FREE-TRADE: The Good, The Bad, and The Ugly

by L. Reichard White
February 29, 2008

Intro:

I originally wrote the following series because hot debate involving free-trade regularly surfaces. This series was orginally circulated on several discussion fora, and I am indebted to the posters on those fora for their feedback. I always seem to do my best work against worthy opponents!

So, here, edited a bit, largely as a result of feedback from worthy opponents, is FREE-TRADE: The Good, The Bad, and The Ugly.

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CONTENTS:

INTRODUCTION
The Bad
The Good
In The Common Interest
The Ugly
Who's Winning?
The Good, The Bad AND The Ugly -- Losing jobs?
The Logical Anti-free Trade Arguments

FREE-TRADE Chapter I: The Bad

Free trade is a hot-button issue. Everywhere. And it always has been. Third Party presidential contender, Reagan speech writer, and political commentator Patrick J. Buchanan billed himself as "next to Ronald Reagan, the strongest free-trader in the White House," -- but he changed his mind. So what gives? Is free-trade in free markets really so controversial? If so, why? Who really benefits from free trade -- and who is hurt by it?

Consider the following:

"The countryside was cut out of trade in the Middle Ages.
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'Up to and during the course of the fifteenth century the towns were the sole centers of commerce and industry to such an extent that none of it was allowed to escape into the open country' (Pirenne, _Economic and Social History_, p.169). 'The struggle against rural trading and against rural handicrafts lasted at least seven or eight hundred years' (Heckscher, _Mercantilism_, 1935, Vol. I, p. 129). 'The severity of these measures increased with the growth of 'democratic government' . . . . 'All through the fourteenth century regular armed expeditions were sent out against all the villages in the neighborhood and looms or fulling-vats [in which cloth was dyed] were broken or carried away.' (Pirenne, op.cit., p. 211)." --Karl Polanyi, The Great Transformation. (Boston: Beacon Press 1957), p. 277 [emphasis added]

Seven or eight centuries of "struggle against rural trading," not to mention a century of loom-stealing and vat-smashing does seem to indicate free-trading was rather a hot-button issue even in medeival times, don't you think?

An increasingly strict separation of local trade from export trade was the reaction of urban life to the threat of mobile capital to disintegrate the institutions of the town. The typical medieval town did not try to avoid the danger by bridging the gap between the controllable local market and the vagaries of an uncontrollable long-distance trade, but, on the contrary, met the peril squarely by enforcing with the utmost rigor that policy of exclusion and protection which was the rationale of its existence. --Karl Polanyi, The Great Transformation. (Boston: Beacon Press 1957), pp. 64 & 65 [bolding emphasis added]

Inherent in the idea that whole villages opposed free trading amongst the rural folks is that for some reason the establishment particularly doesn't like free trading. And contrary to the common perception of some free-trade advocates, businessmen are in the lead of the establishment which doesn't like free trade in free markets:

My first clue to [Ayn] Rand's greatest mistake, though I failed to understand it at the time, came as a friend of mine (Larry) and I gave a talk to the Las Vegas Junior Chamber of Commerce (the "JCs"). We presented two libertarian issues; heroin decriminalization to demonstrate civil liberties and free trade in free markets to demonstrate economic freedom. Since JCs are business folks, we figured we'd get static on decriminalization, but if we addressed the free-trade issues last, we would leave them with a positive impression.
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Sure enough, immediately after the decriminalization presentation one JC stood up, and in a very agitated manner let us know that we were crazy to propose such a thing. Before we could answer, another JC said, "Sit down Bob. They're right." There was a murmur of assent from the rest of the thirty or so in the audience. Larry and I looked at each other amazed. We figured we were over the hump.
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After our free market presentation, however, there was dead silence. We felt a chill. Someone murmured something like "You can't have that sort of thing going on." This audience of business people, which had accepted decriminalization, figuratively turned it's collective back on us. We had violated some hallowed but unstated rule. It was as if actually mentioning free markets, acknowledging they even existed, was unacceptably foul manners. What was going on here? --L. Reichard White, "Ayn Rand's Greatest Mistake, Why Almost Everyone Hates Free-Trade, and Where Totalitarianism Comes From"

Thus whole villages -- tradesmen, and workers of all kinds -- including business persons -- dislike (to put it mildly) the competiton they have to deal with when free-trade is possible. Here's why:

The consumers do not care about the investments made with regard to past market conditions and do not bother about the vested interests of entrepreneurs, capitalists, land-owners, and workers, who may be hurt by changes in the structure of prices. Such sentiments play no role in the formation of prices (It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.) [emphasis added] --Ludwig von Mises, Human Action A Treatise on Economics, Third Revised Edition (Chicago, Illinois: Contemporary Books, Inc. 1966), pg. 337 [available also from http://www.mises.org/humanaction.asp

Bankers are notable -- though often overlooked -- examples of capitalists who don't like the fact that consumers do not care about vested interests -- and have managed to do something about it: They've engineered monopolies around the world (here in the U.S., since 1913). If you've ever wondered where all those banking regulations really came from - - -

LEGAL RESTRICTIONS ON DEPOSITS
As part of the overall pattern of regulation and supervision of banking, it has been customary for state and federal authorities to draw specific lines of demarcation separating the time deposit from the demand deposit functions and to place restrictions on the payment of interest to customers. This has been especially true since the era of the Great Depression. Before that, it was common practice for banks to offer interest on demand deposits. This led to aggressive competition that often took the form of bidding wars, ... --Eric N. Compton, Principles of Banking, (USA: American Bankers Association 1986), p. 118 [At the time Mr. Compton wrote this textbook, he was billed as "Vice President, The Chase Manhattan Bank, N.A."]

The problem with free markets is, that despite the rhetoric, they, not socialism or communism, are "the great levelers." If you see me doing something more profitable than what you're doing, you'll try to do it too, which leads to competition and price reductions. My income gets "leveled."

Notice I didn't include governments in with those groups who don't like free trade. Mises (above) provides the key as to why governments may even "like" free-trade when he observed, "the people concerned ask for government interference." That is, free trade gives governments a big opportunity to make money - - - by interfering with it on behalf of "the people (vested interests) concerned."

What's clear, then, is that large numbers of people have historically perceived problems with free trade. Since we're having this discussion here at Eagle Ranch, it's clear this perception of problems with free trade persists to this day.

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FREE-TRADE Chapter II: The Good

So who DOES like free trade?

If whole villages, including "tradesmen, and workers of all kinds -- including business persons" -- dislike free trade enough to engage in centuries of vat-smashing and loom-stealing, who does like free trade?

WE do. Just about all "consumers" usually like free trade whether they know it or not. That's because it counters the selfish "vested interests of entrepreneurs, capitalists, land-owners, and workers" of all kinds who, instead of selling their products and services into competitive markets which force low prices, want to sell into markets where they enjoy a monopoly (or at least restricted competition) and can therefore charge high prices -- and where they (and their employees) don't have to constantly change to keep up with the competition.

Therefore most of us are, whether we've thought about it or not, schizophrenic about free trade. In our capacity as "consumers," we want to buy from free markets where competition automatically keeps prices low, but as producers and sellers, we want to trade the goods and services which pay our rent into markets protected from competition so we can charge top-dollar.

Clearly then, most of us schizophrenically harbor two diametrically opposed interests when it comes to trade. It's our buyer half vs. our seller half. [1] Which of these interests is, in the wider context of "society," the "common interest?"

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In "the common interest"

Who's the fool in a trade? Is the grocer who sells you a loaf of bread foolish to let such a valuable commodity go at such a low price, or are you (the "buyer") a fool for paying for something the grocer clearly want's to sell?

In a free market the answer is usually, "Neither is the fool." In fact people trade because they both gain time and/or energy and/or money in a good trade. And this gain isn't just psychological or a matter of the whims or desires of the moment. In fact, in most cases, both parties would have to be fools NOT to trade.

For example, let's suppose you can trade wheat to a shoemaker for a pair of shoes. You can, alternatively, make your own pair of shoes with, let's say, 40 hours of work, including aquisition of the raw materials -- leather, rubber, etc.. Let's say the shoemaker will trade you the pair of shoes for 20 bushels of wheat. It takes you about 20 hours total to produce that 20 bushels. Are you better off spending 40 hours making the shoes for yourself or spending 20 hours producing the wheat and trading it for the shoes?

I did a very sloppy non-market, non-price-discovery equivalence guess here as to the trade relationship between 20 bushels of wheat and a pair of shoes. You may be thinking, "This writer made this shoe-wheat price up out of hir imagination and thought I wouldn't catch on." Maybe you're thinking, "It could be that I could produce those shoes in less than 20 hours. I'm not going to let this writer get away with that!" Well, I think you'll decide to let me get away with it afterall - - -

It's obvious that someone who specializes in making shoes will have all sorts of tricks to save herself time and energy. She will have learned her mother's tricks as well as her grandmother's in addition to, over a period of time, discovering her own time/money/energy saving tricks. She probably even has some special machines (capital goods) to make her shoe-making faster, easier and better. Perhaps you have to punch holes in the leather and then thread the shoe-thread through the holes whereas she has a special industrial strength sewing machine that does both automatically in a single operation. Etc.

The same observation applies to you as a wheat producer. Sure, the shoemaker could raise her own 20 bushels of wheat --- but it would take her more than the 20 hours it took her to make your shoes because she doesn't know your tricks of the trade any more than you knew hers. She doesn't have your capital equipment either, any more than you have her industrial strength sewing machine. Thus she saves time too and therefore benefits from trading with you.

This advantage to trading is based on the knowledge accumulation efficiencies of "specialization" which inevitably leads to "division of labor" and is called in economic's classes, "The Law of Comparative Advantage." Because of "comparative advantage," good trades are highly common instances of those fabled "win-win" propositions we hear about so often. We engage in them nearly any time we trade ("buy" or "sell") anything.

That is, other peoples' skill and expertise save us time/energy/money IF we trade with them - - - and vice-versa. That's why free-trade in free markets is nearly always "in the common interest," and tariffs and trade restrictions are, nearly always, against "the common interest."

"Free enterprise can't be justified because it's good for business -- it isn't. It can only be justified because it's good for society. -Peter Drucker quoted on CNBC, October 10, 2002

Unfortunately, few of us are consciously aware of these comparative advantages -- or the win-win nature of the transactions we regularly participate in. Worse, we often feel we're being taken advantage of.

Sometimes, of course, we are, though usually not in the ways we're led to believe - - -

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FREE-TRADE Chapter III: The Ugly

So far we've discovered in previous installments that the establishment in general, particularly including banks, doesn't like free trade in free markets -- at all -- and that the "only one" who does like free- trade is our schizophrenic "consumer" half. The establishment doesn't like free trade because competition for our consumer's money causes the intense competition and pricing pressures (and thus the pressures to change) inherent in free markets.

We've also learned that because of the knowledge we each gain in doing our jobs -- and the techniques and machines (capital equipment) we develop as a result -- we are each usually more efficient at what we do than are "non- professionals" attempting the same thing. The logical offshoot is that in general it's better for us each to do what we do best and trade for most other things. Economists call this "comparative advantage," and it's why we have to be crazy NOT to trade. Also because of this "comparative advantage," interfering with trade is generally not "in the common interest." (However, don't dispair - - - there are at least five logical arguments against free trade under certain circumstances as we'll see.)

The Ugly: Free markets don't exist!

"There isn't one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians" --Dwayne Andreas, ADM CEO, Mother Jones, July/August 1995
A free market is a theoretical geographical area in which people can trade anything they own for anything others own and are willing to trade --- and at what ever "price" they agree to without any coercion --- and no interference by ANY unwanted third parties in any way what-so-ever. No rules, regulations, orders, or controls. No taxes. No loom- stealers or vat-smashers. No protections for either "buyers" (those with "money" to trade) or sellers (those traders who want to trade FOR "money") unless they agree to such between (or among) themselves. Certainly no protection for the "vested interests of entrepreneurs, capitalists, land-owners, and workers" or any other non-participating, non-present (establishment) traders simply because they don't like the competiton!

As I think you can see, we don't have any free markets in the united States, except perhaps in the case of private transactions that ignore all the rules, regulations, orders and controls - - - and if the people involved don't pay any "Taxes, Duties, Imposts and Excises" to unwanted third parties. In a major perversion of fact and practice, such unhampered free-market transactions are regularly labeled as occuring in a "black market" [2] -- because, remember, the establishment "vested interests" (including business, labor and our seller half) don't like the effects free-market competition has on the prices they are able to charge. Or the constant pressure to change and update their operations and products to better satisfy their customers.

And so "the people concerned ask for government interference." And often get it -- because the relationship between large economic interests and government is symbiotic: The bureaucrats get later employment and other perks (not to mention bribes) -- and, in addition, politicians get campaign donations and junkets -- for responding to the approximately 35,000 (as of 2008 A.D.) registered and paid Washington D.C. lobbyists retained by those interests.

This process whereby vested interests hi-jack government for their own use is called "capture theory" and was thoroughly documented by empirical economist George J. Stigler -- who got the 1982 Nobel Prize for doing so.

As things evolve in "real life," protecting vested interests from competition -- and collecting taxes (rather than protecting "we the people") -- quickly becomes the main focus of market-place interference by governments -- which is completely understandable. After all, which institution primarily benefits from the collection of tax money? That's why in government-speak, "black market" quickly evolves to mean, "We didn't get our taxes." I would suggest that "black market" would be a much more appropriate term for any market invaded by largely unwanted third-party government vat-smashers and loom-stealers in the interest of restricting competition --- but today, primarily to collect taxes.

And there are the other government-created "black markets" where people voluntarily buy and sell, largely, a certain arbitrary group of drugs made illegal -- and so highly profitable. But that's another story.

Clearly, even here in the freest country in the world, we rarely have free trade in free markets. THEREFORE, ANY ARGUMENTS THAT THE ANTI-FREE-TRADE FOLKS MAKE AMOUNT TO, "CURRENT TRADE SHOULD BE MADE EVEN MORE UN-FREE AND MORE RESTRICTED THAN IT ALREADY IS."

Are such trade restrictions "in the common interest?" Or are they in the "vested interest?"

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Apparent winners (sellers) and definite losers (buyers)

Since even "here in the freest country in the world, we rarely have free trade in free markets," and despite the fact that free-trade is "in the common interest," it would seem that the anti-free-trade forces are firmly in control. In essence, this is exactly true.

One place to see this is in the market-place taxes we all pay. The most obvious is the "sales tax," but there are many others. Here's a sample of "hidden taxes" we pay in the united States when we buy and/or sell - - -

A study by Americans for Tax Reform (ATF), a non-partisan Washington DC group, has calculated that these hidden taxes raise the cost of goods and services by a wallet-stinging 26% to 75%.
Some examples: there are more than 100 taxes on a loaf of bread which account for 31% of the cost. Taxes account for: 28% of the cost of a restaurant meal; 38% of the cost of a pizza; 46% of the cost of a firearm; 43% of the cost of a beer; 72% of the cost of liquor; 40% of the cost of an airline ticket; 54% of the cost of gasoline; and 26% of the cost of electricity.
Think about that the next time you pay $12 for a pizza that should cost you only $7.45. Or $17,000 for a car that, without invisible taxes, would cost you only $9,350. --Bill Winters in Libertarian Party News

As these taxes prove, there are all sorts of unwanted third parties participating in our trades. And hidden taxes are only one way free trade -- and our buyer half -- get trounced.

Another way is by regulation. My personal favorite illustration of one way that's done is the operation of the various "Dairy Control Commissions," quasi-governmental entities which exist in many states purportedly to "control" or "police" the dairy industry.

First, you might wonder why such governmental bodies as "Milk Control Commissions" exist in the first place. To put this in context, why don't we have "Grain Control Commissions," "Fruit Control Commissions," "Shoe Control Commissions," "Hardware Control Commissions," etc.?

Perhaps about now you're thinking something like, "Hey, this is getting too radical -- we need these types of government oversight and inspection organizations to protect us from predatory businesses!" That IS what you'd think. But remember George J. Stigler and "capture theory" above? Well, it turns out that

As a general rule economists have found that government regulation of industries harms consumers and often gives monopoly power to producers. [3] Some of these findings were behind the widespread support of economists for the deregulation of transportation, natural gas, and banking, which gained momentum in the Carter administration and continued until halfway through the Reagan administration.... Biography of George J. Stigler (1911-91)

So, back to the dairy industry with "capture theory" in mind - - -

The most consistent and visible things the dairy commissions do is set the floor price for milk. You see, despite the rhetoric and illusory claimed health protection functions [4], the real reason dairy commissions exist is to protect the dairying status-quo. That is, these commissions (thru rules, regulations, orders and controls) stifle changes (advances) in dairying practices - - - and set the lowest price --that's the "floor price" -- dairy farmers can legally charge for the milk they sell us.

Let me attempt to make this perfectly clear: Milk control commissions make it illegal for dairy farmers to sell you milk at low prices. Any farmer undercutting the official floor price eventually gets busted by the cops. On the other hand, these commissions say nothing about how high the prices dairymen charge you can be. They could charge you a million dollars a gallon for all the commissions care. Why don't they charge even more then? [5]

The rules, regulations, orders and controls stifle innovation and change -- and create an economic barrier against new dairy producers. Since all producers are saddled with the same procedures and similar capital equipment -- by law -- competition among producers is, defacto, severely limited by the parameters set by the rules, regulations, orders and controls. Guess who most normally serve as the "Dairy Control Commissioners" who make these rules, regulations, orders and controls?

I didn't figure you needed a multiple choice.

The answer is of course, "dairy farmers." The reason is economic: A few extra cents a gallon isn't enough for individual consumers to be able to afford the legal or political effort to do away with such "milk control" entities. On the other hand a nickel a gallon in extra profits times, say, 10,000 gallons of milk a day amounts to $15,000 per 30-day month for a dairy farmer, ample motivation to get yourself appointed to the Commission and fight to maintain the advantages your seller-half gets from these proto-fascist "milk control" organizations.

The reason our buyer half gets trounced, then, is that "consumers" (buyers) usually buy only in small increments here and there, while producers and suppliers on the other hand, as in the case of the dairy farmers, sell in much bigger "lots" with much higher stakes. That nickel a gallon adds up -- which makes it worth-while for producers and suppliers to "purchase" various forms of "competition protection" -- and "capture" other "perks" such as subsidies, etc. -- from the government. We might call this "the economy of scale for graft."

As quipped by businessman Johnny Chung in 1997 during the Clinton fundraising scandal hearings, "I see the White House is like a subway -- you have to put in coins to open the gates." This is the type of thing Ralph Nader and others see so clearly when they point to the 35,000 registered and paid lobbyists (2008 A.D.) stalking the halls of congress -- and so speak of "the corporate state."

In fact, this protection racket is one of the main things governments have always done. Remember the "seven or eight hundred years" of "struggle against rural trading" in England? In the battle between sellers (suppliers) and buyers (consumers), then, this alliance of government with the "vested interests of entrepreneurs, capitalists, land-owners, and workers, who may be hurt by changes in the structure of prices" -- is the main reason why sellers are clearly winning -- and buyers are clearly losing.

And to the extent buyers are losing, we, as a society, are also losing the time, money, and even life-saving benefits of specialization, division of labor, and "comparative advantage."

Traditionally, then, there's always been at least a clandestine alliance of government with business in the interest of surpressing free trade.

In addition to "communist" Karl Marx and seminal free-trader Adam Smith, U.S. President Dwight David Eisenhower recognized a large portion of this symbiotic amalgam of large economic interests and government and called it "the militaryindustrialcongressional complex". [6] He warned against it in his farewell address in 1961. [7] Since then, other sectors of the economy have joined-up, most notably, the media.

In the old days, they called it "mercantilism," and today (2008 A.D.), especially when it goes to extremes, we call it "socialism," "fascism," -- or more generically, "totalitarianism." When I was growing up in the 1960's, we called it, simply, "The Establishment."

And just to show how far this establishment partnership between vested interests and governments can go -- especially with the big vested interests such as banks -- we have U.S. Marine Major-General Smedley Butler as a front-line witness:

War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses. ...
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I spent thirty-three years and four months in active military service as a member of this country's most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle-man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism. [8]
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I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912 (where have I heard that name before?). I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested. --Excerpt from a speech delivered in 1933, by Major General Smedley Butler, USMC, Originally published in Common Sense, November, 1935. Quoted in Felix Greene's The Enemy, Vantage Books, New York, 1971. From the Federation of American Scientists web-site Also available from http://www.mmmfiles.com/amerimpe.htm

This should give you an idea of just how far this symbiotic militaryindustrialmediacongressional-etc complex will go. As Major General Butler explained, even the racket of war is used in the "vested interests." And notice that Major-General Butler prominently mentions banks -- [9]

In addition to this economic advantage of suppliers over consumers -- due to the alliance of big economic interests with government -- there's another central psychological factor that favors our sellers over our buyers and helps explain the trouncing. It's the "vested interest" of our worker half: What good are free markets if you can't buy from them because competition has eliminated your job?

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FREE-TRADE Chapter IV: The Good, The Bad AND The Ugly

So far we've discovered in previous installments that establishment "vested interests," -- including bankers -- don't like free-trade in free-markets because of the pricing, etc. pressures free-market competiton causes - - - and that as a result, only our schizophrenic "consumer-half" likes free-trade.

We've also learned that the logic of "comparative advantage" suggests it's better for us each to do what we do best and trade for most other things and in fact, we'd almost have to be crazy NOT to trade - - - and because of this, that interfering with trade is generally not "in the common interest," but is, rather, "in the vested interests."

Further we've learned that free markets don't exist - - - because they are suppressed and always have been, largely by an alliance between "vested interests of entrepreneurs, capitalists, land-owners, and workers" in cahoots with governments, and that since these supressions are administered by governments, they end up doing more taxing than protecting.

We discovered our buyer half regularly get's trounced by this alliance and looked at "Milk Control Commissions" to see just how this "economy of scale of graft" works: Five-cents a gallon makes it worth-while for dairy farmers to keep the Commissions functioning, but is not nearly enough to make it worthwhile for a consumer to buck the trend.

This protection racket is the main thing governments do and explains why our buyers are nearly always trounced by our sellers. And we discovered, via Marine Major General Smedley Butler, that this "protection racket" has evolved to sometimes even go as far as "war."

But, there's a problem: What good are free markets if you can't buy from them because competition has eliminated your job?

And now for the next installment of FREE-TRADE: The Good, The Bad and The Ugly

Lost jobs

The United States still has the world's strongest agricultural base, even though farmers now constitute only 3 percent of the working population (they still formed 25 percent at the end of World War II). --Peter F. Drucker, Post-Capitalist Society, (New York: HarperBusiness 1993), pg. 72

In 1990 right after the Berlin Wall came down and the Soviet empire tumbled, about 24% of the Polish population made their living by farming. At about that same time in the United States, less than three percent of Americans were farming. But, if you look back in history, a similar proportion of Americans (about 25%) were engaged in farming at the end of World War II. Since about 1950 in the United States, then, we have "lost" about 88% of the jobs in farming. Is this a good thing or a bad thing?

Remember that little ole' shoemaker, improving her skills to be more efficient? Well guess what -- that's normal. So is inventing machines like her industrial strength sewing machine -- "capital equipment" remember -- that further increases her efficiency. And clearly you out there raising all those bushels of wheat were busy increasing your efficiency -- often called "productivity" -- too. It's a never ending process.

And, as Greenspan suggests of productivity, "ultimately the standard of living of human beings is determined by the output per worker." -Alan Greenspan to US House, July 22, 1998

The net result of increases in productivity are that you can produce the same amount of product using fewer man-hours - - - or more product with the same number of man- hours. Or a little of both. What happened in U.S. farming was that productivity had increased so much since 1950 that a combination of the above alternatives happened. The result is, much more food is now produced and it requires fewer man hours to produce it.

We can choose to look at this as a positive - - - fewer men and women toiling in the fields doing exhausting dusk-to-dawn physical labor. I suppose we could also choose to view it as a negative -- more idle hands to do the devil's work.

Is it a good thing that in 1990, nearly a quarter of the Polish people still had to work full-time just to feed themselves and the other three-quarters of their population? Is it bad that only about three in a hundred Americans had to work to feed us all (1990 A.D.) (plus producing huge surpluses to trade overseas to other people)?

Of course, if you told a 1950s American -- or a 1990 Pole -- that the population of farmers within their respective societies was going to dwindle to approximately one-eighth its previous size, they would be incensed and frightened. What would all those people who are about to "lose their jobs" do for a living? Clearly even though we "lost" the farming jobs previously held by 22% of Americans, 22% of us aren't unemployed. (2007 A.D.) Why not?

It's clear that as societies evolve and efficiencies in older industries increase dramatically (because of "capital" knowledge and equipment), the number of man-hours necessary in the older industries decrease and people are freed-up to do other things. These gains in efficiency result in more "stuff" produced per man hour -- and thus increases our standard of living.

Many of the "other things" people find to do can't even be imagined because they're completely new things. Because of changing circumstances, the locations in which things are done also change. Most farming in America used to be done on small family farms --- or in the backyard.

If you could travel back in time to 1950 America, how would you explain to the denizens what their future countrymen would be doing? How could you explain that all those people who "lost farm jobs" are designing and building computers, writing computer programs, working in the entertainment field, etc.? Would things be better if they were all still picking fruit?

How could I explain to you what people 50 years from now will be doing? We can't know.

Individuals who used to work on a farm changed jobs. "Losing jobs" then, is really just the first step in changing jobs. True, for most people, changing jobs isn't a very pleasant pass-time, but these days, it's rarely life- threatening. None the less, it is part of the "creative destruction" that gives free-trade a bad name among the "worker contingent" of those vested interests - - -

"Creative Destruction"
FED Chair Alan Greenspan to Senate Banking Committee, July 21, 2005

But despite "creative destruction" it's good to keep in mind, in line with Greenspan's other observation, that "ultimately the standard of living of human beings is determined by the output per worker" -- an increase in which is an important long-term result of market competition - - -

As late as 1910, workers in developed countries still worked as much as they had ever worked before, that is, at least 3,000 hours a year. Today, the Japanese work 2,000 hours a year, the Americans around 1,850, the Germans at most 1,600---and they all produce fifty times as much per hour as they produced eighty years ago. --Peter F. Drucker, Post-Capitalist Society, (New York: HarperBusiness 1993), pg. 38 [10]

Just as farming moved out of our early American backyards - - - it became cheaper in human hours to let the mechanized mega- farms produce our food mostly in the mid-west - - - just so (because of comparative advantages), some production has likewise moved way out of our backyard -- to Mexico, Asia, etc. In a gold-standard world, there would be few problems if production moved out of our backyard (to Mexico, etc.) under any circumstances -- Americans would just have to change jobs. Unfortunately, however, we don't live in a gold-standard world.

If trade with your next-door neighbor, Joe Nerdy -- who straightens out your computer at a single bound, thus saving you days of fruitless frustration -- is good, and buying those excellent hydroponic tomatoes grown by "The Horticultural Dudes" from neighboring San Jose is good, what's wrong with buying that car, largely produced in Detroit, Michigan, which saves you the time of manufacturing one for yourself?

Why then is it a bad thing to trade with some Canadians for the canola oil you don't have time (or knowledge) to make for yourself -- or the gold they've mined? Or to trade with some Mexicans for the fringed blankets you can't find the time to weave yourself? Or with the Japanese for those great electronic gadgets? Or the Chinese for some of that spiffy bamboo furniture?

From the other direction, if it's a good idea to restrict trade with China, Japan, Mexico, Canada, etc., why not with Nevada, Michigan, and Florida? Or even San Jose?

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Five anti-free-trade arguments

Confoundingly, however, there are five "common interest," even "common sense," arguments in favor of attempting to hamper trade under certain conditions:

1. The Sociological Argument against "free trade," which amounts at its best to, "In order to keep myself and my friends and neighbors employed, and thus the neighborhood safe from scrounging poor and homeless folks, we should protect their jobs from at least some 'foreign' competiton, --- and implicitly, "I'm willing, along with my friends and neighbors, to subsidize (or more likely, be indirectly forced to subsidize) relatively inefficient jobs and/or lower quality products than I otherwise would if I could save time, energy, and money by buying un-taxed, unrestricted 'foreign' goods." This argument is often used by those who themselves are the most directly affected by the "foreign" competition.

2. The Dependency Argument, which amounts to, "If we buy widgets, etc. from 'foreigners,' we'll lose the knowledge, expertise and facilities (including up-to-date capital equipment) to produce our own widgets and will thus become dependent on these 'foreigners' if we continue to decide we need or want widgets. Further, we could be black-mailed by these 'foreigners' if they decide to withhold widgets from us." [11] To one degree or another, the dependency argument applies to anything we no longer "grow" in our own back yard, which includes those tomatoes I get from "The Horticultural Dudes," the ground-beef I get from my favorite neighborhood store, that car from Detroit -- and the e-forum you are likely reading this on. Also having someone store your "nest egg" buying power for you. Like when you put your savings in the form of paper money and give it to a bank. [12] That is, the "dependancy argument" applies to anything we no longer do for ourself.

3. The "Spooky Action at a Distance" Argument, which amounts to, "free trade causes unpredictable economic changes." You're doing, what you've always done for a living and suddenly it doesn't work anymore. The most normal way for these unpredictable changes to present themselves is that you begin to lose customers -- or get laid-off or fired because your employer loses customers. It may be, of course, that because of style or trend changes, customers no longer want your product or service. But another very common reason customers are lost is that some other entity is either underselling you or giving better service -- or both. They could also be out-marketing you of course.

This is the cause of the "spooky action" that you can't know about in advance and don't have any significant control over. (Of course you could have raised your prices and begun giving worse service, but that's not "spooky action" and is theoretically under your control.) Both better service and undreselling you are usually the results of improved thinking and execution by other people -- often enabled by better capital equipment -- and no direct fault of yours.

It's called "competition." You usually don't know about it until the symptoms begin to show up on your bottom line. When this "spooky action at a distance" happens, whatever the cause, it disrupts your life, the lives of your employees and investors (if any), and the lives of everyone else from who you all can no longer afford to buy as much. "It" hits their bottom lines as well as yours. It doesn't seem "fair," and it's not! It's "business as usual."

Some discussion on the first three free-trade objections

Our buyer half, remember, just doesn't care about "the vested interests of entrepreneurs, capitalists, land-owners, and workers" -- or, for that matter, your vested interests. Our buyer-halves don't usually care or even think about the "sociological effects" their individual buying decisions cause, or that they are the agents of "spooky action at a distance," etc. Although they probably don't often think of it that way, like your buyer half, they just want to get as much out of "division of labor" and "comparative advantage" as they can. Just like you, all those buyers really care about, remember, is getting the most they can in trade for the hours of their lives. [13]

While as Mises observed, "It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference," on the other hand, it is exactly this desire of buyers -- and their "uncaring" decisions in pursuit of the best trade for the hours of their lives -- that produces the competition that powers increases in productivity, that is, "output." And, remember, as Greenspan explained, "ultimately the standard of living of human beings is determined by the output per worker." [14]

It is also competition, powered by buyers' selfish desires, that forces the results of increasing productivity to be shared with buyers in the form of lower prices and/or improved quality. Why would equally selfish manufactures and retailers have reduced the prices of computers from the $3000 I paid in 1982 for my first two mega-hertz Commodore Pet to $399 (2006 A.D.) for the latest Dell one-gigahertz machine -- if they had no competition and could have kept all that extra profit ($2,601) for themselves?

As late as 1910, workers in developed countries still worked as much as they had ever worked before, that is, at least 3,000 hours a year. Today, the Japanese work 2,000 hours a year, the Americans around 1,850, the Germans at most 1,600---and they all produce fifty times as much per hour as they produced eighty years ago. --Peter F. Drucker, Post-Capitalist Society, (New York: HarperBusiness 1993), pg. 38

Although it may help with the "dependency problem," usually attempting to limit trading with "foreign" jurisdictions doesn't help the "sociological problem" or the "spooky action" problem much -- you usually still have plenty of "domestic" competition -- except where restricted by government rules, regulations, orders and controls. And the further away the trade comes from, at least trade in physical "stuff," the more it's handicapped since the transportation costs are higher.

However, as Kenichi Ohmae points out, today even transporting stuff from halfway around the world is cheap. Transporting an auto generally costs around 5% of it's end-user price, a TV about 7%. In relation to tariffs, taxes, currency fluctuations and discounts, such a small percentage may often be negligible. In the case of things that aren't so "stuff" oriented -- computer programs, computer games, books, and even computers themselves -- this "transportation cost" protection is much less effective, even missing entirely.

There's still an inherent problem with The Sociological Argument, The Dependency Argument, and the Spooky Action at a Distance Argument, and that is the question implicitly raised in the previous chapter, namely, "Where does 'foreign' begin?" Does it begin at the borders to the neighborhood? The city limit? The state border? Or is it at the national border? Or somewhere else?

Where is it that we cut-off the advantages of trade to ourselves and those we trade with? At what line do we say, "The sociological effects, the dependency problems, and the disruptions caused by 'spooky action at a distance' are just too great?" At what border do we say, "To heck with the advantages of 'division of labor' and 'comparative advantage'; we don't need that competition and we will put up with inferior products, forgo new products -- and we don't care if we and our friends and neighbors have to pay more?" Where is it that we handicap all our buyers to favor some of our sellers?

The U.S. founders, knowing well the propensity of governments to protect their vested "domestic" businesses from competition with "foreign" states -- like the competition of, say, Virginia businesses with Maryland businesses, etc. -- and to take their piece of the action in the form of "tariffs" and political contributions, wrote the Interstate Commerce Clauses into the U.S. Constitution to prevent this "not in the common interest" practice among the various states. [15] If this principle was sound, why should that protection against interference with trade, which we now know is "not in the common interest," stop at U.S. borders? [16]

There are at least two more somewhat obscure "arguments" that can be raised against free trade. For the sake of thoroughness -- and interesting perspective -- we'll take a look at both.

4. We might call the fourth argument against "free trade", rarely heard and somewhat back-handed, the "We Need Tariffs to Pay for Government Argument." This is fairly self-explanatory, and while it sounds quaint in this era of "personal income tax," until at least 1913 when the 16th amendment was inserted into the U.S. Constitution by Philander Knox -- without proper ratification [17] -- and, as currently implemented, in direct violation of Article 1, Section 9, Clause 4 of the U.S. Constitution [18], the Federal Government was almost completely financed by tariffs. In fact the biggest issue before the Continental Congress had been whether or not the new Federal Government should be given even that taxing power. The Federalists wanted the tariff power for their new government, the anti-Federalists didn't, warning it would lead to more and more power concentrated in the hands of the Federals. Clearly, while the Federalists won (by dirty-tricks politics) history proves the anti-Federalists were clearly right.

At any rate, until the so-called "personal income tax" was foisted and conned onto flesh and blood Americans - - - in addition to the artificial corporate "persons," created by the government for business purposes (particularly for limiting the liability of fictitious "persons" (corporations) for "their" mistakes), that it was originally designed for - - - tariffs were nearly the sole source of support for the Federals. And should be -- and could be -- again. [19] So, to have eliminated the tariff by instituting completely free trade, particularly in certain products, would have further restrained the new Federal Government, clear up till 1913. But that's a separate, even if closely related, story.

5. There is a fifth argument that could be raised against free trade, but I haven't ever heard it presented quite in this way: Because trade across borders means using different paper (fiat) currencies -- and the relative value of these currencies can change very rapidly -- free trade across borders can set the stage for rapid economic chaos. We might logically call this argument against free trade "The Fiat Money Argument." Currently Argentina's 2001/2002 default and economic collapse is a good example of only one aspect, if a rather severe one, of the many-faceted free-trade "Fiat Money" problems. In fact, the Fiat Money problems are so ubiquitous in international trade, which currently comprises about 24% of world trade (and as much as 30% of u.S trade) -- and so disgustingly twisted -- that they deserve and will get their own "chapter." In fact, they will get the next "chapter" of "FREE-TRADE: The Good, The Bad, and The Ugly," entitled "A Fist Full Of Dollars -- Free-trade and the Fiat Money Problems."

If the world were using transactional gold instead of all sorts of fiat currencies, the "Paper Money Argument" -- and the attendent twisted and disgusting problems -- wouldn't even exist. Unlike the situation with the first three arguments against free-trade however, there is no uncertainty and little choice as to where the border line is. With the tariffs-finance-government situation and with the fiat-money-problems -- we know almost exactly where 'foreign' begins. In terms of both import-export tariff borders and national-brand fiat money, the standard boundary for "foreign" is the national border.

COMING NEXT: FREE-TRADE V: A Fist Full Of Dollars -- Free-trade and the Fiat Money Problems

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NOTES:

[1] While you may not sell anything directly to the public, unless you work for government, the folks paying your salary or commission do. While you may not think of this often, your salary is much safer if your employer has a monopoly. return

[2] Usually Americans think of drugs when they think of "black markets" but not so officials. Our rural midieval peasants were trading the cloth they wove on those looms and dyed in those fulling vats in what the competing villagers considered "black markets" -- which is what got them those vat-smashing, loom-stealing visits. And here are three more modern examples of things other than drugs which are "smuggled" and sold in "black markets."

KIEV, Ukraine - Ukrainian customs officials confiscated nearly 19 tons of frozen U.S. chicken legs that smugglers claimed was sugar and sand, officials said Monday. --Ukraine Seizes 19 Tons of U.S. Chicken, AP, Mon Jan 26, 2004 9:32 AM ET
The government will seek heavier penalties for illegal foreign rice dealers to prevent the smuggling of U.S. rice through U.S. military bases in Korea, the Agriculture, Forestry and Fisheries Ministry said yesterday. --"Illegal Rice Traders Face Crackdown," THE KOREA TIMES, Seoul, Tues. March 31, 1992, Page 8
BOCA RATON, Fla. (AP) -- Federal customs officials are intensifying their efforts to interdict illegal Asian textile shipments, a US Customs official told industry executives. --"US Smuggling Enforcement Intensified," THE KOREA TIMES, Seoul, Tues. March 31, 1992, Page 9

You may notice that this story is from the the next page of the exact same paper as the rice-smuggling story. At any rate, you can see that the U.S. Government is serious about protecting its businesses as well. Stopping "illegal" foreign textiles requires serious -- even coordinated -- investigations. According to the above story, "The investigations are done by teams of textile import specialists, investigators and analysts from Customs and the Department of Commerce." return

[3] There were and can be more rigorous free-market inspection alternatives. The best example was Underwriters Labs, which originally certified electrical equipment as safe. You may still find the Underwriters tag on some electrical appliances. Also, the "Good Housekeeping Seal of Approval," Consumer's Digest, etc. If these organizations failed in their jobs or were to get "captured," they would go out of business and be replaced by new inspection enterprises. And they would all confront competition for veracity and rigor from other safety rating organizations. return

[4] As it turns out, such commissions allow feces, etc. in your milk, - - - as long as that milk is pasturized. "Sanitary dairy" practice, a much more acceptible solution to most consumers, is harassed and essentially outlawed by the establishment. You can see for yourself by looking into the continual harassment of businesses engaged in such "sanitary dairying." One of the most widely publicized was harassment of Alta-Deana Dairy by California "authorities." Milk Control Commissions also foster "homogenization" done in a way that causes homogenized milk to expose the so-called "x-enzyme" which causes atherosclerotic plaques in our arteries. return

[5] The dairys don't charge more because, since there are more than one milk producer, above the floor price, there is still competition. return

[6] Ike called it "the militaryindustrialcongressional complex" in a draft of his farewell address, but was reportedly prevailed upon by members of congress to leave them out of it. return

[7] You can find the text of Ike's farewell address here, and an interesting video of him delivering it here. return

[8] When Smedley says "capitalism" he clearly means that system of fascism and central control which is akin to mercantilism -- and antithetical to free markets. return

[9] Particularly notice Major-General Butler's mention of "Brown Brother's Bank," which plays prominently in the family tree of two U.S. presidents: George Walker Bush (known as "Dubya") and his father Herbert Walker Bush. And, via Avril Harriman & Vaneever Bush thru Fritz Thyssen, also in the early financing of Adolph Hitler and the Nazi party. This should give you some perspective on just how intertwined governments get with the rest of "The Establishment" -- and not just the "local" American Establishment either.

In mentioning Brown Brothers Bank in 1933, what Major-General Butler nailed was the forerunner of the following:

"... the Dutch connection remained unexplored until 1994 when I published the book 'The Secret War Against the Jews.' As a matter of historical curiosity, I mentioned that Fritz Thyssen (and indirectly, the Nazi Party) had obtained their early financing from Brown Brothers Harriman, and its affiliate, the Union Banking Corporation. Union Bank, in turn, was the Bush [as in U.S. Presidents HW & GW Bush -lrw] family's holding company for a number of other entities, including the 'Holland American Trading Company.' It was a matter of public record that the Bush holdings were seized by the US government after the Nazis overran Holland. ... The Bushes knew perfectly well that Brown Brothers was the American money channel into Nazi Germany, and that Union Bank was the secret pipeline to bring the Nazi money back to America from Holland. The Bushes had to have known how the secret money circuit worked because they were on the board of directors in both directions: Brown Brothers out, Union Bank in. The Dutch Connection: How a famous American family made its fortune from the Nazis, Copyright September 27, 2000 by Attorney John Loftus

And remember, Mr. Butler fingered the connection between Brown Bros. and banking shenanigans in 1933 -- before the beginning of WWII! return

[10] So we are all working less -- let's say half as much -- but producing fifty times as much per hour as we did in 1910. But where did all that extra production go? Theoretically, we should have at least twenty-five times as much as we did in 1910. But do we? Thinking about an answer is your "home work" assignment! return

[11] When USA Corp. imposes an "embargo" on countries such as Iraq, Sudan, etc. it is often exploiting just this aspect of free-trade. USA Corp. has even discussed using what they call "the food weapon," that is cutting off food shipments to the men, women, and children in countries in dis-favor with the D.C. political cliques. return

[12] What you're really doing when you put money in a bank is loaning it to the bank and allowing them to gamble with it in return for "interest." Literally. return

[13] Our buyers can't do much about market forces even when they do care. Because market processes are so regularly complex, indirectly involving millions of people these days -- and thus are "mass phenomena" in every sense of the word -- it usually takes many thousands of buyers acting together to have any impact at all (though mass boycotts can sometimes have significant effects). return

[14] Alan Greenspan to US House, July 22, 1998 return

[15] These clauses were also designed to get maximum money from any tariffs which did exist because they were the main source of money for the Federal Government till the so-called income tax was foisted onto flesh-and- blood humans in 1913 by Philander Knox and the "robber barons." See more below. return

[16] Not unexpectedly, the commerce clauses have been distorted beyond all recognition by the government cliques. See Journeyman (5/21/2000; 15:17:29MT - usagold.com msg#: 30965) "Maybe the OLD Genghis has been around too long," and Journeyman (06/18/00; 12:52:41MT - usagold.com msg#: 32567) "Down with Mr. Hyde!!" for more perspective. return

[17] See WHO WAS PHILANDER KNOX? IS IT CREDIBLE THAT HE WOULD COMMIT FRAUD? return

[18] No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration hereinbefore directed to be taken. -Constitution for the United States of America, Article 1, Section 9, Clause 4 return

[19] See Congress Will Hold Hearing: Is Income Tax Legitimate? return


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