Free Trade and Politics

This is a brutally honest if a bit deliberately blunt summary of how free trade became the political issue in 2016.  Let’s be honest:  free trade works, if you are concerned only with the aggregate size of the economic gains.  The commonly used international econ textbook draws the analogy between trade and technology:  both make for more output of relatively scarce goods at a lower cost in relatively more abundant goods.  So more wealth was created than the wealth that was destroyed.  The conveniently forgotten fact, that Dean Baker reminds us, is that the created wealth and destroyed wealth happen to belong to different people.  (This is not just true of trade:  the word “sabotage,” as Star Trek reminds us, came from workers displayed by machines using their wooden shoes to wreck the machinery.)

Notice that this reiterates the argument that Marx had originally made in The Capital:  capitalism, coupled with industrialization, has been wonderful–it created so much more wealth than anything that came before.  But it also ensured that most of the newly created wealth wound up in the hands of the owners of capital, while most of the price was paid for by the labor and, later as industrialization proceeded, the petit bourgeoisie.  This misallocation of resources led to a society wide instability–the inherent contradiction of capitalism, as Marxists call it–that leads to capitalism’s downfall.

Observe that, all his political preferences, which was obviously in favor of revolutions, there is nothing inherently normative about Marx’s politic0-economic arguments.  If he had access to the tools of modern economic theory, I suppose he would have complemented his wordly argument with elegant agent-based models derived from forest fire models.   Certainly, two of the people who understood the essence of Marx’s argument and translated their understanding to real policymaking had no sympathy for the kind of politics the latter advocated:  Otto von Bismarck and Theodore Roosevelt.  Both these politicians, inherently conservative in their overall political outlook, nevertheless saw that the power of the capital and the wealth it generated was not something that could or should be easily cast aside.  But, unless those who lost out were given due compensation, the buildup of the stress would tear the society apart.  The solution they adopted was a form of socialism, adapted to fit the cultural and political environments of their country, not so much to undermine capitalism as much as to save it from its own self-perverting tendencies identified by Marx.

More than a century after Bismarck and Teddy Roosevelt, the same problems have reemerged.  The development of the technology has drastically increased the “productivity” of the capital (although a lot of this productivity, I suspect, comes from enhanced ability to extract surplus from consumers rather than actual productivity gains), while increased trade has made a lot of goods “cheaper” to produce, generating vast wealth for relatively few.  At the same time, both processes have created many who have paid disproportionate share of the cost.  Not unlike a century before, many who “won” are quick to give themselves credit for “hard work” and eagerly, even giddily, kick those who lost to the curb.  Some things just don’t change.

There is precious little recognition of the threat from social unrest and instability that these dislocations are causing.  Instead, those who are harbingers of the problems to come are deemed as cranks and bigots, all the easier to ignore the depth of the instability.  The solution, at least a partial one, to these problems is not to stop free trade, take money out of elections, or to build a big beautiful wall, but to address the more fundamental problem:  the inequality in the distribution of the costs and benefits of the technological change and the free trade.  A tax on the “capital,” defined loosely, to compensate the losers is hardly a new proposal:  this shows up in every econ textbook as the means of making free trade (and presumably, technological change) Pareto improving.  In practice, nobody seems to ever practice it, except possibly for that allegedly “socialist” chancellor of Imperial Germany.  Perhaps someone should actually put the textbook solution to work.

Where is the Iron Chancellor when we need him?

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