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Friday, November 17, 2006

Economic Nationalism, Enemy of the People

With the 2006 election, America appears to have reached the tipping point on free trade. . . . Anxiety, and fear of jobs lost to India and China, seems a more powerful emotion than gratitude for the inexpensive goods at Wal-Mart. The bribe Corporate America has offered Working America — a cornucopia of consumer goods in return for surrendering U.S. sovereignty, economic security and industrial primacy — is being rejected.

So writes conservative commentator Patrick J. Buchanan in his post-election analysis, Return of Economic Nationalism. Buchanan may be right. Many of the congressional races were won by Democrats who pushed a protectionist, anti-globalist agenda. As the Wall Street Journal reported on the eve of the election, [I]n more than a dozen districts up for grabs, trade issues are giving them [Democrats] an edge over Republicans. . . . Protectionist sentiments and economic nationalism appear to be emerging as symbols of a broader but less well-defined sense of economic unease, which is particularly apparent in the Midwest this year.

The day after the election, Jacob Weisberg of, wrote, Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory. . . . It would be going too far to say that the 2006 election ushers in a new protectionist consensus. But free trade has definitely left the building.

His article was titled Lou Dobbs Democrats.

Free traders — those who reject the bogus idea of a national economy — should be nervous. This is not to say that the pure free-trade principle has ever been big with the public or Congress. The benefits of free trade are rarely recognized as such, so it gets no credit. On the other hand, the temporary disruptions and adjustments are highly visible and easily featured on television news. When many people think free trade, they don't picture stores full of inexpensive products and new industries emerging. They pictured closed factories.

Nor is it is not to say that the defeated congressmen would have won any Frederic Bastiat Awards for Devotion to Unilateral Free Trade. The reigning paradigm of globalization — which includes the World Trade Organization and a bevy of bilateral and regional trade blocs — is heavily laced with flawed ideas, exceptions for special interests, and government management. Indeed, the paradigm is based on the ridiculous idea that we open our markets because it's the only way to get them to open theirs. This is like saying you buy from your grocer because it's the only way to get him to buy from you. (See Don't Talk Trade, Free It .)

In other words, economic nationalism is already a commonplace to some extent. Yet if the choice is between the trade negotiators and the economic nationalists, it's not hard to choose. (Our job is to broaden the choice to include unconditional free trade.)

There is nothing good to be said about economic nationalism. It begins with the idea that the boundaries of economies coincide with the boundaries of nations. But this never happens in the absence of compulsion. Left alone, people naturally buy and sell to best advantage oblivious to political lines. Early on they figure out the benefits of specialization and comparative advantage, which as if by magic leads to the production of more useful stuff. (See The Most Elusive Proposition [pdf].)

It is only when the ideology of nationalism — often a cover for special labor and industrial interests — is permitted to muddy clear economic thinking that common sense is tossed to the wind and obvious truths are traded for rank fallacies. As Bastiat taught, Robinson Crusoe would never shove a useful plank that has washed ashore back out to sea because the free good robs him of work. He doesn't have enough time to make all the things he wants, so the freed-up time represented by the plank is a windfall. Yet at the national level, people fall for that one all the time. For some folks, nothing could be worse than dumping.

A World of Scarcity

The key to understanding the case — and the need — for free trade is contained in a single word: scarcity. At any given time we don't have nearly enough labor, resources, and capital to make all the things we want, including the things we don't yet know we want. So nature forces us to choose among competing desires. We'd rather not have to do that, but that's the world we're stuck with.

This is why the ideas of economizing and productivity arise. If we can make things with less labor and fewer resources, we can make more things. Once nearly every working American was involved somehow in farming. Today only a tiny fraction are. Does that mean we produce less food now? Of course not. Many fewer farmers, using highly productive machinery, methods, and materials, produce much more food than before. People left the farm because they weren't needed in that kind of work anymore. The change may have been disruptive, but consumers were willing to pay more at the margin for manufacturing labor than for agricultural labor. The incentives provided by the price system signaled the change.

We can generalize: whenever we can have our current array of products with less labor and fewer resources than before, the freed-up services and resources are now available for things we have had to go without. This is good news. In a free market material progress consists in increased productivity (more for less) and temporary unemployment as people and resources shift to new purposes, culminating in additional production and wealth. The whole process is driven by entrepreneurship.

I am describing the free market, of course. To the extent that government interferes with the market on behalf of privileged interests, it doesn't work quite that way. Taxes and regulations can make commerce sclerotic and impede adjustment. But that is not an argument against free trade; it's an argument against intervention.

Yes, under free trade in a global economy people have to adjust to changing conditions. What's the alternative? Government policies to freeze the status quo in place? If that thinking had prevailed earlier, some of us would be poor farmers and blacksmiths today; the rest would not have been born. Moreover, disruptive change is not something only foreigners can cause. A modern new plant in California can mean unemployment in Ohio. What does the economic nationalist say to that? Do we need trade barriers between states? Why not between cities, neighborhoods, households? If that makes no sense, then we're just arguing about how big the free-trade zone should be. When you trace the principle out consistently, you see that protectionism is no blueprint for prosperity or even security.

The way to minimize the hardship of change is to make sure the marketplace is free of government intrusion.

Just the Facts

The economic nationalists are wrong in principle, but they don't bother to check their facts either. They attribute to globalization a loss of manufacturing in the United States, when, in fact, manufacturing output is 50 percent higher than it was in 1987. (See this.)True, employment in manufacturing has fallen, but as a percentage of total employment it's been falling since 1950. The reason is increased productivity per worker, thanks to technological advances. More is being made with less, enabling us to make other things. The recent rise of China and India have little to do with this change. The outsourcing scare was manufactured out of whole cloth and never accounted for much unemployment. China and India have their own fears. They have to watch out for competition from cheap labor in Vietnam, Cambodia, and Sri Lanka. The developing world is not a monolith.

Finally, economic nationalism is not just bad economics; it's bad nationalism. It would hurt most Americans immediately and everyone in the longer run. If government restricts imports, Americans will have to pay more for products (whom will that hurt most?) and foreigners will have fewer dollars with which to buy American-made products or to invest in American companies. That'll mean fewer new products and jobs. Where exactly are the benefits?

No government action that makes it more difficult to obtain products can be good for us. Henry George had it right: What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war. Let's hope that bit of wisdom finds its way to the new Congress.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.