Posted on 11/07/2004 2:57:19 PM PST by rmlew
“Oh, yes, I know, we have recently been told by no less than 365 academic economists that such a thing cannot be . . .Their confidence in the accuracy of their own predictions leaves me breathless. But having been brought up over the shop, I sometimes wonderwhether they pay back their forecasts with their money.”
—Margaret Thatcher, 1979
As our $500 billion/yr trade deficit, with its attendant job destruction and long-term damage to our industrial base, continues to spiral out of control, the public may be forgiven for wondering whether there might be problems with the free-trade theories that have gotten us into this mess. And this inescapably raises the question of whether American economists have been doing their jobs, since, as a recent study revealed, 97 percent of them support free trade.
Economics enjoys the highest prestige of any social science (when was the last time a president begged a sociologist for advice or the king of Sweden congratulated a demographer?), and the public believes economists to be trustworthy. We have seen before, however, that the experts can be wrong and, indeed, have a uniquely destructive arrogance when they are.
The public is unaware of the degree to which free trade is a theory full of holes but varnished with a façade of certainty for ulterior reasons. People imagine that the nice Ph.D. technocrats who are the guardians of economic orthodoxy wouldn’t get such a thing wrong.
So how can an entire respectable academic discipline be wrong about so fundamental a question?
For a start, to some extent it isn’t, but economists who know better allow lies about the disciplinary consensus to be foisted on the public. Economists know a lot more about the problems with free trade than one might suppose from reading those economists who speak to the public in the business press and elsewhere. However, they let these shills determine what the public, and the political class, thinks the discipline as such has discovered.
Worse, they often note these problems and go on elieving in free trade anyway, for various reasons. The good news here, of course, is that there is a voluminous and reputable literature on the shortcomings of free trade just waiting to be pushed into the public debate.
So why do economists remain silent? First, many believe that, whatever free trade’s problems, the alternative would be a mess because of politics; thus, we are better off accepting the problems. Mentioning the problems might provoke the public into doing something stupid.
For example, it might demand a 30-percent tariff on steel to save declining Rust Belt jobs at a cost of $300,000 apiece and give no thought to the cost of making American car manufacturers pay nearly a third more for steel than their foreign competitors do. Then every other industry would want in, and, before you know it, we have an industrial policy set by congressional log-rolling: a mess based on political pull without a rational economic basis.
Obviously, this is not a wholly baseless fear. But it is not an economic argument at all: It is a political argument within public-choice theory. It may be true, but economists do not have any special scientific expertise to pontificate on politics. They especially do not have the right to cover up what they know for political reasons. The public has the right to hear both sides and make its own decision.
This fear may also be false: Our political system is sometimes corrupt and stupid, but also sometimes effective. Although controversial, there is good evidence that some foreign nations, principally in the Far East, have successfully used tariffs and non-tariff barriers to enhance their economic development and protect against the mercantilism of other nations. Japan certainly did not become the second-richest nation in the world practicing free trade.
Many economists who know free trade has serious problems are enervated by ivory-tower indifference to the real world. They are not given tenure for picking fights with BusinessWeek. Their careers are determined by their ability to impress other academic economists. Those who are interested in playing a role on the public stage quickly learn on which side of the trade debate the rewards lie.
Nevertheless, they should, as scholars, see that the intellectual authority of their discipline is not hijacked to serve selfish agendas.
To be fair, most actual economists—as opposed to pundits, politicians, lobbyists, and ideologues—will privately talk about flaws in free trade, if you approach them in a way that makes clear that you know that such flaws exist. What economists say to the public is often very different from what they say to one another. Paul Krugman, for example, who writes a witless column in the New York Times, has done superb academic work critiquing free trade.
Because the academically rigorous critique of free trade—as opposed to interest-group protests and fine but nontheoretical polemics such as Pat Buchanan’s and Ross Perot’s—is relatively young, it has not yet had time to inform the consensus of the economics profession as a whole.
This consensus tends to lag behind the work of individual economists and such subspecialties as trade economics. Because it takes years to gather the data and think through the objections needed to resolve controversial questions, 20 years can pass before a discovered insight becomes the general consensus. Thus actual trade economists are often less dogmatic on free trade than their brethren in other subspecialties who cling to what they remember from their grad-student days.
Right now, the consensus of the profession is derived from work that reached acceptance in the 1980’s—the heyday of Milton Friedman and the free-marketers who did brilliant work debunking the Keynesian interventionist consensus under which they grew up. And this consensus, which was dogma in the 1950’s and 60’s until it died under the stagflation of the 70’s, was itself the product of the Great Depression of the 1930’s, which overturned an economic orthodoxy founded on the (domestic) laissez-faire world of 1900.
This chronology is symptomatic of a deeper problem. Economists, despite their pretensions of objective social science, are suspiciously reliable sock puppets of the political status quo. In 1900, when the American political consensus was protectionist, the economics profession was protectionist. In 1960, when our political consensus was Keynesian, the profession was Keynesian.
Neither idea, in its orthodox form, is taken seriously by significant numbers of economists today. This is, frankly, quite a record of failure, given how loudly they insisted at the time that they were right. Economists deserve to be taken seriously, but the public should get over its deference to them as if they possessed some perfect and reliable knowledge beyond the criticism that citizens of a republic rightly apply to ideas that determine how they are governed.
Another concern is that economic theorists keep saying things that practitioners who have to deal with actual economic facts—executives, investors, trade negotiators— cannot take seriously without risking bankruptcy. Even economists employed by business schools are notorious for being out of sync with the rest of the profession. If engineers and physicists did not see eye to eye, might we not wonder about physics?
Some economists are simply paid shills of one variety or another. This is more true the more the theory in question concerns policy questions where somebody will make big money if Congress or regulatory agencies can be persuaded of certain things.
Economic consulting firms such as Global Insight, MiCRA, and Strategic Policy Research basically retail the service of providing whatever conclusions are desired. (Call them up and pretend to be a potential client. After some boilerplate about integrity, you get to negotiate what the study should conclude and how.)
Some economists are hired guns not of ordinary corporate interests seeking mere money but of political interests who want globalism for more sinister reasons and see free trade as a way to get it. A one-world economy may not directly imply oneworld government, but it is a step in the right direction.
Economics has a certain number of true believers for whom the infallibility of free markets is a “beautiful idea” like Marxism used to be. These faithful will warp any facts to vindicate their dream.
Then there are people who are not economists at all but libertarians or Ayn Rand cultists who try to pass off mere ideology as if it were economics, which it is not. They may object that restrictions on trade are a violation of economic freedom—they are—but this is not economic analysis at all: It is a political value-judgment.
The fact that economics aspires to be a mathematically rigorous science creates a bias in favor of free trade because it creates a bias in favor of nice, conceptually clean arguments and equations. The case against free trade largely consists in the observation that, in the real world, empirical facts do not correspond perfectly with the simplified abstractions that purport to describe them. Free-trade math is pretty; trade-realist math is ugly.
Take, for example, the theory of comparative advantage, the very core of free trade theory. Realistic analysis of how nations acquire their comparative economic advantages reveals that these are mainly the product of accidents of economic history, not of nature. Ralph Gomory and William Baumol, in their newish book Global Trade and Conflicting National Interests, mathematize this insight. The elegant graphs we all remember from Economics 101 dissolve into fields of dots, and the curves that used to intersect reliably at the point of free trade no longer unequivocally support this policy as optimal. Uglier, but closer to the facts on the ground in Silicon Valley and Bangalore.
Economics as a discipline has a bias toward free-market solutions like free trade for the same reason biologists have a bias toward evolution: It is the theory that best exalts the status of their profession. If free-market solutions are always right, economists are the final arbiters of what is serious policy and can ntellectually trump anyone else who wants to “interfere” with markets for political, moral, or other reasons. They can sniff “futile” at anyone’s pretences to produce better outcomes than what they have to offer. If free markets are not always right, however, this is not so.
And please do not be intimidated by economists’ equations, which dazzle with their seeming objectivity. The problem is not that the actual math is wrong but that mathematical economics depends on simplifying assumptions that are themselves not mathematical. These mathematical ice castles rest on swamps.
Take, for example, the blithe assumption that people have benign time preferences— i.e., that they do not want a short-term consumption binge at the cost of later indebtedness. If they want this under free-trade conditions, it can cause them to sell their country into debt for cheap imports.
By themselves, none of these points prove that free trade is bad; other arguments are needed to do that. They do, however, show that economists are capable of being wrong and that members of the public who are prepared to use intellectually legitimate arguments have a right to question them. The stakes are too high not to.
Ian Fletcher is the vice president for government relations of the American Engineering Association.
Political Economy ping
It all depends on how you define prosperity.
Which is something most economists overlook.
Economists fail to define almost as many things as they assume.
"Free trade" is a misnomer and a non-existent entity. If Hewlett-Packard can hire a seasoned programmer from Mumbai for $11,500, I should be able to buy fifty pounds of basmati rice for 37 cents.
As time goes on you see more and more engineers questioning our adherence to free trade.
Yawn.
This guy needs to read a few classics on free-market economics (rather than interventionist economics which he mistakenly believes is free-market) so that he can at least appear to know what he's talking about.
1. "Economics in One Lesson" by Henry Hazlitt
2. "The Conquest of Poverty" by Henry Hazlitt
3. "The Failure of the 'New Economics' - An Analysis of the Keynesian Fallacies" by Henry Hazlitt
4. "Liberalism" by Ludwig von Mises
5. "Socialism" by Ludwig von Mises
6. "Omnipotent Government" by Ludwig von Mises
7. "Economics on Trial" by Mark Skousen
8. "Government Against the Economy" by George Reisman
9. "Capitalism" by George Reisman
The one thing that has always struck me as odd was the build up of communist China as a base for our many of our manufacturing plants.
Only a couple of decades ago China was quite open in its quest for world domination, and saw America as the one obstacle in its path.
Within the past few weeks China anounced that it would seek military parity with the US within this century. China, it seems, holds a long term view of power.
So, we are now in a situation where a "cold enemy" has charge of a good portion of our manufacturing base, builds up its military on the money made from exports to the US, and our economists feed us economic theories based on models that have nothing to do with China's covert intentions.
If we are to trust economists with the welfare of this republic then hard questions will have to be asked and answered about China.
"The average person has no strong opinions about chemistry.
But he has lots of opinions about economics.
Which are usually wrong." -- Leonard E. Read
Mr. Fletcher is more well read than your think.
Until TR ran against the protectionist Taft, helping WW to win and begin the irreversible downward spiral of America, Republicans had always been protectionist. Of course, up until then, big business wanted America to be protectionist.
You have to ask yourself, "Why would notorious labor Democrats betray unions in order to pass free trade treaties?" If you say it, "for the good of the country," you must be kidding yourself.
I think there's a great deal of merit in this essay, and I like the fact that the writer brings up some important points about the "science" of economics and the economists who manage that "science." I've often said that free trade will become a less popular idea among economists when more economists' jobs are outsourced to China. In fact, the death of free trade will come when the jobs of bureaucrats, lawyers, and television personalities are outsourced to China and India.
In spite of some agreement with the author, I disagree with the statement that free-trade theories are entirely responsible for the current "mess" in the American economy. I think three or four other factors are equally if not more responsible for many of our problems. They include the following.
Lawsuits: A big part of the reason that anything made in America costs more than the same item made in other countries is that the item made in America carries greater legal costs. Anything done over here has to be cleared with the lawyers. Lawyers are involved in hiring employees. They are involved in making product. They are involved in marketing a product. They are involved in protecting the manufacturer from lawsuits once the product is made. I'm not saying that companies shouldn't be held responsible for faulty and dangerous products. I'm not saying that certain practices by employers shouldn't be stopped. However, many of the lawsuits that have gone against our manufacturers have been decided wrongly. A manufacturer who faces loss of income from unjust suits here in America versus freedom from these suits overseas is going to be more likely to move overseas.
Energy: The cost of energy in the United States is rising dramatically. Every time the price of natural gas increases, my employer moves a little closer to closing the plant where I work and sending that production to China. In some places, they still flare natural gas as a waste product. In the United States, the cost continues to rise. One of the big reasons that the cost is rising is that we are using less of our most abundant natural resource, coal. We have good supplies of this resource and have pretty good technology for burning it cleanly. Unfortunately, we've been pushing industries to convert to natural gas, and the result is a rise in the cost of gas that is hurting all industries that use gas. We need to reverse this trend.
Unions: Unions did tremendous good for the American worker at one time, but for the last generation or so, they've mostly been poisoning the well from which our jobs come. If I have a choice between dealing with people in one country who treat me like an enemy for hiring them and people in another country who treat me like a friend for hiring them, I'd go to the country where people treated me like a friend. Unfortunately, many unions and their members have treated employers like the enemy. I'm not saying that unions have no place, but the attitudes of many unions and union members is detrimental to keeping manufacturing in the United States.
Subsidies: The United States has subsidized the infrastructure that has allowed other countries to be in a position where companies can build factories there. True free trade theory would suggest that a factory in any country must compete on the basis that every expense associated must be part of the capital or ongoing cost of the product from that factory. In many cases, we skewed that equation by paying for much of the infrastructure with foreign aid. When one of our factories closes because of competition from one of their factories, "free trade" didn't hurt our factory but instead the departure from free trade hurt our factory.
Bill
Unfortunately, Trade deficits are necessary for the US to have a vehicle to export it's inflation to other contries.
In a debt-based money system, the only way to show economic growth is by going deeper in debt. As long as the money has sufficient velocity, the overall economy looks good. It's kinda like giving a patient an infusion of blood through a fire hydrant, wading knee-deep in the blood that is flowing from the patient's wound(s) and declaring that the condition is stable. (Joseph Heller was better at describing this situation than I can... )
Unfortunately, spewing a constant flow of cash into an economy to keep it afloat only produces inflation, and weakens the buying power of the money. To lessen this effect, a large amount of this cash must go overseas; as a vehicle for hiding the inflation from the American Citizen.
For all the dollars that China has taken off our hands, their only reward was U.S. threats if they contine to link their currency to the American dollar. (Tag; you're it!)
You're not gonna find many economists talking about this; just like you don't see too many parents telling their kids that they are ugly.
"Free trade" is something not at all practiced by India and China. "Free trade" is an ideological cover story to stripmine the lower and middle classes of the USA.
Amen, you are one who sees what is going on. The EU is a rival, we should adjust our policy accordingly. The Euro was created to replace the dollar, an economic weapon against America. I am amazing at all these guys on here who bash the French, but would go ballistic if we kept their cheese, wine and Airbus jets out with tariffs.
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