What Is Free Trade?

Terms like “free trade” and “free markets” are ubiquitous spout from the lips of libertarians. Occasionally, it is helpful to review what these terms actually mean. “Free” specifically refers to free of any encumbering moral ends other than the ends of the exchanging agents. So it is a matter of liberty. Practically, it means no contravening authority standing between supply and demand. The only justice promised is one of mutual advantage.

Here is what “free” does not mean(in terms of a sufficiency condition): (i) efficiency (ii) self-regulation (3) un-regulation (4) de-regulation (5) perfect competition (5) pareto optimality (6) nihilism (7) justice ….

Yes, “free trade” is not even a sufficiency condition for mutual advantage in the sense that if we show “free trade” we necessarily show “mutual advantage.” Otherwise, there would be little need or demand for that thing called the law.

The point is that “free trade” presumes liberty but implies little beyond that other than an implicit(sometimes explicit) promised mutual advantage. We fashion “free trade” into a social theory(spontaneous order, invisible hand, etc) from experience and attempt to model this experience by economic analysis of rational (marginal)utility calculating agency. While I have no quibble with this per se, it remains important to be cognizant of the distinction between a social theory(predicated on a justice of mutual advantage) and methodology of economic modeling.1.

For example, the notion of “market failure” is in need of a curious bit of deconstruction. “Free Trade” presumes liberty but implies little beyond that. “Free Market Failure” is really a bit of a non sequitur. What we really have is “model failure.” This justifies all sorts of government regulatory intervention to enforce a model outcome. Of course, when we apply an economic analysis to the regulatory agency itself we end up with a predictive model error of correcting the original “model error.” This, of course, is termed “government failure, the distinction here being that the “regulatory agency” is actually promising everything.

Frankly, I think the above example demonstrates why laissez-faire doesn’t comport very well with the neoclassical economic method. That which treats “free trade” as a matter of liberty is always going to spit out model error by something that treats it instead as a regulatory model of a rational pattern.

The incongruity between liberty and regulatory efficiency can be profound. To see this, consider “comparative advantage.” We all should be familiar with how opportunity costs explain patterns of trade. Even if, say, A is superior in productive skill and efficiency to B for every produced item in a given economy, there are opportunity costs involved in A dividing time and labor to self-produce all items of our given economy. So rather than dividing the time up proportionately to produce everything, A specializes in those things which it does relatively best at(compared to what A does less best at, or earns less from), leaving an opportunity for B to produce the other things for trade exchange.2

No doubt opportunity costs explain trade patterns. But comparative advantage also implicitly suggests something else: namely, refusing to trade imposes external costs on trading partners. In our A-B model, if B refuses to trade with A, B imposes costs on A. Essentially, refusing to trade not only hurts yourself, but it also hurts others.

Now I won’t dispute the external costs implication of comparative advantage. However, I will dispute that these costs are a form of injustice, or more specifically, that these costs are something that need to be enforceably corrected(in the legal or regulatory sense). “Free Trade,” after all, must include the freedom not to trade. Otherwise, it is just another form of “freedom to obey.”

However, within the purview of neoclassical economics, “enforcing” Free Trade is entirely consistent with a regulatory model of a rational pattern.

This brings us to a consideration of these “Free Trade Agreements” such as TPP. The public arguments for these trade pacts–supported by many libertarians–essentially reduce to correcting the external costs implied by comparative advantage. The rationale is that despite any “flaws” these pacts are an improvement. An ancillary argument is that if the US doesn’t take the lead in forging these agreements, it opens the door for less savory countries(read: China, Russia) to forge something far less agreeable.

Frankly, these Free Trade Agreements demonstrate why sometimes it is better(perhaps always) to think like a philosopher and not like an economist. In lieu of thinking about the pareto efficiency of trade models, one perhaps may be better served contemplating the philosophical implications of a social theory that implies one bad actor playing a bad strategy forces everyone to play a bad strategy. Au contraire, “justice of mutual advantage.” More like a suicide pact.

Perhaps only after such consideration is it then profitable to dissect the problem from an economic point of view.

From a public choice perspective, these “free trade agreements” are essentially trading decison-making costs for external costs. Recall decision-making costs are “the price we pay for civilization.” These type of costs are imposed by a decision-making rule whose legitimacy–at least within the purview of liberal political theory–is delineated by some condition of unanimity.

A trade-pact is rent-seeking bargain. But the decison-making cost of this bargain results in a disclaimer that the price we pay for civilization–in this case, trade–is the loss of geo-political differentiation. In other words, unitary jurisdiction. Or more descriptive yet, oligarchical collectivism.

When the United States declares the entire planet a battlefield or issues talking points asserting global jurisdictional reach, it is not grandstanding on an explicit or implicit threat of military invasion. Instead, it is relying on a presumption of organs of a unitary political economy serving as an agency of enforcement. Wherever you are on this planet, there stands an authority between supply and demand that is hierarchically intertwined with the regulatory jurisdictional reach of any government. The price of dissent is that you do not trade. Or another way to put it: you can trade but there is nowhere to run.

A rent-seeking bargain that imposes decison-making costs is the negation of Milton Friedman’s famous aphorism regarding capitalism and freedom: showing freedom is sufficient for showing capitalism3. Friedman’s aphorism fails because capitalism as an economic treatment translates to a regulatory model of a rational pattern. And an economic analysis of this regulatory model suggests the potential for an intractable agency problem. If trade entails a decision-making cost attached to the enforcement of the regulatory model, then capitalism trumps “liberal trumps,” with the latter defenseless against an agency problem in our rent-seeking bargain.4

This agency problem is why I reject the notion of markets as any instrument of social justice, a la bleeding heart libertarianism. To treat it as such an instrument is to treat it as a regulatory model of a promised rational pattern. Enforcing the promise is what introduces the agency problem. Markets serving in the role of a type distributive justice may indeed by an observed pattern, but justice without an enforcement mechanism/agency is a trifle thing indeed. Distributive justice as an enforceable outcome is not a free market.

I conclusion, I am bit flummoxed at the extent many libertarians endorse “free market” as a regulatory model of a rational pattern. Whether cognizant of it or not, this endorsement more or less substitutes “free trade” with “conscription to the market.”5

Interestingly, the most recent cinematic work of the Wachowski brothers(actually now brother/sister since Lana now identifies as a trans-gender), Cloud Atlas(which is a cinematic adaptation of a novel and not an original screenplay) illustrates my point quite dramatically, demonstrating that if a picture is worth a thousand words, a good film is certainly worth a million.

In the futuristic corporate state, Neo Seoul6, fabricant AI subordinate themselves to indentured contractual servitude to the efficient functioning of consumer society. In exchange, the fabricants are promised a retirement nirvana(operating under their own agency with no wants) at the conclusion of their contractual obligation. The fabricants are indoctrinated into a religious catechism oriented around the sanctity of the consumer.

In reality, the fabricants are not given their promised nirvana. Instead they are duplicitously decommissioned and recycled as a cheap source of protein to newly “manufactured fabricants.” The underground rebellion to the corporate state places its hope in the emergence of “free will fabricants,” in the story dramatized by sonmi-451. When sonmi-451 is given the “liberty to read,” she rejects the present bargain of indentured servitude in exchange for a future payoff of agency. This is before she learns that the promised future is actually a sham. The immediate consequence of her decision, of course, is her own execution7.

Just as “unpluggable” perhaps conveys more immediate meaning than any lengthy tome against the standard liturgy of political obligation, to those who insist on intoning the free market as some type of regulatory model, whether it be efficiency, trade deals or social justice, perhaps the best response is simply: sonmi-4518

1 economics is certainly useful as a positive science in describing observed patterns but I find it often suffers from an Is-Ought problem in making unjustifiable prescriptive statements. I believe this view is substantiated by Tullock’s little-referenced work, “Efficient Rent-Seeking: Chronicle of an Intellectual Quagmire,” which establishes the apparent quagmire of prescriptive reasoning in economics. As I would say, Free Trade is little more than a statement about “free agency” or “free will” and not a logical condition for any model outcome.

2 Absolute advantage/superiority of A over B in everything is not real-world. It is merely an illustrative device to demonstrate how opportunity costs trump the historical notion of “absolute advantage” in explaining trade patterns.

3 Freedom is understood to mean in the “liberal” sense.

4 Richard Stallman’s classic parable, “The Right to Read,” is an excellent example of this point.

5 Free Trade is contingent upon a free agency or free will. However, this should be distinguished from the libertarian meaning of “free will” in metaphysics, which is contingent upon path independency(in determinism, similar to mechanics in physics, knowledge of initial conditions of a path is sufficient to know the path at any future state). The question of whether one has a choice in preferring A to B is an interesting one, but not germane to the discussion. Free will in our discussion is perhaps better interpreted as “free preference,” i.e., the liberty to act according to preference.

6 The ideological party of this corporate state is “unanimity.”

7 The Buddhist-Existentialist theme of the story is that we are a product of each other’s stands that ripple throughout time, so the future consequence of her decision is a better outcome down the line within “the cloud.”

8 451 is obviously a nod to Fahrenheit 451, specifically the auto-ignition point of paper books.