Steve Keen on the fallacy of free trade

Brainstormers will remember Steve Keen, the brilliant iconoclast who is breaking new ground in the field of economics. In Forbes, he points out that Trump’s heretical anti-globalism is actually more economically sound than the fallacy of Ricardian free trade:

Globalization and Free Trade are good.

This belief is shared by almost all politicians in both parties, and it’s an article of faith for the economics profession.

You are right to reject it.

It’s a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of “Comparative Advantage and the Gains from Trade” two centuries ago. The best way to prove that (apart from looking at the bitter experience of the millions of once-were-factory-workers who voted for you) is to apply real-world scepticism to the original argument in favour of free trade.

When Ricardo wrote, England was the global economic superpower, and Portugal was its main rival. Ricardo was in favour of abolishing the “Corn Laws” that placed tariffs on grain imported from Europe. His opponents argued that, if the tariffs were abolished, Portugal would undercut England in all industries. Ricardo came up with an example that accepted that Portugal was better at producing everything than England was, but still “proved” that free trade was better than protection for both countries.

He assumed that England would need 100 workers to produce a given amount of cloth in one year, and 120 workers to produce a given amount of wine in a year. Portugal could produce the same amount of cloth in a year with just 90 workers, and the same amount of wine in a year with just 80 workers. So Portugal (read China for today) was absolutely better at producing everything than England (read the USA), but relatively better at producing wine.

Ricardo argued that free trade could nonetheless benefit both countries, if England devoted all of its workers to producing cloth, while Portugal turned all its workers into wine makers, because the total amount of wine and cloth produced by the two countries would be higher. They could trade the two commodities, and everyone would be better off than if trade didn’t occur. So specialization allows “gains from trade”. Drop the tariff barriers, and everyone will win—even the inhabitants of the weaker economy.

The argument might sound convincing, until you ask a simple question: “So how do you turn a wine press into a spinning jenny?”. Answer? You don’t.

Ricardo’s model assumed that you could produce wine or cloth with only labour, but of course you can’t. You need machines as well, and machinery is specific to each industry. The essential machinery for making wine can’t be used to make anything else, if its use becomes unprofitable. It is either scrapped, sold at a large loss, or shipped overseas. Ditto a spinning jenny, or a steel mill: if making steel becomes unprofitable, the capital involved in its production is effectively destroyed.

Ricardo ignored this little detail in his example, pretending that goods could be produced using labour alone. Later economists have made Ricardo’s example more complicated, and included the need to have machines as well as labour to make output. But they have been even worse than Ricardo, because they pretend that you can shift a machine (they call it “capital”) from one industry to another without loss.

That is simply nonsense.

The theory ignores the reality that, when foreign competition undercuts the profitability of a domestic industry, the capital in it can’t be “transformed” into an equal amount of capital in another industry. Sometimes it’s sold at a fire-sale price, often to overseas buyers. Most of the time, as ex-steel-mill workers throughout the Midwest know, it simply turns to rust.

Ricardo’s little shell and pea trick is therefore like most conventional economic theory: it’s neat, plausible, and wrong. It’s the product of armchair thinking by people who never put foot in the factories that their economic theories turned into rust buckets.

So the gains from trade for everyone and for every country that could supposedly be shared more fairly simply aren’t there in the first place. Specialization is a con job—but one that the Washington elite fell for (to its benefit, of course). Rather than making a country better off, specialization makes it worse off, with scrapped machinery that’s no longer useful for anything, and with less ways to invent new industries from which growth actually comes.

Excellent real-world research by Harvard University’s “Atlas of Economic Complexity” has found diversity, not specialization, is the “magic ingredient” that actually generates growth. Successful countries have a diversified set of industries, and they grow more rapidly than more specialized economies because they can invent new industries by melding existing ones.

So, globalization isn’t merely a societally destructive infringement on national sovereignties, and entirely dependent on substituting debt for economic growth, it builds huge economic inefficiencies into the global trade system.

If you’re still a free trader after everything you’ve seen, after everything you’ve read from Ian Fletcher, Steve Keen, and me, it is apparent that at this point, you’re simply clinging to economic dogma you don’t really understand.

Open trade and open borders

That’s Hillary’s dream and America’s nightmare:

“My dream is a hemispheric common market, with open trade and open borders, some time in the future with energy that is as green and sustainable as we can get it, powering growth and opportunity for every person in the hemisphere,” Clinton told Banco Itau, a Brazilian bank, on May 16, 2013.

Of course, she isn’t likely to tell the voters that, since everybody’s watching and “you need both a public and a private position.”

Thank you, Julian.

The Libertarian Case for Free Trade

Tom Woods graciously granted me permission to publish the complete transcript of his recent show with Gene Epstein, with whom he discussed the libertarian case for free trade, and in doing so, criticized my case against free trade. If you prefer to listen to Episode 728 of the Tom Woods show, you can do so by clicking on the title. Read the whole thing. I will respond to Mr. Epstein in detail in a future post.

Episode 728: Can Libertarians Make a Decent Case for Free Trade?

Guest: Gene Epstein

WOODS: All right, let’s get down to business. I want to talk about free trade. You’ve got a great column on the subject that’s linked to at So let me start it off this way, because I want to frame the issue the way critics of free trade have been framing it for the past 10 or 20 years in particulars. They’ll say — now, the mercantilists were different, because they didn’t have free traders around whom they could accuse of being academic pointy-heads out of touch with the real world, but anti-free traders today do have that.

And what they say is, what am I supposed to believe: your theories or my own eyes? The fact is in the wake of free trade I see all these towns that have been decimated because the plant left, and everything’s boarded up, and the white workers all on Oxycontin or whatever, and their families are devastated, and they’ve got social pathologies. This has gone all over middle class America; it’s devastated America, because we can’t possibly compete with people who live in countries with no regulation and where they earn 10 cents an hour. And you pointy-heads keep telling me that some day this is all going to work out, but look, I can see the devastation everywhere. And that matters to me more than your academic theory in a textbook.

How do you — not that you have to give every single argument right now, but how do you attack that kind of angle on the question?

EPSTEIN: Well, I think you pose it very well, pose the challenge very well, and I do first want to lead, so to speak, with my chin as a libertarian and say that libertarian principles dictate that we should have the freedom to trade, whether it be with a foreigner or with somebody domestic. Nobody has a right to interfere in our right to trade with whomever we please when we perceive mutual benefit.

Now, with that said, since we are Austrians we recognize that people have all kinds of values and attitudes when it comes to freedom to trade. It is a fascinating fact that the first 20 years after World War II Jewish people did not buy German cars. I happen to know that firsthand. My father refused to buy a German car, and in fact, by the 1980s he would only buy American-made cars. So if you are concerned, if you are convinced that your right to trade freely is harming other people or is helping people you think are evil, then go ahead and buy American. Exercise your freedom.

But apart from that, it’s very clear then that we are potentially interested in the consequences of our exercise of freedom, and my article attempted to address that.

The problem does indeed get back to Bastiat’s statement about the evidence of things unseen. You see some concentrated pain. Some people did lose their jobs, who have to find other jobs, and who, by the way, by and large when people lose their jobs, the next job they get does not pay as well as the job they lost. All of that is quite true.

However, when you look at our deficits, when you look at it from any standpoint, you begin with the fact that the trade deficit of the US in total is 3% of gross domestic product. Then when you’ve examined all of the estimates about jobs lost to foreign trade — and what I did is I took the highest possible estimate. I then raised it. I then found that it accounts for about 3% of all jobs lost in the domestic economy. So my point then was that if you’re going to be against jobs lost, then you ought to also be against the other 97%. One thing you ought to do, for example, is quit buying on the Internet, because you know what that has done? That has destroyed possibly, probably, millions of jobs in the retail sector, or at least hundreds of thousands of jobs. So if you care about not destroying jobs, then be consistent in your behavior.

And then, what’s the evidence of things unseen? The people who go to Walmart —mainly, by the way, the lower half of income receivers of the population — are getting bargains because Walmart is basically selling them cheap imported goods. And so if you actually look at the benefits, then the benefits are enormous. However, I’d hasten to say that we Austrians are not utilitarians. There is no way to balance out benefits and costs. I only say approximately we’re talking about the pain to the relative handful of people who lose their jobs, 3% of the population, 3% of job losers; we’re not talking about the other 97%.

But ultimately at the end of the day it’s a matter of ethics. Do people have a right to think for themselves about how they’re going to spend their money? Do I have a right to buy from Walmart, even though Walmart is selling me products made by Chinese people? I happen to think that’s a good thing to do, because that’s giving very, very poor people better job opportunities than they otherwise would have gotten.

WOODS: All right, so there’s the problem. I mean, you just stated it. There would be people who would come along and say, I don’t feel like my job in this world is to make Chinese people richer. What matters to me are the people who are closest to me, whom I have the most fraternal affection for. And those people would be people in my family, my neighborhood, and in a series of concentric circles. And the biggest of those circles is the US of A. There is no circle outside of that. I couldn’t care less what happens in Canada, Mexico, anywhere else in the world, China — I don’t care. So I care about the income of American middle class people, and you, Eugene, are saying that we’re going to get cheap goods for them. But if they have no job or if they have a crummy burger-flipping job, the cheap goods are just a wash at best.

EPSTEIN: Well, the first answer, as a libertarian and as an Austrian, which you and I, Tom, owe these people, is to say that, just like my father would only buy an American car, then I would tell Vox Day, by the way, who debated this issue with Bob Murphy, establish a website, a competitor with Amazon. Call it the Vox Day Buy American Website. And that will steer people into goods that they might want to buy, which would only be made in the USA.

And I guess it would mean, for example, that you don’t drink coffee anymore, since it’s grown abroad, but perhaps then somebody’s going to respond and grow coffee at many times the cost that it would normally cost, and grow it in a greenhouse. If you want a movement in that direction, do it. It is your perfect right to do so under the principles of libertarianism and under the basic notion of the Austrians, which is that people do not just spend their money in accordance with what is cheap. They have all kinds of other considerations in so doing.

However, do not interfere with my right to disagree with you and to buy from Chinese people abroad who are desperately poor. Then in terms of consequences, please understand that by probably through your actions, you are costing many, many more jobs lost across the economy. Then also recognize that by opposing companies like Walmart, you are denying people of limited means the opportunity to buy cheap goods.

But at the end of the day, utilitarianism cannot resolve this matter. The only thing that can resolve this matter is your right to exercise your free choice. I can only lay out the options for you and tell you that that is not the way I exercise my right to free choice because of the reasons that I outlined; however, if you think you can persuade people to have values in this regard — certainly Donald Trump seems to have caught an impulse among people to be super patriotic. Certainly Vox Day made it very clear that he is a nationalist. That’s his value? Fine. I would only tell him he’s not a libertarian. And he has the right, however, to push his nationalism as far as he can possibly persuade people to go along with it.

WOODS: I have some questions that aren’t just devil’s advocate questions, that are more “let’s elaborate on the argument,” but there’s one more I want to throw at you, and here it is: I’ve heard the argument that the replacement jobs that people get when they get displaced from their current employment because of free trade — and you point out that the number there is actually quite small. But let’s say, all right, they get displace from their jobs. The jobs that they get after that are all low income; they’re burger flipping-type jobs, or the jobs are so high tech that a high school graduate can’t do them. And so this led Gary North to say, when he was asked what are low skilled people going to do in the future, this robotic future, what are they going to do in this future of free trade, and his answer was, “Less.” Do you have a less grim outlook than that, Gene?

EPSTEIN: Well, I think I do. I again first want to emphasize something that surprises people, but it actually should be fairly evident in people who read the economic news and track unemployment insurance claims. In the 1950s, a million people a month filed for new unemployment claims. That was in the 1950s before international trade was very large. In fact, the US had an even balance of trade in merchandise trade in the 1950s, and yet a million people filed for new unemployment insurance claims every month. In the recent period, the Bureau of Labor Statistics has been tracking it even more carefully, tracing jobs destroyed to firms that downsize, tracing it to bankruptcies. And they find that it’s been running, again, about a million a month on a yearly basis. By the way, in the short run it’s even bigger, but it’s about a million people a month.

Now, I took the largest possible estimates — I spurned the estimates that were more careful from peer-reviewed research about jobs lost to foreign trade over the last 15 years, and I took the left-wing Economic Policy Institute’s estimates, and then I raised them by a certain amount. And I found that on an annual basis, the number of people who lost their jobs to foreign trade was the approximate equivalent, a little bit larger, than one week’s worth of new unemployment insurance claims. However, if it’s concentrated I guess people are more aware of it. If it’s concentrated in a particular community.

So my point then was what about the other 97%. What kind of hypocrisy is it on the part of people who will ship their income expenditures, who abandon the deli on the corner because they don’t like the sandwiches or who will buy from Amazon and not go to the local bricks and mortar store and destroy jobs, and yet they think they’re so concerned about those people who lose jobs to foreigners.

Now in particular, to get to your question about what people do when they lose their jobs, there is a great deal — the research, by the way, is very, very misty about this. People just talk in broad brush strokes about where people go who actually want to seek opportunities to do something else. But if we’re talking about a million people a month who lose their jobs — by the way, in the late 1990s it was actually 1.3, 1.4 million against a smaller base, and yet jobs creation was enormous. We find that when the economy is even more dynamic, more people lose their jobs and more people go on to other jobs.

In terms of the research about what happens to people who lose their jobs, the one thing that we can indeed be sure of is the same thing that happened to me when I lost my job from the New York Stock Exchange, is that I started at Barron’s at a lower salary. And indeed, anybody who loses — by and large, people who lose their jobs start at lower salaries. But the burger-flipping image that is invoked probably does not capture the reality about someone who really does search for a job. If you search for a job, you can apply for Uber, you can do that 50 hours a week. There is in fact — there are plenty of jobs out there, plenty available. Again, the image of a sort of bipolar economy in which there are no decent jobs — no decent jobs in construction, no decent jobs in driving cars, in driving trucks — all of that is way exaggerated.

And so indeed, people suffer, but again, if you’re concerned about people suffering, why don’t you stop consuming from Amazon, because you should be concerned about the 97% of the job losers who lose their jobs for reasons other than foreign trade. You should bear in mind again that the trade deficit is 3% of GDP, and indeed on top of that you should bear in mind that foreign trade creates jobs through all kinds of channels. The US, by the way, because of globalization, has an enormous surplus in services trade. Now of course, that tends to be high-end, but actually a huge part of services trade is tourism. People do come to the US, and tourism by and large is employment of people of limited means. There’s low-level employment. There are jobs available.

Now of course when you mentioned robots, Tom, that opens up a whole new question about what’s going to happen. The main thing I would have to tell people who are so concerned about robotics is that for all practical purposes, wants are infinite. You know, 110, 130 years ago if I were to tell you that the 60 to 70 to 80% of the people who are on the farm is going to shrink to 1% 120 years from now, I guess those who are concerned about that robotic replacement of labor would also be predicting mass unemployment. The fact of the matter that if wants are for all practical purposes infinite, then if we allow the market to operate there will be plenty of jobs for all, although there may indeed be, instead of a two-day weekend, a three-day weekend.

Maybe that will happen as well, which is of course also part of the evolution of work over the last 100, 120 years. People worked 50 to 60 hours a week, and now they work 40, 41 hours a week. So that happens too. There’s a labor-leisure tradeoff. But the idea that robotics are something new strikes me as a historical. Robots have been replacing labor to one degree or another for many, many years.

Let me throw in the Milton Friedman anecdote about his observation of an Egyptian project in which the workers were using hand shovels, and he said why are they using hand shovels rather than steam shovels, and the bureaucrat in charge said, well, this is not just a program for greater infrastructure; it’s a job-producing program. And of course Friedman’s quip was, well, then they shouldn’t be using shovels; they should be using spoons if you want to produce more jobs from this project. The economy is not in the business of producing jobs. There should be in a decently functioning economy plenty of jobs for all, and there should indeed be in a decently functioning entrepreneurial economy plenty of opportunity for people who lose their jobs to do a midcourse correction and start another kind of employment.

But at the end of the day, if it’s all about people in distress who have to be helped, then that’s another discussion for libertarians to have. There will indeed be in any economy people who through no fault of their own have had bad luck and have had difficulty, and I of course believe that there’s plenty of private money available to help those people. But that too is a different discussion.

WOODS: All right, I’ve got a few more things I want to ask you, but first let’s thank our sponsor. Okay, there are a few things I still want to get to here.


WOODS: One of them is the point you make in the article about the way cheap imports actually contribute to other jobs.


WOODS: So if my industry needs inexpensive steel to survive, and you’re telling me that the way to increase jobs is to put a tariff on steel, you’re actually going to decrease jobs in my industry. So talk about that.

EPSTEIN: That’s right, absolutely, and that’s one of the channels through which free trade actually helps jobs. You know, why not talk to — if you are so self-righteous about causing people to lose their jobs, then demanding tariffs, like you speak, again, to those people who don’t realize that they are suffering from tariffs, as in the case you cited. Business by and large — by the way, free trade from China and from abroad is not consumer goods; it’s by and large intermediate inputs that business buys. And those cheap inputs of course make it cheaper for the business to operate and make it possible for that business to employ more people.

The other part about globalization and the rise of mass communication is indeed the huge surplus in services, the fact that tourism is booming. The other third channel through which free trade creates jobs is that foreigners who get dollars from having sold us goods have a surplus of dollars, and they make huge investments in businesses in the US. There’s an enormous belt of auto companies in the South that are run by foreigners: Japan, others, they operate in the US.

And by and large, by the way, manufacturing in the domestic market makes good business sense. It’s a very old story. You want the finished product to be in the domestic market, because you want your manufacturing center to be very sensitive to the domestic market for the cars you want to sell.

So in fact, manufacturing output in the US is nearly almost at its record high, which was reached in 2007. Again, that’s manufacturing output is nearly at the record high of 2007, much of it owned by foreigners, who are using dollars that they get to invest in the US. So in fact, the 3% estimate that I did for the jobs lost was strictly on the debit side. Nobody has bothered to do any decent audit of jobs created. This indeed is difficult research to do, but we know that 3% is probably exaggerated.

But again, at the end of the day it comes back to ethics, because I can’t — I’ll tell you an interesting analogy in my view. Those who push for the minimum wage, raising the minimum wage, many of them admit that you’ll destroy some jobs. Then they say, well, you know, you’ll destroy — maybe 2% or 3% of low-wage workers will get dumped on the ash heap, but what about that other 97% that will see raises? And it’s very odd that that’s okay with them. That 3% who’s going to be dumped on the ash heap, by the way, are usually the most marginal and unskilled people. But their utilitarian calculus says, well, if it’s going to raise it by several bucks for the other 97%, then why not?

And so that’s what they say in that case, but when we say from the other case, in terms of utilitarianism, look at all the millions of people who are benefitting as consumers, who go to Walmart, who buy cheap goods, the workers who benefit as workers when cheap goods are bought. Look at all those people, and they are far more numerous than the relative handful of people who lose their jobs. Those people say, oh, no, no, that’s unfair. Suddenly they’re defending the minority in that case, rather than — and we’re defending the majority when we make a utilitarian argument in terms of free trade. And our roles are reversed when we talk about minimum wage.

But at the end of the day, the only way to resolve this argument is that, in terms of the minimum wage, that’s the free transaction between business and labor. That’s what you’re interfering in. Similarly in terms of free trade, that’s my freedom, your freedom, to spend our money for perceived gain with anybody else as we see fit. That includes business, and it includes individuals.

And that’s where, by the way — if I may segue for the moment into what Vox Day was saying — he made it very clear when he said, for example — and I jotted down some of the things he said when he was debating Bob Murphy about free trade. He says, I don’t trust government, but I trust corporations even less. He said, I’m a nationalist, not a globalist. He said — now, what does that mean in terms of not trusting government but trusting corporations even less?

Well, he seemed to be overlooking the reality that these corporations, unless they engage in crony capitalism, are essentially businesses that are trying to sell us goods. And I don’t have to buy their goods. I can just say no, and I can buy domestic if I want to. Or if I don’t buy domestic, I can simply refuse to buy from them. I should tell Vox Day, you try to refuse to buy from the government, refuse to pay your taxes. You’re going to be thrown in jail. And so he was making a very clear choice. He was choosing government over the free market by trusting corporations even less.

And then when he said he’s a nationalist not a globalist, what does “globalism” mean? Globalism simple means in terms of the free market, my right to buy from companies that import from China. That’s all. Or from any other country. I don’t have to exercise that right. I can refuse to do so. But a nationalist is somebody who declares the right of a nation state, of politicians to dictate to us about what we want to buy. And so again, he was making a very clear ethical choice. His utilitarian arguments I believe were often shoddy in any case, and Bob I think had him dead to rights on certain points, but essentially he was saying I am not a libertarian; I’m a nationalist. I believe that politicians should be in charge, because even though I don’t trust them, I trust corporations even less. That was his point.

And then when he even further said that some people are smart but other people are not so smart, that’s why we have government, for all its faults, I mean, the way to make people dumb of course is for dumb politicians to dictate to them what their choices should be. And this of course was where Adam Smith came in sounding like Bastiat, when Adam Smith wrote, and I quote, from my column quoting Adam Smith, that the power to interfere with free international trade would “nowhere be so dangerous as in the hands of a man with folly and presumption enough to fancy himself fit to exercise it.”

I believe that Vox, again, is investing in these politicians the believe that their folly, their idea that they are smart and so many people are dumb, and therefore they have the right to decide what these people will buy with their money, I think that’s presumption. The idea that they know what they want to buy is a question, but the idea that they have the right to interfere with other people’s right to buy because in Vox’s view they aren’t so smart, he’s clearly drawing a line in the sand.

He is clearly saying for all its faults we’ve got to trust the politicians, because again, ignoring, I mean, Bastiat, who said a long time ago that if people are basically incompetent, how does it follow that when you turn them into regulators and political bureaucrats they suddenly become smart and have a right to rule over the rest of us. Isn’t it possible that these politicians are going to become corrupt? But in any case, in any case, our fundamental belief is in the right of anybody, whether he passes an IQ test with Vox Day or not, to be able to exercise his or her right to engage in trade in however he sees fit.

WOODS: All right, before I let you go — I mean, this has been great; it’s great information. I feel guilty asking you another question, but I am going to ask you one more. What about people who say — I don’t want to mention any names — the people who say it’s important for us to make things in this country? We don’t make anything anymore, and you can’t have an economy based entirely on services. We need to make things. We need manufacturing.

And my thought has always been, well, you’re telling me a doctor doesn’t do anything worthwhile? I mean, a lot of people who don’t produce tangible things do add an awful lot of value to this. But what’s your answer to that, that we need to make stuff?

EPSTEIN: Well, I mean, of course that’s a great question. You hear that all the time. It’s sort of a faith-based statement. But of course first empirically — and it’s really, as I mentioned, not surprising for reasons I stated — that manufacturing is slightly below its all-time peak hit in 2007. So manufacturing hasn’t grown as fast as other things, but just for starters let’s get to reality and recognize that manufacturing does operate, and by and large it’s because manufacturers know that at least for the high end of finishing goods, finishing cars, they want their manufacturing outlet to be close to the domestic market. So we do make things.

But second, “making things”? Does a chef not make food? We have restaurants. They’re in effect taking raw materials and turning it into finished products. That’s restaurants, and that’s very ubiquitous. They make many things as well. And then in fact “making things,” is not agriculture making something as well? Well, that’s growing stuff, taking it out of the ground, preparing it, later on milling it into bread. All of those things are making things also.

But of course when we insist on the fact that empirically they’re a little bit off when they say we don’t make things because farming, manufacturing, preparing food, all of that is very, very ubiquitous in this economy and consists of making things, you know, if you want to make things as you’re indicating, Tom, then I guess we just don’t need physicians to operate on us. We don’t need teachers. We don’t need Tom Woods either, I guess, and we don’t need me, because we don’t make things.

But indeed, at the end of the day, since we provide services that people want to buy, like haircuts — that doesn’t make things, although it sort of makes a better head — it’s all rather theological in any case. At the end of the day, what we want to do is respond to the market economy, allow people to exercise their right to buy what they need to buy. And it might turn out they want to buy services from people that are relatively intangible. They may want to get a massage; they may want to get a pedicure. All of those things they choose to buy because they value those services.

So at the end of the day, again, it gets down to a libertarian ethic, which is that if nobody wanted to buy any of these services, that would be fine with me, because I don’t run other people’s lives. But since people do want to buy these services and they want to buy some goods —

And indeed what’s the other broad point that’s taken place in the world? What’s taken place in the world is that we have these economies like China, like in India, that are suffering because of the enormous, horrible legacy of different forms of socialism that kept these people poor. And so we now have open trade with rich countries in the world and very, very poor people, whose alternatives for employment are very, very sketchy, very, very low paid. And so they can make goods, and they can better themselves by selling and exporting these goods to the rest of us. We have advancements in container shipping that make it possible to ship these goods. It’s basically a positive development for the world that these poor people in China are getting better employment, are lifting themselves out of $1 and $2 a day poverty to sell us these goods and to make things for the rest of us.

And then we in the rich countries, this rich, enormous country, can find plenty of job opportunities for those people who no longer make the same things that the cheap labor Chinese people make. And then again, if we remember that we still have a turbulent entrepreneurial economy in which jobs are destroyed every month to the tune of a million a month, then we recognize that we cannot do without our dynamic economy. We should make the most of it. And that’s marching in a very different direction from what the anti-free trade people, where they want us to march.

WOODS: All right, well, we’ll leave the conversation there. I’m going to link to your excellent column, again, at I’ve got to keep a closer eye on your columns, because every one of them seems to have an episode in it. I don’t know if I can — you know we’ll have to pick the bes ones so I don’t drive you crazy, but I’m glad we were able to do this.

EPSTEIN: Tom, it’s always a pleasure, and let’s do it again soon.

“The gravest risk since communism”

The Economist sees nationalism as a great evil that is to be defeated rather than the only way to save Western Civilization:

AS POLITICAL theatre, America’s party conventions have no parallel. Activists from right and left converge to choose their nominees and celebrate conservatism (Republicans) and progressivism (Democrats). But this year was different, and not just because Hillary Clinton became the first woman to be nominated for president by a major party. The conventions highlighted a new political faultline: not between left and right, but between open and closed (see article). Donald Trump, the Republican nominee, summed up one side of this divide with his usual pithiness. “Americanism, not globalism, will be our credo,” he declared. His anti-trade tirades were echoed by the Bernie Sanders wing of the Democratic Party.

America is not alone. Across Europe, the politicians with momentum are those who argue that the world is a nasty, threatening place, and that wise nations should build walls to keep it out. Such arguments have helped elect an ultranationalist government in Hungary and a Polish one that offers a Trumpian mix of xenophobia and disregard for constitutional norms. Populist, authoritarian European parties of the right or left now enjoy nearly twice as much support as they did in 2000, and are in government or in a ruling coalition in nine countries. So far, Britain’s decision to leave the European Union has been the anti-globalists’ biggest prize: the vote in June to abandon the world’s most successful free-trade club was won by cynically pandering to voters’ insular instincts, splitting mainstream parties down the middle.

News that strengthens the anti-globalisers’ appeal comes almost daily. On July 26th two men claiming allegiance to Islamic State slit the throat of an 85-year-old Catholic priest in a church near Rouen. It was the latest in a string of terrorist atrocities in France and Germany. The danger is that a rising sense of insecurity will lead to more electoral victories for closed-world types. This is the gravest risk to the free world since communism. Nothing matters more than countering it.

Considering that their counter will consist of “stronger rhetoric, bolder policies and smarter tactics”, they’re not off to a good start. They are at a disadvantage, of course, because the most effective rhetoric is utilized in the service of the truth, and they are attempting to sell blatant and obvious lies.

But if “nothing matters more than countering” nationalism, that means that nationalism is the only political objective that matters for the opponents of globalism. We need to continue to expose their lies about NATO benefitting America, about the EU benefitting Europe, about free trade and immigration enriching societies, and how cooperation is necessary for fighting terrorism.

If you’re still foolish enough to swallow the false assertion that free trade is beneficial to America, perhaps you should consider if you believe any of the other lies you are being told by the same people.

Jerry Pournelle on free trade

Thanks to his There Will Be War series, Jerry Pournelle was one of my biggest intellectual influences as a teenager. If you want to ensure that your teenage sons have an antidote to the progressive and globalist nonsense in which they are engulfed by the mainstream and conservative medias, you simply cannot do better than give them a book or three from that series; the educational aspect of TWBW was the reason it was my absolute top priority to get it back in print. We’ve got seven of the original nine back in print already, and we’ll have the rest out by the end of the year.

Now Jerry is turning his still-formidable intellect towards one of the great questions of the day: free trade. It is of particular import for conservatives:

One reason Conservatives are advised by Conservative leaders to disagree with Trump is his position on Free Trade. The problem for me is that I do not see Free Trade, particularly laissez faire Free Trade, as necessarily Conservative at all,

The advantages of Free Trade are lower prices for stuff. That means they are more cheaply produced. As the economist David Ricardo wrote, there is a principle of comparative advantage that coupled with free trade guarantees maximum profits for when there are no trade restrictions, and impediments to free trade are supposed to be mutually disadvantageous.

But do understand, what is conserved is lower prices. Nor social stability. Not communities. Not family life. Indeed those are often disrupted; it’s part of the economic model. Under free trade theory, it’s better to have free trade than community preservation, better to have ghost towns of people displaced because their jobs have been shipped overseas; better to have Detroit as a wasteland than a thriving dynamic industrial society turning out tail finned Cadillacs and insolent chariots and supporting workers represented by rapacious unions in conflict with pitiless corporate executives.

The theory of free trade includes liquidity: liquidity in capital flow, and liquidity in labor relocation.

What was conserved by turning Detroit into a wasteland? How was that conservative? Wouldn’t it be more conservative to argue that if everyone pays a little more for stuff made here, by people who work here, we are better off than having it made south of the border and inviting our people to go work there at their prevailing wages?

Go further. You don’t have to move. We’ll pay you for not working and you don’t have to move. Of course we’ll have to raise taxes on those who do work to pay those people no longer working, but that’s life. But after unemployment benefits work out – in my days the government would pay you $26 a week for 26 weeks – you’re in trouble. So much so that welfare benefits kept being raised. Food stamps, which became larger and bought more items. Negative income tax. And if you dropped out of the labor force – no longer looking for a job – you are no longer unemployed. The unemployment rate just went down. You stopped looking for a job. Of course you don’t have a job – you are certainly not employed – but you aren’t unemployed and don’t count toward the unemployment rate. I wouldn’t have thought that sort of lying to the people by government officials was a very Conservative thing to do at all.

Would a 15% tariff on cars have saved Detroit? It would mean that I would have had to pay about $5000 more for my 1988 Ford Eddie Bauer V8 Explorer I bought in 1999. I could have afforded that. And I suspect that I’ve paid more in income taxes sent to welfare recipients in Detroit than that. Is paying people not to work more Conservative than trying to keep their jobs – and manufacturing capabilities and potential here, bot dismantling it and leaving its former site to rust away – Conservative?

And is encouraging people not to work – at least making it easier and more possible – building a Conservative nation?

What, precisely, is being conserved here?

At the core of the intellectual case for free trade is the idea that Say’s Law somehow applies to labor, that the aggregate supply of labor necessarily creates an equal quantity of aggregate demand for labor. Hence the claims that since those who had been employed by technologically outdated buggy whip manufacturers found jobs working for automobile manufacturers, those who no longer work for corporations that went offshore will find them doing something else.

But this is a complete failure of logic. The buggy whip workers were able to go to work for the auto manufacturers because those factories were located in their home states. A Detroit auto worker cannot go to work for a Korean or a German manufacturer, or even for a US automaker who sets up a plant in Mexico.

Free trade is, in fact, intrinsically anti-conservative, which of course is why revolutionaries such as Karl Marx have historically favored it.

I should also mention that There Will Be War Vol. VI is now out in ebook, and Vols I and II are now available in a hardcover omnibus edition.

Free trade: bad idea or bait-and-switch

Gary North believes it is the latter:

What was the bait and switch? This. Lure intellectuals and then politicians into a lobster trap of one-world government by means of the promise of greater wealth through free trade. Create free trade alliances that are in fact not free trade but rather trade managed by international bureaucrats. This is a combination of low tariffs and detailed regulations of production and distribution. Economic regulation favors large multinational firms that can afford lots of expensive lawyers. This regulatory system creates economic barriers against newer, more innovative, but under-capitalized competitors. In short, use the bait of greater national wealth to persuade national leaders into agreeing to a treaty-based international government that requires member nations to surrender much of national sovereignty. The final stage is the creation on centralized regional governments that absorb national governments into an immense international bureaucratic system that regulates most areas of life.

The arguments favoring free trade go back to David Hume in 1752, and later to his friend Adam Smith, whose Wealth of Nations (1776) presented a comprehensive case. Liberty is more productive than statist bureaucracy.

Free trade simply means that two people can legally agree to an exchange if they choose to. Simple. The idea of voluntary exchange is hated by those producers who cannot compete effectively, but the case is both logical and moral.

The reason why the Rockefeller Foundation paid F. A. Hayek, Wilhelm Röpke, and Ludwig von Mises to write books on international trade was to provide the economic bait.

Raymond Fosdick went on John D. Rockefeller, Sr.’s payroll no later than 1913. He went on Junior’s payroll no later than 1916. He had met Fosdick in 1910. Fosdick was one of Woodrow Wilson’s protégés at Princeton. A brief summary of his career is here. It does not cover his time at the Versailles Peace Conference, where he and Jean Monnet worked together in 1919 to create the League of Nations. It does not mention Monnet. It also does not cover his time as Junior’s personal lawyer and advisor, 1920-1936. His brother Harry was on the board of the Foundation from 1917 on.

Another Wilson protégé was John Foster Dulles. He was the grandson of John Foster, Secretary of State under Harrison, known as “the fixer.” He was also the nephew of Robert Lansing, Wilson’s Secretary of State, who helped take the government into World War I. He was Secretary of State under Eisenhower. He was the defense attorney for Harry Emerson Fosdick in Fosdick’s 1924 trial for heresy in the northern Presbyterian Church. He had been one of America’s richest lawyers in the 1930’s. He was a committed globalist. He was a deal-maker between American firms and the Hitler government until a revolt in his own firm got him to stop. He was an early promoter of the World Council of Churches, founded in 1948. He also presented a program in the 1930’s for creating an international government funded by a low tax on international trade that would be created for the sake of huge firms — his clients. They would be exempted from national tariffs.

These men were globalists. They proclaimed the doctrine of free trade, but always with this proviso: free trade was the bait for creating an international government with managed trade.

My belief is Gary North is gradually stumbling his way towards the truth, which is that there is no bait-and-switch, the globalists genuinely believe in free trade because free trade destroys nations and national sovereignty. After all, no less a personage than Karl Marx supported it for precisely that reason; he considered it a weapon in the arsenal of international socialism.

But regardless of whether they do or not, note that even this staunch defender of free trade is observing that free trade is a trojan horse. Therefore, it should be opposed on that basis alone, even by those who genuinely believe it increases national wealth in any and all circumstances.

Up and over their heads

MC listened to the Day-Murphy debate on free trade:

I was unable to attend on Friday, but I just listened to the audio.  Excellent debate, loved the format.  Really should make anyone stretch their thinking as well as help them come to their own conclusion.  Admittedly I heard things I had not heard before and my knowledge base was expanded and continues to be with these debates. 

One point you made that “Let reason be silent when experience gainsays it’s existence”.  This seems to be the problem with most economists and Austrians is that they are so sold on their theories and their ability to come to a conclusion that is elegant reasoning, they totally miss the forest for the trees.  I think most economists lose the common man because the common man lives in the real world and knows that those elegant theories have failed to bring about a better result in reality.  The previous debate and this one has shown me that these economists are not too acquainted with real life and the practical effects free trade has had on this country. 

I did not vote to make my country poorer so as to make the rest of the world richer.  I am a Christian, but my benevolence is my decision, not one forced on me by my government.  I don’t think that is what God had in mind when he asked me to help the poor. 

Anyway, both of these debates are more instructive than anything I learned in college and infinitely more practical.  Please keep these coming.     

I wasn’t crazy about the format in practice, as it prevented either interlocutor from really pinning the other down, but I think it was both fair and useful in that it illuminated the arguments for both sides, at least for those capable of following them. I suspect it can be improved, but regardless, it wasn’t bad for a first experiment.

On the other hand, it has been rather remarkable to witness the slack-jawed astonishment of the lesser free trade advocates, who completely lack the ability to even begin processing the simplest of my anti-free trade arguments.

Who is this guy? I highly question his economic understanding.

All five of his opening arguments are extremely weak. For example, he puts forward the notion that decreased real incomes and increased indebtedness proves free trade doesn’t work. I mean, are you serious? How can anyone make such a stupid argument? As if free trade is the only determinant of real incomes and indebtedness, that domestic economic and fiscal policy has nothing to do with it? How naive must he be to think everything bad that happens domestically can only be explained by free trade. People give this Day guy too much credit.

This is further evidence of the inability to communicate across the 30-point IQ gap. The gentleman clearly doesn’t realize that he is attacking the same correlation-causation argument that I am, only he is doing so considerably less competently because he doesn’t understand that I am not making an anti-free trade argument per se, but rather, explaining the falsity of a very common free trade argument.

He makes the same mistake twice,in fact, as he also fails to understand that I am citing an empirical failure of the theoretical free trade model when it comes to quality:

The example he provides to show that protectionism promotes quality products was the example of Parmesan cheese in the EU, where producers of a definite kind of Parmesan of a cultural value get the legal monopoly on labeling the product vis-a-vis imported versions. In his opinion, the protected cheese is of much better quality.

Well, I guess that’s the case for government imposition of restrictions on trade, to ensure the nation state has high quality cheese.

Notice how free trade advocates are reliably dishonest, in that they make appeals to exceptions when it suits them and deny the legitimacy of such appeals even when the exception is valid because it disproves the free trade model. I could as easily say that one very common case for the removal of government restrictions on trade is to ensure the nation state has high-quality automobiles.

How is it intellectually legitimate for free traders to point to low-quality American autos in the 1970s as a meaningful example, but illegitimate for anti-free traders to point to high-quality Italian cheeses in the 2010s as an equally meaningful one? Especially when the latter clearly disproves the assertion that government protection necessitates lower quality goods for the domestic market.

What I found particularly amusing were those critics who simultaneously complained that I was making non-economic arguments, then insisted that my position was immoral or in violation of the human right to freely engage in economic activity. It never even crossed their mind that their arguments were considerably less economic in nature than my own.

One thing I’ve noticed is that midwits reliably fail to understand the difference between a positive argument and the critique of an opposing argument. This explains why so many people are, on the one hand, saying that my arguments are weak while so many others are impressed at how I have methodically destroyed the pro-free trade arguments. It rather reminds me of the atheist response to TIA, in which many of them expressed disappointment in the weakness of my arguments for the existence of God.

But they were only weak in that they did not exist at all. They were an altogether different creature, being critiques and debunkings of dozens of arguments against the existence of God.

Free Trade debate podcast

Tom Woods has posted Episode 684 Debate on Free Trade, with Bob Murphy and Vox Day, on his site. Below is part of my 10-minute presentation opposing the resolution, which stated:

Free trade is always economically beneficial in the long term,
and the more free trade is practiced by a country, the higher the
standard of living of its inhabitants will be.

The Japanese novelist Natsume Soseki once wrote: “The memory of having sat at someone’s feet will later make you want to trample him underfoot.” While I have been seated, metaphorically, at the feet of the great Austrian economists for most of my life, I harbor no desire to trample them. I retain genuine affection and respect for the Austrian School of economics.

However, just as the classical economists eventually gave way to the superior understanding of the Austrians, so Ludwig von Mises and Murray Rothbard will one day be surpassed by the post-Austrian economists of the future. Is that day here yet? I will argue that it is, at least with regards to the doctrine of free trade.

The world has changed in many ways in the 240 years since Adam Smith triumphed over the mercantilists. The most significant changes, with regard to the topic at hand, concern the mobility of capital, a factor which was not accounted for by either Smith or Ricardo, and the mobility of labor, a factor which was never taken into consideration by Mises or Rothbard.

Let me first state that I accept Bob’s general terms with regards to both free trade meaning unlimited transactions between domestic and foreign parties, and national wealth being measured on average. I am presenting five arguments against free trade tonight: they are empirical, mathematical, existential, practical, and logical. Given the time constraints, it is not possible to go very deep into any of them, but each of the five represents a very serious and substantial challenge to the claim that free trade makes a nation wealthier in the long term.

My first argument is empirical. The conventional argument in favor of free trade has changed very little over the centuries, and was repeated this very week in a major essay by Francis Fukuyama in Foreign Affairs. It states:

  1. International trade has become increasingly free over time.
  2. Wealth has increased during the same period.
  3. Therefore, free trade produces wealth.

Or to put it another way, as Bob did in his excellent textbook, Lessons for a Young Economist, “If we imagine an initial situation of worldwide free trade, and then further imagine that an individual country decided to “protect” its domestic industries and “save jobs” by preventing foreign goods from crossing its borders, its residents would become much poorer.”

But this is not true. We have considerable evidence that freer global trade does not necessarily make an individual country wealthier. For example, although the free trade in goods has considerably increased over the last 50 years, real wages are lower in the USA than they were 43 years ago. So is the country wealthier? Proponents of free trade often cite growing GDP per capita, and it is true that since 1964, US GDP per capita has risen from $3.5 thousand to $54.6 thousand, a 15-times increase.

That means the USA is wealthier, right? No, because over the same 50-year period, total US debt per capita has risen 34 times. If your income doubles, but your personal debt goes up by a factor of 4.5, are you wealthier? No, of course not. Your perceived increase in wealth is a mirage.

Freer trade has clearly not produced greater wealth for America or Americans, but rather, greater indebtedness. This is not to say free trade can never benefit a national economy, but we have clear empirical evidence that in the case of the United States, it has not. Therefore, the resolution is false.

My second argument against free trade is mathematical. Free trade theory relies, at its core, upon the Law of Supply and Demand. But in Debunking Economics, Steve Keen cites the work of William Gorman, who in 1953 utilized mathematical logic to prove that the Law of Demand does not apply to a market demand curve. It only applies to single individuals, and it is not possible to derive a market demand curve by simply adding together the quantities demanded by all individuals at each price. In other words, the combination of all rational consumer preferences results in an irrational market where lower prices may or may not increase demand.

This proof has many implications for economics that have not yet been explored, and among the obvious casualties is David Ricardo’s theory of Comparative Advantage. The math literally does not add up. Therefore, the resolution is false.

Listen to the rest of it there. Brainstorm members will receive a full transcript once it is complete. I should note that Steve Keen informed me that there is a more substantial mathematical case to be made against free trade than the one I presented, but as it was his point and not mine – and frankly, I don’t fully understand it yet – I did not utilize it in the debate. I will devote a separate post to it later.

Mailvox: debate responses

We had a nice turnout for the Day-Murphy debate on free trade last Friday, and most of the 250+ registrants showed up for it. It generated more than a few questions, and here are some that later showed up in my email. NC wonders about the role of the state:

I greatly enjoyed the debate. Thank you broadcasting the debate and the work you put into the arguments.  I found the debate valuable as I mull over my own thoughts.

I’m curious if you have thoughts on this:  I think that your arguments depend on the existence of the state.  I compare your arguments to a similar case of discriminately acting on relationship principles; that is, if one is interacting with a sociopath, one would not act on relationship principles of openness and honesty, for the sociopath would not conform to those principles, exploiting them for advantage.  I think Trump emphasizes “good deals” over free trade because of the realities of coercive government institutions–nation-states which would violate principles of free trade like a sociopath would violate principles in a relationship.

If, after a generation of peaceful parenting, the nation-state dissolves, would not a free trade environment be the principled and logical environment of such a society?

No, my arguments depend upon the existence of the nation, not the state. If there is no coherent group of self-identified people sharing traditions, characteristics, and values, then there is no need to concern ourselves with their collective fate, as we owe nothing to them, share nothing with them, and can abandon them and ignore their interests without a thought. This, of course, is one reason why the globalist elite wants to destroy cohesive, coherent nations, for much the same reason they want to destroy the family. The individual is easily corrupted or destroyed, the nation, not so readily.

The dissolution of the nation-state on the basis of peaceful parenting does not logically lead to a free trade environment, moreover, it is about as credible as a monetary system that relies upon leprechauns distributing gold harvested at the rainbow’s end. That is pure libertarian fantasy babble, which is even less coherent than the Marxian withering away of the state leading to the worker’s paradise.

GO also thought rather well of the debate, a transcript of which will be provided to Brainstorm members:

I thoroughly enjoyed the debate. I have enjoyed Mr. Murphy’s writings over the years. I thought he mildly tried to take you on personally. You didn’t do that and stuck to the debate issue making excellent points. I also like Tom Woods. I think they both learned a lot by getting involved with you. I have begin to wonder about the rigidness of some of the Austrians. I am happy to see a challenge to them from a non-communist or socialist perspective.

I was actually quite pleased that Bob was sufficiently concerned by the arguments I presented in the Miller debate to view me as a potential threat to the conceptual status quo. This is extremely unusual, as for the most part, free traders consider their position to be utterly unassailable. As for Tom, he was not only an excellent moderator – I was very impressed by him and think he would make a great talk radio guy – but he made a very interesting comment when we met the day before the debate to make sure everyone’s system was working correctly.

He commented that the free traders had not helped strengthen their own position by failing to seriously consider the arguments on the other side. This is understandable, as for two centuries, their underlying assumptions more or less held. And it was easy to dismiss the impact of the Japanese mass-immigrating to Australia, as Mises did, so long as they weren’t actually doing it.

So, I think that even if I’m not able to convince either Bob Murphy or Tom Woods of the inimical nature of free trade, I suspect this debate may mark a step towards stronger Austrian arguments in defense of free trade. Unless, of course, I am able to convince the entire Austrian School that a rethink of its core position on the subject is required.

JK saw the same flaw in one of Bob’s arguments that I did:

Great brainstorm yet again! I was annoyed by Bob’s use of a country giving a bunch of free SUVs to the US as a reductio ad absurdum, but a country might use that strategy to destroy another country’s infrastructure, and that would definitely not enrich the country who receives the goods.

But  I would have loved to have asked him this, had I thought of it: if the receiving country is enriched by cheaper imports then surely if the other country produces all things and therefore the receiving country nothing, then that country should be infinitely enriched, no?

Well done Vox.

I wasn’t annoyed by the argument, I was amused by it. There is a very good reason dumping, or selling goods below their cost, is legally prohibited by most countries, and that is because it is correctly seen as harmful to the recipient. As I mentioned in the debate, I don’t think Bob quite grasped how damaging the welfare analogy is to his neo-Bastiat “free sunlight” argument. Free goods damage an economy in much the same way free welfare checks damage an individual; in neither case do they make the economy or the individual wealthier in the long term. Quite to the contrary, they make them dependent.

Are tropical countries where everything grows easily and the fruit just drops from the trees generally more wealthy than others? No, because the effect on the populace is not wealth-generating, but enervating.

Over the next week, I’ll attempt to respond in detail to some of the questions that were addressed to me during the debate that Tom did not pass on to me because we did not have time to address them.

Another free trade debate

This exchange with Louise Mensch on Twitter vastly amused me. In my book, it is right up there with the digression into sexbots in the James Miller debate:

Louise Mensch ‏@LouiseMensch
The idea you need free movement of people for a free market is a lie. We have free trade with USA without free movement

Supreme Dark Lord ‏@voxday
It’s not a lie. Read Mises: the same arguments apply. For full benefits of free trade, free labor mobility is required.

Louise Mensch ‏@LouiseMensch
no; we presently enjoy free trade with America no free movement between us either way

Supreme Dark Lord ‏@voxday
You can see exactly how NOT free UK trade with USA is here. Complete with tariff codes and rates.

Louise Mensch ‏@LouiseMensch
live animals?

Supreme Dark Lord ‏@voxday
3.8 percent on the sale of domestic rabbits, to be precise. Just one of thousands of examples. Demonstrably unfree trade.

Louise Mensch ‏@LouiseMensch
er… I honestly don’t think most people are going to count bees and rabbits Vox

Supreme Dark Lord ‏@voxday
It’s 5.7% on nuclear reactors. Would most people count them?

In fact, the USA and UK have neither free trade nor free labor mobility.