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Free Trade, Managed Trade and the State, Part 1

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“The principle of free trade is non-interference,” wrote the English classical economist Nassau Senior in 1828. “It is to suffer every man to employ his industry in the manner which he thinks most advantageous, without a pretense on the part of the legislator to control or direct his operations.”

The advocates of free trade in the 19th century argued that the direction of production and the allocation of resources was best left to the private decisions of the individual members of society rather than to be entrusted to the commands of the state. They explained that each man knows his own circumstances better and can more fully appreciate profitable opportunities than any government bureaucrat assigned the task of performing these duties.

“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him,” said Adam Smith in The Wealth of Nations. “The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

And the free traders were insistent on emphasizing that whenever the state interfered with freedom of trade, the benefits that might accrue to the recipient of the protection from competition were always made at the expense of other members of society.

“If one individual, or one class, can call in the aid of the [political] authority to ward off the effects of competition, it acquires a privilege to the prejudice and at the cost of the whole community,” insisted the French classical-liberal economist Jean-Baptiste Say in 1821. “It can then make sure of profits not altogether due to the productive services rendered, but composed in part of an actual tax upon consumers for its private profit. . . . Moreover, arbitrary regulations are extremely flattering to the vanity of men in power, as giving them an air of wisdom and foresight, and confirming their authority, which seems to derive additional importance from the frequency of its exercise.”

Over several decades in the early 19th century, the arguments of the free-trade advocates gained more and more adherents, first in England and then slowly throughout the rest of Europe and the civilized world.

The Fruits of Free Trade

And what did the free-trade era of the 19th century produce? A wondrous epoch of liberty and prosperity. It was the era of what the German economist Gustav Stolper referred to in his book This Age of Fable (1942) as the three freedoms:

“They were: freedom of movement of men, for goods, and for money. Everyone could leave his country when he wanted and travel or migrate wherever he pleased without a passport. The only European country that demanded passports (not even visas!) was Russia. . . . Who wanted to travel to Russia anyway? . . . There were still customs barriers on the European continent, it is true. But the vast British Empire was free-trade territory open to all in free competition, and several other European countries, such as the Netherlands, Belgium, Scandinavia, came close to free trade. . . . Whether a bit higher or a bit lower, tariffs never checked the free flow of goods. All they effected was some minor price changes, presumably mirroring some vested interests. . . . And the most natural of all was the freedom of movement of money. Year in, year out, billions were invested by the great European Powers in foreign countries, European and non-Europeans. . . . These billions were regarded as safe investments with attractive yields, desirable for creditors as well as debtors, with no doubts about the eventual return of both interest and principle. . . . The interest paid on these foreign investments became an integral part of the national income of the great industrial Powers, protected not only by their political and military might but — more strongly — by the general, unquestioned acceptance of the fundamental capitalist principles: sanctity of treaties, abidance by internal law, and restraint of governments from interference in business.”

In the euphoria of this epoch of advancing human freedom and commercial liberty, the proponents of free trade saw only an endless road of growing prosperity and peace. Said the French liberal economist Frederic Passy in the 1860s:

“Some day all barriers will fall; some day mankind, constantly united by continuous transactions, will form just one workshop, one market, and one family. . . . And this is . . . the grandeur, the truth, the nobility, I might say the holiness of the free-trade doctrine; by the prosaic but effective pressure of [economic] interest it tends to make justice and harmony prevail in the world.”

The depoliticizing of economic intercourse among the citizens of the various nations of the world — the privatizing of trade and commerce globally — it needs recalling, was seen by the free traders not only as the path to productive efficiency and rising standards of living through an expanding internationalization of the division of labor and increasing world-wide competition. No. It was also seen as an effective avenue for minimizing the causes of conflict and war among the nations of the world. In 1850, Richard Cobden, the great leader of the English free-trade movement, explained this in a speech:

“When I advocated free trade, do you suppose I did not see its relation to the present question [of war and peace], or that I advocated free trade merely because it would give us a little more occupation in this or that pursuit? No; I believed free trade would have a tendency to unite mankind in the bonds of peace, and it was that, more than any pecuniary consideration, which sustained and actuated me, as my friends know, in that struggle.”

International freedom of trade would increasingly make nations interdependent. The nations of the world would become the mutual buyers of each other’s consumer goods and purchasers of each other’s resources and raw materials. The interest income earned by the creditor nations would be the result of the capital supplied to the poorer (in savings) nations; and the productive and profitable investment of that imported capital would accelerate the debtor country’s economic development and rise out of poverty. Expanding global competition would not be a rivalry for political power and plunder, but, instead, the peaceful competition of the market place in which “victory” and “conquest” became a benign striving among private individuals for economic profits through a better satisfaction of the wants of consumers in comparison to the offers of one’s rivals. Success or failure in winning a greater share of the world’s business would no longer be “affairs of state,” but, instead, the private affairs of individuals pursuing their own personal and peaceful interests, receiving neither subsidy nor protection at the expense of their fellow citizens.

The 20th Century

How different is our world of the 20th century in comparison to that of the generations of the 19th century? In the 19th century, the guiding idea was, in the words of Wilhelm Roepke, “the [classical] liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of the government and the economy.” In our century, the exact opposite has become the dominant idea. Nothing in the 20th century has been considered outside the interests and the concerns of the state. Governments have assigned themselves the role and obligation to interfere everywhere and with everything.

In his 1921 volume, The Fruits of Victory, Norman Angell explained that

“the wearing down of the distinction between the citizen and the state, and the inroads upon the sacro-sanctity of private property and individual enterprise, make every citizen much more dependent upon his state, much more a part of it. Control of foreign trade so largely by the state has made international trade less a matter of processes maintained by individuals who disregard their nationality, and more a matter of arrangements between states, in which the non-political individual activity tends to disappear.”

Neither men, money nor goods pass across the borders of the world’s nations without the inspection, approval and control of the state. Our lives and our property have become the possessions of the state in which the accident of birth has placed us. The purchase and sale of every commodity and raw material among the citizens of different countries are, once again, affairs of state, matters of government — measured and government — manipulated national income, employment and output. The exportation or importation of the most minute and insignificant items of consumer desire or productive application has been elevated to concerns of the highest levels of political decision-making and deliberation.

The arrival of the smallest child or the most ordinary adult into one nation from another raises issues of national survival and economic well-being in the eyes of the state. The most innocent choice to invest one’s wealth and savings in one part of the world instead of some other generates pensive debate and political consternation for those in the higher reaches of the state’s bureaucracy who claim the right to determine how people may invest and dispose of that which is the result of their own effort and energy.

We have been again reduced to a state of increasing servitude from which the classical-liberal revolution of ideas in the 18th and 19th century was meant to liberate us. And with the latest international-trade policy proposals of the Clinton administration, we are headed towards more bondage at the hands of the state.

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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).