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Why Free Trade Isn’t Efficient

For the past few weeks, I’ve been reading a raft of literature by lawyers, economists, and bureaucrats involved with the World Trade Organization (WTO) and other free traders. It’s been a fascinating journey into an alternate world, one in which frictionless trade and money flows, and unified regulations and laws are considered to be a good thing.

The reasoning behind this virtually unquestioned acceptance is as follows: If there are no barriers to trade, whether financial or regulatory, goods and services will be created (or done) wherever they cost the least. If they are done in the lowest-cost place, they are being done in the most efficient way, and that means more is created and consumers also pay less.

It is thus a good thing, virtually always, to reduce barriers to trade and services. If it can be done for cheaper somewhere, it should be. Some people may lose, but overall more (or the same) is created for less, and this is good.

This is basically an article of faith in everything I’ve been reading from people who make their living around the WTO.

But you may have caught the error in the thinking: It assumes the lowest cost is equivalent to the most efficient.

But it isn’t. When manufacturing moved from the US to China, it cost less to do in China, yes, but it produced more carbon (climate change); it took more people to produce the same amount of goods, and it generally used more materials, as well.

In other words, it is less efficient in every way except the monetary cost.

The rejoinder to this might be that those people who were manufacturing those goods would be better employed elsewhere; people were being wasted. If it can be done for a few dollars an hour, rather than $20 or more (if labor was unionized), then the higher-paid workers should do something else.

But everyone knows now, and trade advocates admit, that the people who lose the jobs to offshoring and outsourcing were mostly not employed again, or never had as good a job again. People are not fungible, they don’t just fit into any spot.

Moreover, as those jobs moved away, those people earned less money, and local businesses got less money from them as consumers. Everyone’s employees are someone else’s customers: When everyone cuts wage “costs,” they’re also cutting demand.

The core problem with capitalism is that it assumes that money measures benefit: If someone is willing and able to buy something (is in “demand”), then that something is good.

But the cheapest cost and the highest profit don’t take into account actual efficiency or actual good in the world. Producing less climate change gases to produce the same stuff is more important than saving five or ten percent manufacturing cost, or making five percent or ten percent profit. Using less resources that are limited is more important than the lowest cost. And good wages are also important, because they measure good lives. (There is an argument that China’s industrialization required America’s de-industrialization. I don’t think that’s true, but that subject is too large for this piece.)

The core assumptions of capitalism are wrong. They are simply wrong. But that doesn’t mean they don’t create a very effective system, where effective means “good at sustaining itself” and “good at telling people what to do.”

Capitalism is really very simple. It’s an algorithm for directing human behavior, and it works because it makes sure that the people who obey the algorithm are the people who have power.

Until they run the world off a cliff.

More later, but for now the point is simple: Neither the lowest price nor the highest profit automatically equal the most efficient thing to do in any way except with respect to money.

And money, while it’s lovely, is not actually food, water, or a livable environment, nor will it be able to buy those things for everyone (or perhaps anyone) when there just isn’t enough of it to go around.

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  1. Jay

    Any measurement of efficiency is by nature efficiency of some output with respect to some input. Free trade is often an efficient producer of profits with respect to capital invested, because that’s what the market optimizes for. If you wanted to optimize for quality-adjusted human life years with respect to carbon dioxide released, you’d likely get a completely different optimum. Any way you slice it, you’ll run into Goodhart’s law: “When a measure becomes a target, it ceases to be a good measure.”

  2. Hugh

    Words like efficiency and competivity are just code to take attention off of economic activity which is beneficial to the rich but not the society at large. Efficiency is not an absolute. All we really need are processes to be efficient enough to be useful. On top of this, as Ian notes, all manner of externalities: pollution, greater use of resources, increased production of greenhouse gases, poor quality control, labor abuse abroad, loss of jobs at home are routinely and deliberately ignored.

    Cable news does an adequate job of covering Trump at least some of the time, but otherwise it is an Establishment ghetto of elite group think. So they love free trade there and always ritually bemoan the loss of TPP. And why not? As members of the punditocracy, their jobs will never be threatened by free trade, their paychecks will never be diminished by it, indeed their stock portfolios will be enhanced by it. But of course, they clothe all this in other terminology. It is all about American leadership, countering China, being great for the economy, i.e. their economy.

  3. nihil obstet

    “Efficiency” frequently means “shifting costs onto somebody else”.

  4. bob mcmanus

    Hey Ian, Ocasio-Cortez beat 14-term Crowley. Ben Jealous won.

    And Emily Sirota beat her incumbent. You remember David.

    I may not feel optimism, but just a little revenge, a little pain inflicted on the dollar dems feels pretty damn good.

  5. johnm33

    Those with access to cheap money bought up the productive economy one piece at a time, they profited from all the ‘fat’ in all those enterprises. Once they’d consolidated any particular sector into near monoplolies with a few big players and many small competitors who refused to sell out, probably because the owners enjoyed their work, the next step was to shift all that long developed bought for peanuts productive culture offshore. It had to be dressed up in fancy words because it meant destroying the livelyhood of all those working in the big companies and driving the small players to the wall, not just that but handing those livelyhoods over to a competitor. Something that those who sit in offices scribbling or pressing keys don’t realise is that engineering moves on relentlessly and once sold off those on the recieving end will see endless improvements and innovations, and once trained will form a new raft of competition a new group of ‘owners who enjoy their work’ and who will prosper in a growing economy rapidly outcompeteing their erstwhile benefactors. The rich sold the poors living dressed it up as efficiency then believed their own lies.

  6. Hugh

    So Trump has started a trade war but as per usual, there is no strategy, no goals. Meanwhile does anyone even know where the Democrats stand on trade? Me either.

    Off topic but I am fully behind making life uncomfortable for Trump enablers. For me, Trump likes dictators because he wants to be one. But for the Establishment, it is still business as usual. They may not like Trump and his henchmen, but at the end of the day, as far as they are concerned, Trump et al are still members of the club, their club, the one we don’t belong to. So while Trump and his cronies are screwing us over and telling us outrageous lies every day, we are supposed to smile and be polite to them. Again the Democrats stand for nothing and certainly it would never enter their heads to actually fight for anything, at least for ordinary Americans. So we have the spectacle of Chuck Schumer pontificating about leaving POS like Huckabee Sanders and McConnell alooone and just show our disapproval at the ballot box. My view is chuck Schumer. If someone is screwing me over I want to make it as uncomfortable for them as possible. I want them to be miserable. I want them to know that they can’t act with impunity, that there are costs to their actions. Maybe if more Germans had been less civil to the Nazis, there would have been no Hitler. Maybe if more Americans were less civil to our Little Hitler/Beloved Leader wannabe and his supporters, maybe we could stop this slide toward Know Nothing authoritarianism. We need more not less sand in the gears.

  7. Webstir

    “It’s been a fascinating journey into an alternate world, one in which frictionless trade and money flows; and unified regulations and laws are considered to be a good thing.”

    I recently read a great book review outlining the roots of neoliberalism, here:

    The take-home is that the “we can build it cheaper elsewhere and pass the savings on to you” trope is just cover for a global system of “unified regulations and laws,” which as Ian points out, the plutocrats feel is a good thing. But why do they think it’s a good thing?

    Because a sovereign state can tell you what you can and can do with your property, leaving open the possibility of populist socialist uprisings.
    However, a sovereign state bound by international trade treaties has a much harder time going socialist.

    It’s a great read. A real eye opener.

  8. Sid Finster

    I think what you are trying to say is that cost of a good or service does not necessarily reflect all externalities associated with that good or service.

  9. someofparts

    “engineering moves on relentlessly and once sold off those on the receiving end will see endless improvements and innovations”

    I look at the dazzling things happening in China and realize that it could have been us. The venal sleazoids who did this to us belong on the business end of guillotines. Too late now though. We will never catch up. But that is okay because once the vermin finish destroying our schools, the kids coming up won’t know who they were or who they could have been.

    “They may not like Trump and his henchmen, but at the end of the day, as far as they are concerned, Trump et al are still members of the club, their club, the one we don’t belong to.”

    So true. Hillary has the gall to present herself as someone who cares about women, given her vile record, and Obama started the inhumane detention policies Trump is escalating, but he was slick and sly about it.

  10. gnokgnoh

    @Sid Finster. Not exactly, at least not in my interpretation. It’s not just the measure of monetary costs that are important. You only used the term “cost,” but the implication is solely monetary cost. So, Ian is not just challenging the omission of externalities, but how costs are measured.

  11. Tom

    The Roman Empire had Free Trade and was a Capitalist Country.

    Lets see:

    Its elites ran a trade deficit with China and India which exported more to it than they imported.

    They were constantly fighting wars to expand the Empire and bring in cheaper labor to undercut their citizens’ wages. But the wars took on a life of their own and caused ever escalating campaigns that caused ever escalating number of new enemies to pop up.

    They gutted their conscript army and replaced it with a volunteer army that was essentially a mercenary army loyal to the generals rather than the state.

    Eventually their infrastructure crumbled and they ran out of gold and silver and tried Fiat Money, but that didn’t work.

    Gee, this sounds a lot like the US today.

    Funny how all the economists who were wrong in 08 are saying trade deficits benefit America, ignoring that nations with trade deficits in the past were all destroyed by said trade deficits.

  12. NoPolitician

    It’s more than “externalities”.

    When you have an economic system that requires money for people to participate in it, then “efficiency” equates to “removing people from that economic system”.

    If an actor within a capitalist system could perform an economic activity with 99% less people and save 1% in the cost of that activity, capitalism says that he should do it, because capitalism does not analyze the costs or effects on the system of capitalism itself.

    I also think there is far too little ink devoted to the idea that by globalizing capitalism, capitalism has completely broken free of government. So maybe if capitalism wants to be global, the right response would be a world government with the ability to constrain it again.

  13. Synoia

    “It’s not just the measure of monetary costs that are important. You only used the term “cost,” but the implication is solely monetary cost. ”

    It’s consuming the commons (Fresh Air, for example) for profit. We just don’t place a value on the Commons. The commons, schools, roads, police, etc and the Environment have real costs, but there is no accounting.

  14. Pelham

    I’ve wondered about the heavy emphasis on average, undifferentiated consumers in free-trade theory while workers and industries of widely varying worth and strategic importance are sort of left off to the side.

    Let’s say England is great at producing textiles and lousy at producing wine. And Portugal is great at producing wine but lousy at textiles.

    So the two should trade freely, and everyone’s better off. Right? Maybe not. In this case, free trade destroys England’s wine industry, but that’s a small loss as vineyards employ few people and it’s primitive and not susceptible to much improvement. But the extra demand from Portugal for textiles scoops up those few unemployed plus others in an industry that develops and grows.

    Meanwhile, Portugal is able to employ a few more people in the vineyards, but massive numbers are laid off when the country’s textile industry goes under, depriving Portugal of any opportunity for technological advancement as well.

    Thus, we have cheaper and better textiles and wines in both England and Portugal, but few Portuguese can afford either and the country falls behind in overall development while England continues to advance and prosper — until the wage differential between the two is sufficient to persuade England’s globalist textile honchos to begin offshoring production to Portugal.

  15. Free trade, free markets, are by definition anarchy.

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