One of the most pressing choices facing modern economies
is whether to adopt
a policy of free trade
or of protectionism,
that is, whether to encourage
foreign goods into the country with
minimum tariffs
and allow industries to relocate abroad;
or whether to make it hard for foreign firms
to sell their goods internally
and discourage domestic producers
tempted by cheaper wages in other lands.
It feels like a very modern dilemma,
but the debates between proponents of free trade
and protectionism
go back a very long way.
The argument began in earnest in Europe in the 15th century
with the formulation of a theory
known as mercantilism
the forerunner of what we today
refer to as protectionism.
Mercantilism was, like nearly every economic theory
interested in increasing a nation’s wealth.
But, Mercantilists argued
that in order to grow richer,
a country had to try
to make as many things as possible
within its own borders
Nd reduce to an absolute minimum
any reliance on foreign imports.
The role of government
was to help local industries
by applying huge tariffs on imported goods
and discouraging foreign manufacturers
from competing with local players.
A strong country was one that knew how to
provide for itself
and could achieve almost total independence in trade
a goal known as
economic
economic autarky.
The philosophy of mercantilism reigned supreme
as the most persuasive theory of economics
until the 9th of March 1776
the publication date of possibly
the most important book
in the history of the modern world.
In 'An Inquiry into the Nature and Causes of the Wealth of Nations'
the Scottish philosopher and economist Adam Smith
attempted to dynamite
the intellectual underpinnings of mercantilism.
Smith argued that the best way for
any country to grow wealthy
was not to try to make everything by itself,
for no country could ever hope
to do well in every sector of an economy.
Smith observed,
that countries naturally had
different strengths in particular areas
Some were great at making wine,
others had talent in pottery,
others still might be experts at making lace
and it was on such strengths
that every country should focus.
This was an application
at the level of nations
of a theory we can understand well enough
at the level of individual life.
If someone has a natural aptitude
for accountancy,
it makes no sense for them to spend
a considerable part of each day
trying also to make cheese,
to sew their own trousers
or to learn to play violin sonatas.
Far better for the accountant,
cheese-maker,
tailor and violinist
to specialize in the areas in which
they each have the greatest advantage
and then trade with others to
satisfy their remaining needs.
As Smith noted:
“It is the maxim of every
prudent master of a family,
never to attempt to make at home
what it will cost him more
to make than to buy.”
Smith emphasized that if Britain could
produce woolen goods more cheaply
than Portugal
and if Portugal could produce
wine more cheaply than Britain,
then it would be beneficial to both parties
to exchange the product they
could make at a lower cost
for the one they could only make
at a higher cost.
The overall wealth of both countries
would rise as labor and capital
would always be optimally employed,
directed to those sectors
where native skill and opportunity
was at its greatest.
The job of the government
was to recognise sectors where
there was a national advantage,
assist in the education of the workforce,
but otherwise, reduce tariffs
as much as possible,
and step out of the way.
With astonishing speed,
Smith’s theory convinced most of the economic
and political classes of
north Western Europe.
In Britain, his ideas were
first put to a practical test
in relation to the primary foodstuff
of the nation:
corn.
Grain prices had, for many years,
been protected by government decrees.
Cheaper foreign grain had been kept out,
apparently in order to
protect jobs and national wealth.
But Smith’s ideas,
now driven forward by his foremost
disciple David Ricardo,
proposed that all tariffs on imported grain
protectionist measures known as
The Corn Laws
were in fact obstacles to economic growth.
After bitter debates in Parliament,
the laws were repealed in 1846.
The result demonstrated both
the advantages and incidental
costs of Smith’s ideas:
the price of corn dropped sharply,
food became cheaper
and everyone, especially
the working classes,
had a lot more spare money
to spend on other goods,
This, in turn
grew the overall size of the
British economy,
so that it significantly outperformed
all of its European counterparts.
But – and it was a very big but
large swathes of British agriculture
went to the wall.
Cheap imported corn, from
Canada and the United States,
destroyed farms
and ways of life that had persisted for centuries.
Smith’s theories were both correct
and, depending on where one was standing,
plainly agonizing.
An enduring problem for the undoubtedly very
sound arguments in favour of free trade
is that its human costs
have seldom been addressed
with sufficient passion
and ingenuity.
The cries of the dispossessed
have not been recognised for what they are:
threats to the entire stability
and moral dignity of a nation.
As has only gradually been realised,
the benefits of an open economy
can only properly bear fruit
if a series of steps are taken to mitigate
the attendant downsides.
Any nation committed to free trade
must tax the sectors of the economy
which have an advantage
and then use the money
to retrain those in the
sectors of the economy
with the gravest disadvantages
in relation to foreign competition.
Without such redirection of money and labor
a nation will become highly
unstable politically
thereby endangering
any progress that free trade has made.
Secondly, governments must enable
everyone in the economy
to find their own natural areas of strength;
which means high levels of investment in education
and a raft of measures to maximize social mobility.
Monopolistic behaviour by the rich
endangers the integrity of a free trade system
just as much as punitive import tariffs.
Intellectually, free trade has
undoubtedly won the argument.
When a Mexican worker can make a car
for eight dollars an hour,
whereas an American one
costs 58 dollars an hour,
it is clearly wise to allow Mexico
to do what it can do best,
whatever the effect on American car workers.
However, defenders of free trade
have been grossly negligent
when it comes to instituting
the political programs necessary
to support the efficient
operations of the system.
It has forgotten the pain
of the car workers,
the coal miners and the steel makers.
And, in democracies,
there has been a heavy price
to pay for this neglect,
in the form of the rise of a new
class of mercantilists,
who have successfully argued that
barriers must again increase,
that a country should try to make
everything within its own borders
to regain its greatness
and that cheap importers
are invariably the
destroyers of domestic jobs.
These arguments make no sense,
but so long as the proponents of free trade
fail properly to articulate a program
to remedy free trade’s operations,
whole nations will be seduced by the
easy promises of the mercantilists
and will suffer accordingly
until the distinctive wisdom
of Adam Smith can once more
reassert itself.