the

    “difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country” (Ricardo, On the Principles of Political Economy and Taxation, 7.18).

    Once capital moves overseas you don’t have comparative advantage, you have absolute advantage. See also Roy J. Ruffin, History of Political Economy 34.4 (2002): 727-48.

    Paul Craig Roberts shows precisely how comparative advantage does not work when the necessary conditions are not met:

    http://mises.org/daily/1420

  • Current says:

    “Lord Keynes”,

    I think it’s interesting what Mises had to say about this. The quote below is from Mises book “Nation, State and Economy”, which is from 1919!

    “People had no illusions about the fact that the reasons for emigration were of compelling economic nature and that the emigration as such could not be impeded. Only a poet like Freiligrath could ask the emigrants:

    Oh sprecht! warum zogt ihr von dannen?
    Das Neckartal hat Wein und Korn.
    [Oh speak! Why are you moving away?
    The Neckar Valley has wine and grain.]

    The statesman and the economist well knew that there were more wine and more grain overseas than at home.

    As late as the beginning of the nineteenth century people could scarcely suspect the significance of this problem. Ricardo’s theory of foreign trade still started with the assumption that the free mobility of capital and labor exists only within the boundaries of a country. In the home country all local differences in the profit rate and the wage rate are evened out by movements of capital and workers. Not so for differences between several countries. Lacking there was that free mobility which would ultimately be bound to cause capital and labor to flow from the country offering less favorable conditions of production to the country of more favorable conditions. A range of emotional factors (“which I should be sorry to see weakened,” the patriot and politician Ricardo interjects here into the exposition of the theorist) resists that. Capital and workers remain in the country, even though they thereby suffer a loss of income, and turn to those branches of production having, while not absolutely, still relatively more favorable conditions.[34] The basis of the free-trade theory is thus the fact that noneconomic reasons keep capital and labor from moving across national boundaries, even if this seems advantageous for economic motives. This may have been true on the whole in the days of Ricardo, but for a long time it has no longer been true.

    But if the basic assumption of Ricardo’s doctrine of the effects of free trade falls, then this doctrine must also fall along with it. There is no basis for seeking a fundamental difference between the effects of freedom in domestic trade and in foreign trade. If the mobility of capital and labor internally differs only in degree from their mobility between countries, then economic theory can also make no fundamental distinction between the two. Rather, it must necessarily reach the conclusion that the tendency inheres in free trade to draw labor forces and capital to the locations of the most favorable natural conditions of production without regard to political and national boundaries. In the last analysis, therefore, unrestricted free trade must lead to a change in the conditions of settlement on the entire surface of the earth; from the countries with less favorable conditions of production capital and labor flow to the countries with more favorable conditions of production.

    The free-trade theory modified in this way, just like the doctrine of Ricardo, also reaches the conclusion that from the purely economic point of view nothing speaks against free trade and everything against protectionism. But since it leads to quite different results regarding the effect of free trade on locational shifts of capital and labor, it presents a quite changed point of departure for testing the extraeconomic reasons for and against the protective system.

    If one sticks with the Ricardian assumption that capital and labor are not impelled to move abroad even by more favorable conditions of production, then it turns out that the same applications of capital and labor lead to different results in the individual countries. There are richer and poorer nations. Trade-policy interventions can change nothing about that. They cannot make the poorer nations richer. The protectionism of the richer nations, however, appears completely senseless. If one drops that Ricardian assumption, then one sees a tendency prevail over the entire earth toward equalization of the rate of return on capital and of the wage of labor. Then, finally, there no longer are poorer and richer nations but only more densely and less densely settled and cultivated countries.

    There can be no doubt that, even then, Ricardo and his school would have advocated nothing other than the policy of free trade, since they could not have avoided recognizing that protective tariffs are not the way out of these difficulties.”

  • Lord Keynes says:

    Mises was wrong in thinking that “interventions” violating free trade do nothing for economic development.
    Careful examination of economic history shows that infant industry protectionism works:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/industrial-policy-brief-comment.html

    The theoretical work on why it works has proceeded nicely in my view:

    Antonio Tena, “Tariff Structure and Institutions in the Late 19th Century. New Perspectives on the Tariff Growth Paradox,” Paper presented to the Seventh Conference of the European Historical Economics Society Lund, 29 June – 1 July 2007
    http://www.ekh.lu.se/ehes/paper/Antonio%20Tena%202%202%20(EHS%20Lund)%20(2).pdf

    Like a lot of Mises’ arguments I fear that something has gone badly wrong in his a priori reasoning.

    When you believe that empirical evidence cannot falsify or verify your inferences (as Mises, Human Action, p. 32 does), even though you use unverified synthetic propositions as premises in your deductive arguments, it is usually a recipe for disaster.

  • Current says:

    “Lord Keynes”,

    I had a little read of your website. You make a much better attempt to argue against free trade than most I have read.

    As I understand it your argument is that empirically infant-industry protection tariffs have aided growth. Proving this using statistics is extremely difficult. When country X is successful and Y is not then how can it be shown that that is down to protective tariffs? How can other differences between the two countries be completely ruled out? It could be an unobservable difference or a difference that can only be expressed subjectively that is most relevant. I’ve been to South Korea many times and in my opinion the reason for it’s success is down to culture not tariffs, but how could we prove one or the other? How can we know that those supporting tariffs have not “data mined” the results and picked out a high proportion of successful cases?

    However, I think the argument that you and Tena make about positive externalities is essentially correct. But, it doesn’t relate directly to tariffs. If something (an industry or anything) has positive externalities then Pigouvian logic implies that it should be subsidised. That subsidy should be set to such a point that the activity is not over-subsidised and the point at which returns diminish compared to general economic activity is not overshot. This has nothing per se to do with trade. Exports don’t necessarily have positive externalities and imports don’t necessarily have negative externalities. If high-tech industries have positive externalities then they have them even if they don’t export and they have them even if the world is one huge state. If they are to be subsidised it would be better to do so by a broad based tax than by one that impacts specific groups.

    All that doesn’t mean that a government can choose to subsidise various industries and expect higher growth due to positive externalities. The government must identify those positive externalities in prospect rather than retrospect. That they can be identified a century after they occurred doesn’t mean they can be so clearly identified at the time. Also, to make it a practical policy it must be immune to rent-seeking by politicians, bureaucrats and those who benefit in the private sector. That means that the public must understand which industries are to be subsidised and why.

    (Incidentally, I work in the “high-tech” industry, I don’t see why there are more positive externalities there than with other industries.)

    Your original point was quite different, the article by Paul Craig Roberts you mention is about absolute advantage not about infant industries. These are two very different arguments. Robert’s argument is essentially that rich countries suffer from open capital markets because that capital can be exported to where wage rates are lower. That is essentially correct. I’m not sure you read all of the quote from Mises, because my point was that Mises *agrees*. Mises realised during the first “great liberal age” that the argument from comparative advantage no longer applied. He realised also that the absolute advantage argument means that trade can be economically destructive to some countries. But, what Mises realised the Roberts’ does not is that wealth movements due to absolute advantage don’t harm overall human welfare, only relative welfare. The US, for example, may be able to aide its growth slightly by banning capital exportation or emigration. The cost of that would be less development in the developing world. And, as both Mises and Roberts point out it’s in the developing world where the return on capital is higher. As Mises writes in that book from 1919, modern world opinion cannot tolerate a situation where the British and French empires hedge off much of the world’s best land “like a private park” as he says, even if it is to their advantage. I would have thought that someone who calls their website “Social Democracy for the 21st century” would appreciate this.

    Regarding Mises methodology…. The part that I quoted was not “praxeological” it came before Mises developed that method. I don’t fully agree with Mises methodology either. However, I think it is much less unreasonable than you describe. I think you would find it difficult to disagree with Mises “unverified synthetic propositions”. None of them are complex statements about economics, rather they are simple statements about logic. He integrates them with more complex statements about empirical economics later in the book.

    What Mises was driving at in his methodology is that economics must be consistent. Macroeconomics must be consistent with microeconomics, inconsistency sheds doubt on both. And both must be consistent with logic.

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