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Free trade harms America

Posted By Vox Day On 06/13/2011 @ 1:00 am In Commentary | Comments Disabled

One of the more onerous aspects of being a superintelligence is the way in which many critics have a tendency to erroneously assume one is operating at the same level of near ignorance that they are. In response to the inaugural Voxic Shock podcast, in which I interviewed economist Ian Fletcher about his book, “Free Trade Doesn’t Work,” a number of free-trade champions actually attempted to appeal to David Ricardo’s theory of comparative advantage, which utilizes an example of trade between two countries in two products to argue that trade is intrinsically beneficial to a national economy.

I am never sure whether to be more amused or insulted when I am met with a critical response of this kind. Possessing a B.S. in economics, having published a book on economics and the current economic depression and being one of the millions of college-educated Americans who have passed an Econ 101 class, I am, as it happens, familiar with the theory. Furthermore, I have actually read Ricardo’s 1817 book, “On the Principles of Political Economy and Taxation,” which contains the theory and what passes for the reasoning behind it. This does not appear to be the case with most of the free-trade enthusiasts who appeal to it.

It may surprise some to learn that despite his significant historical influence on capitalist and socialist economic theory alike, Ricardo was a superficial economist of dubious intellectual integrity. His theory of profit is rather less known these days than his theory of comparative advantage, but is an equally vivid example of what the great economic historian Joseph Schumpeter labeled “the Ricardian Vice.”

Ricardo’s was not the mind that is primarily interested in either fundamentals or wide generalizations. The comprehensive vision of the universal interdependence of all the elements of the economic system that haunted Thünen probably never cost Ricardo as much as an hour’s sleep. His interest was in the clear-cut result of direct, practical significance. In order to get this he cut that general system to pieces, bundled up as large parts of it as possible, and put them in cold storage – so that as many things as possible should be frozen and “given.” He then piled one simplifying assumption upon another until, having really settled everything by these assumptions, he was left with only a few aggregative variables between which, given these assumptions, he set up simple one-way relations so that, in the end, the desired results emerged almost as tautologies. For example, a famous Ricardian theory is that profits “depend upon” the price of wheat. And under his implicit assumptions and in the particular sense in which the terms of the proposition are to be understood, this is not only true, but undeniably, in fact trivially, so. Profits could not possibly depend upon anything else, since everything else is “given,” that is, frozen. It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice.

– Joseph Schumpeter, “The History of Economic Analysis,” Pages 472-473

In “Free Trade Doesn’t Work,” Ian Fletcher methodically exposes Ricardo’s simplifying assumptions one after another. He finds seven false assumptions, which he examines in a chapter entitled “Ye Olde Theory of Comparative Advantage.” The seven assumptions are as follows:

1) The comparative advantage is sustainable.

2) There are no externalities.

3) Production factors move easily between domestic industries.

4) The trade does not change the ratio of income inequality.

5) Capital is not internationally mobile.

6) Short-term efficiency causes long-term growth.

7) The trade does not improve foreign productivity.

While Fletcher is far from the first to demolish the theory of comparative advantage on sound Schumpeterian grounds, he is perhaps the most accessible. And yet, there are not many free-trade advocates who will find his comprehensive refutation to be convincing because so few of them actually understand the logical mechanics of the theory to which they adhere. Furthermore, the modern mind’s misplaced addiction to empiricism under the mask of science means that most individuals today will give no credence to even the most sound and impeccable logic unless there are also a panoply of statistics, preferably provided in the form of colorful bar charts, to accompany it.

Fortunately, Ricardo’s theory is so grievously flawed that it is not at all difficult to provide the empirical evidence required by those who are incapable of following the abstract criticism. If Ricardo’s theory is correct, then growth in international trade must be strongly correlated with economic growth because it is a direct causal factor of that growth. Furthermore, since economic growth is directly related to employment, we should also see a correlation between an increase in the amount of international trade and an increase in the percentage of the population that is employed.

In the 80 years from 1930 to 2010, international trade increased significantly. Combined imports and exports rose from $74.1 billion in chained 2005 dollars in 1930 to $3,753.5 billion in 2010. This represented a rise from 8.5 percent of the economy to 28.3 percent of it over those eight decades; international trade is now more than three times more important to the U.S. economy than it was at the beginning of the Great Depression.

But has the economy grown in a similar fashion, as per the assurances of the Ricardian free traders? No. Whereas trade has grown by a factor of 50, the U.S. economy has only grown by a factor of 14. Moreover, the Bureau of Labor Statistics shows that the percentage of men who are gainfully employed has not increased during this time, but has plunged instead, from 85.8 percent in the first year provided by the BLS, 1948, to 63.7 percent now. (The increase in the female employment ratio from 33 percent to 53 percent over that time also played a large role in decreasing male employment. But since the number of women who have ever worked in a productive, trade-related sector is relatively small, the male employment-population ratio is more relevant and less misleading with regards to the subject than either of the two statistical alternatives.)

What the chart shows is the ratio of decade-long growth in international trade compared to the ratio of 10-year growth of Gross Domestic Product. While GDP actually grew faster than international trade during World War II and the immediate post-World War II period when the ruined economies of Europe and Asia were rebuilding their infrastructures, by 1955 the rate of growth in both imports and exports had already outstripped rate of economic growth. In 2000, when imports were exploding at an annual rate of 14.4 percent, the economy was growing at exactly its 80-year average of four percent. More significantly, as trade grew from a tenth of the economy to more than a quarter, more than one quarter of the male population became unemployed; the overall employment-population ratio has also fallen about 10 percent since 2000 despite a $927 billion increase in trade during that time.

It does not matter whether one considers free trade and the theory of comparative advantage from a theoretical perspective or an empirical one. In either case, Ricardo’s theory is manifestly incorrect and the rational observer has no choice but to conclude that while the thought of more government involvement in international trade matters may be distasteful in the extreme, it doesn’t change the fact that for the United States of America, free international trade simply does not work.

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