Ian Fletcher, Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, has taken lately to calling libertarians Anti-American and delusional. The point of contention is “Free Trade.”
For the purposes of clarity, I’m going to explicitly define “Free Trade.” It is the exchange of goods and services divorced from serving political/economic ends. It is the rejection of political economy as an ends-related device. Free, as in “free of political ends,” was an instrumental part of “enlightenment liberalism” and best articulated by Adam Smith’s “The Wealth of Nations,” which was an attack against mercantilism, the prevalent nationalist trade policy at the time.
However, Smith viewed trade in terms of “absolute advantage” which holds mutually beneficial exchange and the flow of international trade to be a function of labor productivity. A country would have an absolute advantage in the production of a good relative to another country if it could produce the good at lower cost or with higher productivity. David Ricardo, however, would overturn “absolute advantage” with comparative advantage, which holds exchange and trade to be a function of opportunity costs and not necessarily labor productivity. So, a country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country.
Comparative advantage is a more general principle than the specific application to international trade flows. “Opportunity cost” is a fundamental economic principle.
So, I take a pretty skeptical view of claims that “Free Trade” and “Comparative Advantage” have been overthrown. This would actually mean (1) A Political Economy of Ends, or National Trade Policy, has been demonstrated to be superior to mutually beneficial exchange of goods and services (2) The principle of Opportunity cost has been displaced from Economics.
These types of claims are typically restricted to Politicians, Nationalists, Xenophobes, and “Special Pleaders.” So, let’s take a look at Ian Fletcher’s claim as presented in his book: Free Trade Doesn’t Work: What Should Replace it and Why.
The first point I will make is very simple. Fletcher claims libertarians are delusional and don’t operate in the real world(a common refrain). But that charge actually better fits Fletcher. In the real world, if you advocate for a National Trade Policy, it’s not going to be up to you what that trade policy is. It’s going to be a thousand Ian Fletchers lobbying congress for their own versions of trade policy. It’s going to be politicians bidding out artificial economic rents and special favors. It would be the appointment of “Industrial Trade Czars” occupied by those who move freely between being a CEO, a Czar, and a lobbyist. I could go on. That’s the reality of an ends-related Political Economy. You are merely advocating for competition in “Political Advantage.” That’s “Public Choice,” and that’s the real world.
Here are two chapters from his book that are online.
The Theory of Comparative Advantage and Why It’s Wrong
The Natural Strategic Tariff
The basis for his claim is that “Comparative Advantage” has been overthrown is that the standard Neoclassical “Hecksher-Ohlin model” of comparative advantage has been challenged by “New Trade” theory models. “Hecksher-Ohlin model” explains the pattern of international traded in terms of such traditional factors as the ratio of capital to labor. “New Trade” theory challenged the “standard view” by incorporating “technology,” “network effects,” and “increasing returns.” Paul Krugman actually won his Nobel Prize for using the “network effects” of “economic geography” to explain patterns of international trade between countries that couldn’t be explained by the Hecksher-Ohlin model(in particular, countries that had similar ratios of capital to labor).
“New Trade” hardly overthrows “comparative advantage.” It simply incorporates “network effects” along with the traditional neoclassical factors of capital and labor as determinants of comparative advantage.
Fletcher cites as Ralph Gomory and William Baumol as “overthrowing the neoclassical Ricardian contention that global free trade will produce optimal outcomes for all participating national economies and the world.” I would say that is about an accurate statement as someone claiming Misean capital theory had supplanted the Hicks IS/LM general equilibrium model within the mainstream economics profession. Gomory/Baumol is heterodoxical. The basic gist of G/B combines the “network effects” of New Trade with a principle roughly analogous to John Rawls Original Principle(an attempt to nullify “accident of birth” from justice theory). Network effects result in “retainable industries” that are by and large products of historical accident. This “retainable industry model” does not have a single equilibrium of supply and demand; rather, it’s a multi-equilibria model. Therefore, there isn’t necessarily any “optimum equilibrium.” This is similar to concepts in game theory where some games, for example, can have multiple nash equilibria.
The G/B argues that the equilibria of the “retainable industries model” should not be subject merely to historical accident but should be affected by deliberate government policy.
It should be noted that Gomory and Baumol thought the US, unlike Japan, was too corrupt for a “dedicated bureaucracy” to have an industrial policy for existing “retainable industries.” Therefore they advocated “public-private” venture funding for nascent retainable industries. Of course, it’s unclear why one wouldn’t think that such public choice pressures wouldn’t likewise affect the dollars flowing into this “public-private” partnership for research into creating these “new” retainable industries; nor why one shouldn’t think that “public-private” partnership wouldn’t be dominated by already existing retainable industries.
Ian Fletcher, in his chapter, The Natural Strategic Tariff, is even less sanguine regarding the effectiveness of a “dedicated bureaucracy” than G/B. Basically, it’s not possible.
The natural question, if one assumes self-interested nation states, is what kind of trade policy will acquire any given nation these retainable industries. Unfortunately, there is no easy answer here, because in order to win these industries, the state must, naturally, know which industries they are – or it will be incapable of directing its tariffs, subsidies, and other policy measures to their appropriate targets. (And this is not even considering the fraught problem of how to effectively favor the right industries, once they have been identified.)
While there is some evidence that fabled institutions like Japan’s Ministry of International Trade and Industry (MITI) have successfully done this in the past, there are also vast empirical and theoretical grounds for supposing that this is extremely difficult to do, indeed probably beyond the ability of most contemporary governments. Because the cost of trying and failing is potentially very high, this is (not entirely unreasonably) taken as a dispositive argument against protectionist measures aimed at winning retainable industries.
There is, however, one possible loophole in the above problem. The above reasoning presumes that the state must know which industries are potentially retainable. That is, it presumes that the only possible means to impose strategic protectionism is central planning based upon ex ante industry-specific knowledge. But what if this were not so? What if, instead, it were somehow possible to have a effective strategic tariff without such hard-to-obtain knowledge? What if, that is, there existed some simple rule for tariff policy which, when applied to the complex empirical conditions of the economy, had the desired complex effect? If such a simple rule exists, we should call it a “natural strategic tariff.” It is my purpose in the remainder of this paper to vindicate the proposition that such a thing does exist.
So essentially, Fletcher is arguing for a “de-politicized” Political Economy of political/economic ends. For all the bluster, pontifications and name calling, Fletcher’s model of trade would, in some respects, be similar to the “libertarian model.” Each would dismantle the trade bureaucracy, the central planning, the lobbying interest groups, etc. However, whereas the libertarian model would have the tariff–>0, Fletcher’s model would have a flat tariff–> “natural strategic tariff.”
Once again, however, the libertarian Public Choice critique applies. If you think the libertarian case for dismantling the the trade bureaucracy is delusional, I can assure you that a National Trade Policy case against a trade bureaucracy is more delusional. In politics, the “natural strategic tariff” does not result in a flat tariff and half the Washington Political class crowd filing for unemployment. Then again, Fletcher probably doesn’t actually believe what he is trying to defend. Concludes Fletcher.
Does this imply America should impose a tariff?
Yes and no. Unfortunately for opponents of free trade, the above reasoning does not, on its own, prove that the US would be better off with a tariff. Although the above logic does explain how such a tariff would bring a benefit, it does nothing to quantify this benefit against the well-known expected costs. Such quantification would require a major econometric study, and because the GB model used above is not the only valid critique of free trade, this study would have to incorporate these other theoretical models as well. This essay should only be taken as a contribution to the underlying theory that makes such studies possible.
Fletcher calls for major econometric studies that would also include models that would increase the trade bureaucracy. In the end, it appears Fletcher is primarily making a “special pleading” argument for research money. And, in the process, reinforces the libertarian point: that any National Trade Policy necessarily will result in hodge podge of policy that would be a product of Public Choice Competition. And public choice competition is not even a zero-sum game. It’s a negative sum game. These type of games have significant negative impact on everyone’s overall welfare.
(1) Libertarian arguments are not dependent on equilibrium in Neoclassical models. I don’t subscribe to Neoclassical equilibrium to begin with. I subscribe more or less to complexity economics. The presence of “multi equilibria” in no way invalidates comparative advantage.
(2) Libertarians should view “Free Trade Agreements” with skepticism because they are actually “ends-related devices.” And, in that sense, that are actually not representative of “Free Trade.” A case can be made that they actually increase monopolies, economic rents in areas of money,patent, and labor under the guise of “reduced tariffs.”