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Used by date: free trade

By Ben Rees - posted Tuesday, 20 September 2011


The recent closure of steel plants has brought a section of the trade union movement to publically criticise Australian trade policy. Another high profile example of attack upon trade policy is by retailers protesting over online shopping. Both groups have been given token support by Australian business. But to date nobody is seeking to mount the barricades and so the criticism of trade policy is fragmented, uncoordinated, and lacking credibility.

Railing against Free trade in isolation by one section of the trade union movement or business group is a pointless exercise. The real debate should be about the underlying economic philosophy and whether or not it is suited to a modern world.

Free trade ideology has been dominant in Australian politics since the formation of the Cairns Group of free trading nations in 1986. Labor Minister, John Dawkins, was the first Chairman of the Cairns Group that sought to raise the international profile of free trade in agriculture. By the time the Doha Round of trade talks arrived, the Cairns Group had lost standing in international trade forums. The arrival of the G 20 Group of nations had diluted the influence of the Cairns Group.

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Free trade has been an integral part of classical and neoclassical economic philosophies since David Ricardo (1782-1823) first formulated his comparative advantage theory. It was primarily a labour theory of value and specialisation of production.

The neoclassics realised the unreality of Ricardo’s theory in a changed world. They sought to modernise the theory. Inherently, the model remained a labour theory of value, which distributed income between nations. But, it has no institutional structure to explain income between capital and labour. Income distribution is inherently contained within the assumption of full employment. The assumption of full employment is an important underlying assumption of both classical and neoclassical economics. The full employment assumption dates back to Say’s 1803 theory of supply and demand: Supply creates demand. The full employment assumption implicitly underwrites industry policy.

Theoretically, this assumption implies that a flexible labour market will adjust the wage rate so that the existing production base employs all those willing to work.  In a fully employed economy, efficiency and productivity have to rise to raise production and income. Any surplus is exported into open international markets thereby improving domestic and international welfare. If unemployment exists, it must be either voluntary unemployment, or, frictional unemployment. Voluntary unemployment occurs when workers voluntarily do not seek employment whilst frictional unemployment happens when workers move between jobs.

The philosophy does not recognise involuntary unemployment such as occurred during the Great Depression, 1970’s-1990’s, or, the GFC. Because the full employment assumption excludes involuntary unemployment, neoclassical theory cannot provide a solution when it occurs.  Chronic unemployment is explained as supply side bottlenecks impeding market forces.  Trade union power is a favourite target for neoclassical economists when labour markets become “sticky”. Market reform is recommended to reduce union power and make markets more flexible.

The modern political architect of contemporary economics was Margaret Thatcher. Reagan took it to America. Hawke/ Keating brought it to Australia. Lange took it to New Zealand. Gonzalez introduced it to Spain and Mitterand in France.

It could not have been introduced to Australia without the consent and active support of the trade union hierarchy. Paul Omerod in his book  “The Death of Economics,” describes social democrat governments that embraced this philosophy over the 1980’s and 1990’s as “notional“ social democrats. Ostensibly, regression to early nineteenth century economics was to solve the problem of stagflation post Bretton Woods collapse in 1971.

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Post World War II, the international monetary system required economic management to focus upon full employment and balanced trade. When the Bretton woods system collapsed in 1971, a period of monetary uncertainty prevailed as the major players sought an alternative international monetary system. An “alternative system” was endorsed by 1976 when IMF member nations decided that countries could adopt whatever exchange rate system they preferred. International institutional endorsement of neoclassical economics and the push for free trade came from the alteration of IMF articles in 1976. By altering the charter of the IMF, the post War requirement for full employment and balanced trade was replaced by managing domestic price stability. Modern monetarism was internationally institutionalised.

Neoclassical economic philosophy in reality is a genre within which reside several separate schools of economics, some more austere than others. The particular school that received approval under the IMF was the Chicago School. Its leading scholar and advocate was Milton Friedman. As they are embedded in neoclassical philosophy, monetarists embrace the genre’s full employment assumption and belief in flexible markets. Competition drives markets both domestically and internationally.

The assault on industrial protectionism came from Reagan and his call for trade talks in the early to mid 1980’s. These talks dragged on until finalization at Uruguay in 1995. The Australian Cairns Group was very active in the push for winding back international protectionism whilst Hawke/ Keating set about withdrawing government involvement from Australian industry. Floating of the currency, microeconomic reform, and competition policy were euphemism coined to politically sell neoclassical reforms that deregulated markets. Howard and Costello formally confirmed monetarism when they gave independence to the Reserve bank in 1996. Australia’s back to the future modernisation had been completed.

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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