Last week's New Yorker contains an 'Annals of Economics' piece by John Cassidy, entitled 'Winners and Losers'. The article is notable for challenging (however timidly) the fairly uniform endorsement of "the luminaries of the economics profession" that "trade liberalization is always and everywhere beneficial". Chairman of the WH Council of Economic Advisers N. Gregory Mankiw's recent descriptions of white-collar job outsourcing as "the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith" and as "just a new way of doing international trade" such that "More things are tradable than were tradable in the past and that's a good thing" is a case in point.
Mankiw's remarks drew some political (though not economic) fire, probably because, as Cassidy notes, the claim that trade liberalization is always and everywhere beneficial "simply isn't true":
In today's world, where multinational corporations can produce many goods and services practically anywhere, and where investment capital can move from one continent to another at the flick of a switch, there is no economic theory which guarantees that new types of trade, such as outsourcing, automatically benefit the United States. Some Americans gain: consumers, who enjoy lower prices; stockholders, who see profits rising at companies that employ cheap foreign labor. Some Americans lose: workers whose jobs are displaced; the owners of firms whose contracts are transferred to foreign suppliers. But the economists' argument that the country as a whole inevitably benefits is questionable.
Such observations are clearly correct, but in my view they fail to identify the real problem with the received economic wisdom; namely, that it's based on an unsound argument. Cassidy summarizes Adam Smith's original argument for international free trade, which "economists cite ... all the time in an attempt to alleviate concerns about outsourcing":
As Mankiw indicated, it was Adam Smith who developed the argument that the unfettered exchange of goods and services allows individuals to specialize in what they do best, thereby raising over-all income and prosperity. "The taylor does not attempt to make his own shoes, but buys them of the shoemaker," Smith wrote in "The Wealth of Nations," which was published in 1776. "The shoemaker does not attempt to make his own clothes but employs a taylor." [...] [T]he division of labor, which is what Smith was talking about, lies at the heart of outsourcing and offshoring. [...]
Smith took the logic of specialization and applied it to the international market, arguing that no country should produce anything it could import more cheaply from abroad. "What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom," he wrote. This analysis implied that countries should concentrate on industries in which they are the low-cost producer, or, in the language of today's economists, industries in which they have an "absolute advantage" over foreign competitors.
A classic example involved Lancashire textile mills, which exploited the damp climate of northern England, and Portuguese vineyards, which prospered in the southern sun. In the presence of prohibitive tariffs on imports and exports, which were widespread at the time Smith was writing, England would have been forced to make its own wine (or go without), and Portugal would have had to manufacture cloth, which would have wasted valuable resources. But if free trade was introduced each country could concentrate on its strength, with England exchanging its surplus cloth for Portugal's surplus wine, to the benefit of consumers in both places.
The principle of absolute advantage is relatively easy to understand, and economists cite it all the time in an attempt to alleviate concerns about outsourcing. "The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods," the Council of Economic Advisers said in its testimony to Congress earlier this year. "When a good or service is produced at lower cost in another country, it makes sense to import it rather than produce it domestically. This allows the United States to devote its resources to more productive purposes."
Cassidy goes on to note that the doctrine of "absolute advantage" might not explain some cases of outsourcing (where the outsourced jobs could be done better or more cheaply locally); and that in such cases, economists instead appeal to the doctrine of comparative advantage, according to which an absolute advantage over all other countries isn't required in order to motivate a country's specializing in a given area (and trading for all other goods); rather, it is enough that the area have a comparative advantage over other areas in which the country might specialize. Cassidy intones that the argument for this doctrine "is subtle---Paul Samuelson, the great M.I.T. economist, once said that comparative advantage is the most difficult economic theory to grasp", and perhaps for this reason, does not bother to report it (is anyone else but me worried that one of the driving theoretical underpinnings of U.S. economic policy is so "subtle" and "difficult" that it is considered beyond even the readers of the highbrow New Yorker?). But for purposes of assessing the basic motivation for free trade, we do not need to consider situations involving (only) comparative advantage, insofar as situations involving a country's having an absolute advantage in some area over all other countries offers a best-case scenario for the argument from the local division of labor to international free trade.
So, what about Smith's argument? As presented by Cassidy, it goes like this:
(1) In relatively small local groups, such as families, villages, towns or cities, there tends to be a division of labor.
(2) This division of labor "allows individuals to specialize in what they do best".
(3) Allowing individuals to specialize in what they do best is good.
(4) The way in which such specialization is good is that it allows the "raising of over-all income and prosperity".
(5) What is good at the local level is also good at the international level: "What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom".
Conclusion: There should be an international division of labor, with each country "concentrating on industries in which they are the low-cost producer", exporting the surplus to other countries, and importing all other goods from the surplus of specialized industries in other countries.
There are several problems with this argument, but here I will assume that the first three premises are broadly correct, and focus just on the worst problems, associated with the combination of premises (4) and (5), which problems lead directly to an unacceptable consequence of Smith's argument.
As regards (4), the problem is that (even granting that individuals' specializing in what they do best at the local level is good in that it "raises over-all income and prosperity"), there might be other goods associated with individuals so specializing, that are as or more important than the good associated with raising income and prosperity. There is an obvious candidate for such a good: namely, the good attending to humans becoming competent at something they enjoy doing. Yes, it's more economically efficient for the tailor to buy her shoes from the shoemaker rather than make them herself; but this is not the only reason she does so; there is also the fact that the tailor prefers making clothes to making shoes. After all, in general we do not choose our professions solely on the basis of gaining "income and prosperity", either for ourselves or for our community, but rather (at least when not forced to do otherwise) in large part because we are inclined towards the profession at issue, and our specializing in and practising this profession is part of what it is to be a fulfilled human being.
The fact that the "good" at issue in local group division of labor may go beyond that stated in premise (4) is relevant to assessing the truth of premise (5). Smith's claim that "What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom" is surely too broad, but it would be enough for purposes of his argument if he could establish that "What is prudence in the local division of labor can scarcely be folly in that of a great kingdom", so let's read (5) in this more restricted fashion.
Now, if the prudence---the "good"---at issue in (5) were just that of "raising over-all income and prosperity", then perhaps one couldn't have anticipated that (5) was false (though arguably it has since been empirically disconfirmed). But insofar as the "good" at issue in local group division of labor is clearly not just that of "raising income and prosperity", but also includes the human fulfillment that comes from "specializing in what one does best", then (5) is clearly false. For the inevitable consequence of applying the local division of labor to "the conduct of the kingdom" will be that individuals may no longer "specialize in what they do best" but rather will be forced, in one way or another, to work at whatever industry has an "absolute advantage" relative to other countries.
This is the sick secret of "free trade": Smith's suggestion, if taken seriously, entails an immediate abrogation of the freedom of individuals to specialize in "what they do best" and rather specialize in what their country does best. Free trade leads directly to individual lack of freedom in one of the most important areas of human existence: one's profession. And a lack of freedom in this area is bound to have a drastic negative impact on individual human satisfaction---an impact that is unlikely to be sufficiently compensated by the (in any case illusory) "raising of over-all income and prosperity", or by vaporous consumer benefits, such as lower prices for cheap plastic goods or inedible vegetables made or grown elsewhere.
In addition, Benj points out that another unsatisfactory outcome of the national mono-culture mandated by the "absolute advantage" argument is that individuals lose out on the value of living in a diverse, self-sustaining local community.
Of course, the absolute advantage argument isn't strictly implemented, and so as a matter of fact there do remain (at least in first-world countries) certain options open for certain individuals as regards what they would like to do with their lives. But these options are, as a result of the decimation of local group economies, the off-shoring of manufacturing, and the outsourcing of jobs, increasingly closing off. Moreover, the present and increasing suffering of U.S. workers and unemployed pales next to the sort of enforced industrial and agribusiness servitude that this system is presently imposing on individuals in the global South. In these countries, too, there has been a decimation of the local group economies (often by their government's privatizing, under the gun-point direction of free-trade enforcers such as the WTO and the IMF, the land, water, food and other common resources that enabled local communities to live self-sufficiently for centuries). But the individuals thereby displaced have little option than to go "specialize" in the industry in which their country has a "low-cost advantage"---namely, labor so cheap and grueling that it is barely distinguishable from slavery. The pathetically few "success stories" of how free trade has enhanced the lives of third-world individuals (as in the continually hauled out tale of Indians who have risen to the "middle class"---on $6 an hour---as programmers or call-center specialists) cannot make up for the grisly fact that free trade of the statist, corporatist sort that Smith's argument encourages, necessarily spells anything but freedom for the vast majority of those it affects.
Recent Comments