The case for free trade

It is easy to establish the arguments for free trade both in theory and in practice.

In theory, if it were true that the people of one country would be better off not trading, or restricting trade with the people of another country, then for exactly the same reason, it would be true that the people of one state within a country would be better off not trading, or restricting trade with the people of another state within that country. Society doesn't stop at the border. The principles of economics apply just the same regardless of political boundaries.

And if it were true that the people of NSW, say, would be better off restricting trade with the people of Queensland, then for the same reasons it would be true for the people of one region within NSW – say the Hunter Valley - as against the people of another - Sydney. And so on, down to the level of the town, the household, and the individual. Reduced to its absurdity, protectionism asserts we would all be better off if social co-operation were abolished, and everyone produced in isolation their own food, clothing, shelter, transport, communications and entertainment.

When you point this out, the critics of free trade rush to resile from that logical consequence. No, they say, free trade in most things is obviously necessary and desirable for human society; it is only free trade in this or that category of goods or services which should be restricted.

But this only raises the question, if free trade is necessary and good where they agree with it, why doesn't the same argument apply where they oppose it? In the end, there is no rational standard by which any given claim for protection can be established but by arbitrary whim, or the special pleading of vested interests.

The original colonies that later made up the states both of Australia and the U.S.A imposed tariff barriers between themselves before their respective federations. The irony of any Australian arguing for protectionism is that Australia as we now know it – a free trade zone between its several states and territories - would not exist were it not for the efforts of earlier advocates of free trade who exploded the economic fallacies on which the case for protectionism rests.

The fundamental economic fact that makes free trade mutually beneficial, is that labour in co-operation is more productive than labour in isolation. If the assumptions of protectionism were true, and free trade was actively detrimental to those who participate in it, then during the long ages of human evolution those at the margins of subsistence who practiced social co-operation would have died out, and man would have evolved to be a solitary species like the snow leopard.

The fact that this has not happened, is because free trade underlies the social principle - the tendency of humans to form themselves into societies. We did not evolve social emotions such as sympathy for the less fortunate, and then later evolve a material basis for them to be advantageous. It's the other way around. Social emotions evolved because the greater degree of social co-operation based on the division of labour is mutually beneficial, especially to the less fortunate.

Charles Darwin observed that competition is fiercest between species and varieties that are most similar to each other. However man has more and more been able to transcend that rudimentary fact of animal life based on voluntary exchange and, after money was developed, on free trade.

"The antagonism between an animal starving to death and another that snatches the food away from it is implacable.
Social cooperation under the division of labour removes such antagonisms. It substitutes partnership and mutuality for hostility. The members of society are united in a common venture."

Mises, Human Action, at p.273

http://mises.org/Books/humanaction.pdf

All criticisms of free trade on the basis of analogies with war, battle, assaults, predation, hegemony, unfair domination and such like, are mistaken. It is precisely the fact of voluntary exchange under the social division of labour, that enables human beings, more than any other animal, to practise the highest degree of peaceful and mutually beneficial social co-operation.

With the development of a common medium of exchange – money –the circle of possible social co-operation expanded astronomically to include everyone who participates in market exchanges. Thus the theoretical upper limit of human wealth is when all people participate in the peaceful division of labour in one free trade zone.

In practice, the circle of social co-operation made possible by free trade has expanded only slowly. This is because the benefits of social co-operation were only extended beyond the narrow circle of immediate family and tribe when the benefits were realized. But they were realized only gradually - the original condition was one of ignorance. For countless millenia, the predominant idea of where wealth comes from, is that you take it by force from some "other" group, as the old legends of so many societies testify. The warrior ethos, and the spirit of conquest, remained strong against the principles of peaceful co-operation with strangers under a division of labour based on voluntary exchange – free trade.

The great contribution of the classical economists was to explain how and why the division of labour and its corollary free trade, form the basis of the increasing intensification of human social co-operation, and the wealth of all those who participate in it. David Ricardo demonstrated in arithmetic terms how, even where one party was superior in the production of all items being traded, free trade was still more beneficial for all participants than producing for self-sufficiency.

(Ricardo assumed that only the goods are mobile: capital and labour are restricted. However his demonstration holds good to the extent that capital and labour cannot freely move between countries. And to the extent that capital and labour can freely move between countries, the argument for free trade still holds good; it would only be invalid for a country so little suited for production that it would cease to be used as the basis of any human industry, like the polar ice-caps or the deserts.)

The influence of Ricardo's demonstration was enormous. The rational understanding of the benefits of free trade that he made explicit for the first time in history was followed by a high tide for the political movement to repeal restrictions of trade. Many such restrictions had been in place since the dark ages with the traditional beliefs that trade was somehow morally suspect – only landholding was noble; that government's proper source of revenues was the licensing of monopolies; and that a proper role of government was to stop efficient businesses from out-competing inefficient ones.

It is no coincidence that the repeal of trade barriers on an unprecedented scale was immediately followed by an unprecedented rise in living standards, including those of the poorest of the poor. For the first time in history, an increasing population was supported at increasing standards of living.

The debate about free trade was well and truly won and lost in the first half of the nineteenth century. The protectionists lost. They have been unable to advance a single tenable argument in refutation of Ricardo's theory. Yet they have never ceased to wage a rearguard action in favour of privileges for the few at the expense of the many, always dressed up as the common good.

Frederic Bastiat in 1845 in one short humorous article "A Negative Railway" lampoons and destroys the arguments of all protectionists: http://mises.org/daily/5201

So if the arguments for protectionism are based on fallacies, why are we still hearing them today?

Henry Hazlitt explains why:

"Economics is haunted by more fallacies than any

other study known to man. This is no accident. The

inherent difficulties of the subject would be great enough

in any case, but they are multiplied a thousandfold by a

factor that is insignificant in, say, physics, mathematics or

medicine-the special pleading of selfish interests. While

every group has certain economic interests identical with

those of all groups, every group has also, as we shall see,

interests antagonistic to those of all other groups. While

certain public policies would in the long run benefit every-

body, other policies would benefit one group only at the

expense of all other groups. The group that would benefit

by such policies, having such a direct interest in them, will

argue for them plausibly and persistently. It will hire the

best buyable minds to devote their whole time to presenting

its case. And it will finally either convince the general pub-

lic that its case is sound, or so befuddle it that clear think-

ing on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest,

there is a second main factor that spawns new economic

fallacies every day. This is the persistent tendency of men

to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups."

"Economics in One Lesson", at p.3

http://www.hacer.org/pdf/Hazlitt00.pdf

The effect of a protective tariff say on "our" sugar industry is to force all sugar consumers to pay more, so that a small minority can be given the privilege of being paid above the market rate for their product.

This only begs the question why everyone else should not be entitled to an equal privilege. If they were, it would spell the end of human society, and thus protectionism is intrinsically anti-social.

Protectionists almost always talk in the royal plural. "We need to think what kind of country we want." What they mean is "The majority need to be forced to pay for the kind of country a privileged few want."

The pretensions of protectionists to make society more productive or fair are false. Protectionism by its very logic only ever succeeds in feathering the nests of vested interests while simultaneously striking a blow against the principles underlying freedom and society at home and abroad.