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Thursday, April 27, 2017

Free Trade As a General Rule

When in doubt, free trade is a safe bet.

At a conference at the Property and Environment Research Center in Bozeman, Montana a few days ago, one of the readings we discussed was “The Creative Powers of a Free Civilization,” Chapter 2 of Friedrich Hayek’s The Constitution of Liberty. I hadn’t reread the book in about 45 years, and I had forgotten how good it was. (My copy was destroyed in my 2007 fire and I haven’t replaced it.) In the next few days, I’ll highlight some segments of the chapter.

Here’s one. In discussing the role of ignorance and uncertainty in the case for tolerance, Hayek writes:

The classical argument for tol­erance formulated by John Milton and John Locke and restated by John Stuart Mill and Walter Bagehot rests, of course, on the recog­nition of this ignorance of ours. It is a special application of general considerations to which a nonrationalist insight into the working of our mind opens the doors. We shall find throughout this book that, though we are usually not aware of it, all institutions of free­dom are adaptations to this funda­mental fact of ignorance, adapted to deal with chances and probabili­ties, not certainty. Certainty we cannot achieve in human affairs, and it is for this reason that, to make the best use of what knowl­edge we have, we must adhere to rules which experience has shown to serve best on the whole, though we do not know what will be the consequences of obeying them in the particular instance.

I tend to follow the late W. Allen Wallis‘s dictum that one should always read footnotes and endnotes. In this case, there was a big payoff. At the end of that paragraph, Hayek references the late Abba P. Lerner on free trade. Lerner, in a 1957 article in the Journal of Political Economy, wrote:

The free-trade doctrines are valid as general rules whose general use is generally beneficial. As with all general rules, there are particular cases where, if one knew all the attendant circumstances and the full effects in their ramifications, it would be better for the rule not to be applied. But that does not make the rule a bad rule or give reason for not applying the rule where, as is normally the case, one does not know al the ramifications that would make the case a desirable exception.

It’s interesting that economists tend to have Lerner’s views on free trade. I wrote about this in “Hooked on Economics,” Chapter 2 of my The Joy of Freedom: An Economist’s Odyssey, and how the rules don’t seem to carry over to other branches of economics:

The first lesson I learned was that the rules for the debate between freedom and government intervention varied from one economic subdiscipline to another. Take international trade. My professor, J. Clark Leith, appeared to be a complete free trader, as were the other trade economists in a school that was thought of as having the strongest international trade group in Canada, a country known for producing economists who are strong in trade. In a large part of the course, Leith considered the various arguments that had been made for tariffs rather than free trade. In each case, he would lay out the argument clearly and then show the problems: Imposing tariffs would cause other countries’ governments to retaliate with tariffs of their own; in rare circumstances, tariffs could benefit a country, but the information a government needed to set tariffs at the “right” level was information it was unlikely to have; governments with the power to set tariffs would abuse it because the government officials involved didn’t have the right incentives. These were not just Leith’s views but were–and are–the dominant views of international trade economists around the world. An international trade economist who advocates tariffs or import quotas is about as rare as a whooping crane.

But when I went to my class on welfare economics, I learned that the rules are different.

Republished from EconLog.

  • David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at