Home > The Economics Profession > Myth of free trade

Myth of free trade

from David Ruccio

Matthew O’Brien does a pretty good job capturing the myth of free trade:

There’s only one thing economists love more than free trade. That’s telling everyone else why they should love free trade too.

This rare exuberance from the practitioners of the dismal science is understandable. Free trade is the closet thing economics has to magic. The trick, and it’s quite a trick, is you don’t even need to be better at making something than somebody else for you both to be better off from you specializing in it (and trading it). As long as you both make different goods with different efficiencies, you can both gain from trade by focusing on your more efficient good. And these gains can be big — similar to inventing new, labor-saving technology — since specialization lets you produce more in less time.

But — you knew there was a “but”, right? — there are plenty of caveats. Every magic trick has some. In the case of free trade, the logic falls apart when the economy isn’t at full employment, and even when it is, the gains from trade won’t be equally shared. In other words, everybody will pay less for goods, but some will earn less, or lose their jobs entirely.

Except for two things: First, he fails to explain that it’s not economists in general who extol the virtues of free trade. Neoclassical economists are the ones who have taken it upon themselves to celebrate the existence of free international trade.

Second, much of the international trade that takes place these days does not occur through market transactions. As William Milberg has explained (e.g., in “Decentering the Market Metaphor in International Economics,” in Stephen Cullenberg, Jack Amariglio, and David F. Ruccio, eds., Postmodernism, Economics, and Knowledge),

Today’s international economic relations are characterized by considerable amounts of non-arm’s-length transactions. These take the form of intra-firm trade, inter-corporate joint ventures and alliances, special arrangements between buyers and sellers (supplies), and state-negotiated trade. The scope of this array of forms of non-arm’s-length is so broad that the relevance of the market cum locus of arm’s-length transactions is greatly diminished.

It’s time to put an end to the neoclassical myth of free international trade.

free trade

  1. originalsandwichman
    February 26, 2013 at 3:45 pm

    Sandwichman is ecstatic about the graphic!!!

  2. February 26, 2013 at 4:14 pm

    My objection to free trade (defense of protectionism) is this externality: Suppose there are people ordered by wealth:

    A : Western investor
    B: Western manager
    .
    .
    .
    Y : African farmer
    Z : African laborer

    The ABCs trade effectively in the rich economy at high prices. The XYZs also trade effectively in the poor economy with low turnover of goods and low prices. But everyone has reasonable security.

    Along comes free trade and suddenly the ABCs hire all of Y’s output to produce coffee for export. Y earns enough to buy food from the open market (mid-price) but Z starves.

    My heuristic is trade works well between parties that are roughly “equal” that is they operate at similar price environments. If trade hapens across very different price environments it may be very lucrative for the direct parties but:

    – The weaker party (the one more compelled to trade or operating in the poorer economy) gets an unfair deal and,
    – Worse, the immediate neighborhood of the lesser trading partner is hit by a scarcity.

    It’s like electronics, where bad things happen if you directly connect two parts of a circuit that are operating at different voltages.

    So trade is good, but I’d advocate protection against the case where mismatched markets are disrupted by long-distance links. The proper use of protection is to compensate the weaker consumer (party Z) who suffers scarcity, not the rich producer who faces competition. Export, not import tariffs. One can take a similar view to immigration, compensating for brain drain.

    I don’t hear this objection raised frequently. Any of you professional economists wnat to take it up?

  3. henry1941
    February 27, 2013 at 7:44 am

    Free trade is, I suggest, the basic human right for people to exchange, freely, goods and services, without interference from authorities. The usual argument given against it is that it is necessary to protect “jobs” ie the producers of goods in the countries protecting their markets against outsiders.

    This leads to losers all round. The consumers in the protecting country are paying more for the goods they could have purchased more cheaply from abroad. The producers abroad are prevented from selling their goods. Producers of other goods in the protecting country lose out because people have less money all round. And there is an overall economic loss as the less efficient production is allowed to continue under its protectionist umbrella.

    The real issue is “jobs”, and behind that is the “lump of labour” theory. But the real reason why “jobs” appear to be in short supply is that land is enclosed and opportunities for productive activity are restricted on that account. There is no free trading in land because all sites are monopolised by a landowner who demands a rent payment for access. And the solution to that issue is a shift to land value taxation.

    So the real objection to free trade is that without free access to land at the margin, there is no free trade. But the solution is not protectionism but genuine free trade, including free trade in land. To argue for protectionism is to miss the point.

  4. William Neil
    February 27, 2013 at 5:40 pm

    Henry1941:

    I always felt that the good olde free traders had an interesting sense, definition of proportionality: you trade me your coconuts, and I’ll sell you refrigerators. Somehow, as the American farmers of the South and West found out in the 1890’s – and they were participating in one of the grand classical “free” markets of all time: many small producers, world wide markets in grains – their own domestic relations with banks and railroads did not exactly leave them with a sense of appreciation and wonder at the benefits to all parties.

    There is such a huge advantage to getting to industrialism/the modern economy first, no nation with any sense of its own dignity is going to play on “your terms” Henry, they are going to do what Asian economies did after the 1997-1998 crisis – come up with a new model.

    And had the world joined Wall Street’s vision of one united financial market with free flows of capital and achieved this by 2005, I shudder to think of what the consequences would have been for an even more intensified form of securitization mania.

    I hope every good American nationalist (and that term is taking on a new meaning for me after the hacking of the NY Times and Hilliary Clinton’s shrugs about it…) stops and thinks long and hard how this China venture has worked out and for whom. The whole dynamics are going to – are now – coming back to haunt us.

    Paul Krugman lacerated Bill Greider’s “One World, Ready or Not” for its journalistic techniques, lack of models and playfullness (it was one of Greider’s “darkest” works) yet he got more of coming troubles right than Krugman, pointing out based on the history of capitalism that no nation had ever maintained its leadership role after shifting from manufacturing to finance.

    Economists who want the harder truths, contained not in equations and models but in the historical perspective would do well to consult John Grey’s “False Dawn” and Karl Polanyi’s “The Great Transformation.”

    I’ve already had enough of conservative “capitalist Utopia’s,” and I’m left somewhere in the range of social democracy’s compromises, which, at the present time, can’t generate enough intensity to change the ideological playing field. Apparently I have some good company: see Michael Lewis’ NY Review of Books (March 7, 2013) review of John Lanchester’s “Capital.”

  5. Rachel Wild
    February 28, 2013 at 12:34 am

    Haven’t free trade agreements made corporations more powerful than governments and allowed companies like Monsanto to impose their patented products on countries, like Mexico, that were formerly protected by trade barriers, thereby corrupting the food supply chain with potentially hazardous goods? Isn’t it all about legitimised imperialism?

  6. Denis Frith
    February 28, 2013 at 11:05 am

    Free trade is a misnomer. Most goods and services are produced by technological systems that irreversibly use up limited natural resources and devastating the environment with wastes without paying the ecological cost. Social and economic costs are mentioned in the article but that is only part of the equation. All that ‘free’ trade does is speed up the unsustainable process of destroying civilization’s life support system in order to give the fortunate few a high material standard of living.

  7. Allen
    March 2, 2013 at 3:10 am

    I think a major problem is related to the theory of one world price. As there is a world surplus of labour in many fields one would expect with mobile labour the price it can command will move somewhere between top and bottom. In New Zealand there has been an influx of Filipino workers in retirement homes because pay is so low an inadequate number of Kiwis will work there. Certainly this is interference in a hypothetical classical market as envisaged by Ricardo. I must add that the Filipinos have been frightfully exploited and not informed of their rights in some cases.

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