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.
