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Book Review: How Nations Grow Rich

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How Nations Grow Rich: The Case for Free Trade
by Melvyn Krauss (New York: Oxford University Press, 1997); 140 pages; $22.50.

One of the frustrations in the study of economics is the discovery of how frequently the same fallacious ideas keep reappearing. Since the time of David Hume and Adam Smith, economists have demonstrated over and over again the mutual benefits to transactors from a policy of free trade. Yet, every few years, protectionist arguments rise to the surface once more. And once again, economists must cut through the fog of confused reasoning and show the errors and dangers in pursuing a policy of restrictions and prohibitions on the free movement of men, money, and goods across international borders.

One of the most recent defenses of freedom of trade is also one of the clearest and most concise to appear in several years. How Nations Grow Rich: The Case for Free Trade by Melvyn Krauss presents the basic principles for a policy of free trade and refutes many of the contemporary arguments for protectionism.

This is not the first time Professor Krauss has addressed this issue. In an earlier work, The New Protectionism: The Welfare State and International Trade (1978), he showed how redistributive programs and government “safety nets” have established privileged and protected corners of the domestic economy that could have been secured only from foreign disruption through international trade barriers.

And in Development Without Aid: Growth, Poverty and Government (1983), Professor Krauss explained how foreign-aid programs, intergovernmental loan and investment projects, and welfare statism have all worked to inhibit Third World countries from raising themselves out of poverty.

In his new book, he brings those arguments and many more up to date. He begins by reminding the reader that the purpose of production is consumption. The only rational and truly “socially oriented” trade policy, therefore, is one that focuses on the maximization of consumers’ real income. By their very nature, protectionist policies place barriers in the way of consumers’ buying from sellers in foreign lands who are offering products at prices or qualities more attractive than those of domestic products. This must result in a lowering of standards of living by making the buying public purchase goods and services at a higher cost than might be obtained from more efficient international rivals.

Furthermore, Professor Krauss explains that by imposing trade barriers that restrict the sale of foreign manufactured goods in the United States, a stimulus is created for greater immigration from other countries into America. Basically, he is arguing that if goods are not allowed to move across borders, people will. American trade barriers limit the demand for foreign goods. With less world demand for their products, workers in Third World countries find their wages lower than they would be under a system of free trade.

By indirectly depressing wages in other countries, America’s trade barriers create an incentive for some Third World workers to move to where the wages are higher than at home — and that means into America. “These artificial and unintended inducements to labor migration mean too much international exchange between the United States and Mexico takes the form of migration, and too little international trade and capital export,” says Professor Krauss.

“In addition to trade protectionism, labor migration to the United States also has been made excessive by the generous welfare programs existing in certain border states. California is a leading example. . . . The most effective way to reduce excessive labor migration to California is for California to reduce its welfare state, and for the United States to follow a free trade policy.”

Professor Krauss devotes a chapter to refuting such protectionist arguments as the fear of “dumping,” the concern that American manufacturers cannot match the foreign products made with “cheap labor,” the worry that foreign imports cause domestic unemployment, and the paranoia over American trade deficits. In each case, he demonstrates the error in the protectionist position.

For example, on the dumping topic, he shows that all that dumping means is that Americans are sold products below their actual costs of production in the foreign country of origin. The complaints over dumping should come from the taxpayers in the exporting nation, who are having to pick up the tab. For Americans, this is equivalent to a foreign-aid program in which foreign taxpayers are subsidizing the goods we are importing.

He also criticizes the U.S. government’s shift in emphasis from a consumer-oriented policy to a producer-oriented policy. Professor Krauss shows that this has led to such absurdities as the Clinton Administration’s insistence that other countries introduce “affirmative action” programs for American exporters. If foreign countries such as Japan find American products less attractive than domestically manufactured goods, President Clinton has proposed that the Japanese government guarantee that American exporters will be assured a certain percentage of sales in the Japanese market.

The only way the government of Japan could do that is to directly command Japanese importers, wholesalers, and retailers to buy particular quantities of American exports, whether or not they find it attractive or profitable to do so. Thus, to stimulate a certain number of exports, the Clinton Administration implicitly wants the Japanese government to impose more of a controlled economy on its own market.

Professor Krauss also challenges such interventionist foolery as foreign aid and the imposition of trade restrictions and embargoes in the name of trying to change the domestic policies of other countries. Restricting trade with other countries that fail to meet American conceptions of human rights or who fail to implement Western, left-wing notions of welfare-statist redistribution, minimum wage laws, workplace regulations, or environmental controls only ends up hurting the very poor and low-income people in Third World countries that our American interventionists say they wish to help. “The choices available to many really poor children in poor countries is not between a lousy job (by U.S. standards) and a good job. It is between a lousy job and no job. . . . The way to help poor people abroad is to open our markets to them — not force them to adopt U.S. human-rights standards,” says Professor Krauss.

In a chapter entitled “The Consensus of Expert Opinion,” Professor Krauss explains the elitist and arrogant mentality of the global social engineers in America and Western Europe who preached central planning, foreign aid, redistribution of wealth, and collectivist ethics to the leaders of Third World countries throughout most of the post-World War II period. One of the most destructive of those social engineers was the Swedish socialist Gunnar Myrdal, who ignored or downplayed the inevitable negative effects of such policies in his drive for imposed utopias around the world.

Finally, Professor Krauss points out some of the dangers from regional economic trading blocs such as the European Union and NAFTA. Global free trade, he concludes, must be the ultimate goal if international tensions are to be minimized and economic opportunities are to be maximized for all.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).