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Free Trade, Managed Trade and the State, Part 2

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In 1836, the English classical liberal Henry Fairbairn looked into the future and this is what he saw: “Seeing then, that in the natural order of things the triumph of Free Trade principles is now inevitable, magnificent indeed are the prospects that are opening for mankind. Nations will become united in the golden bands of peace; science, liberty and abundance will reign among the inhabitants of the earth; nations will no longer be seen to descend and decline, human life will become prolonged and refined; years will become centuries in the development of the blessings of existence; and even now the eye can reach to the age when one language, one religion, and one nation alone will be existing in the world.”

One can only wonder if Mr. Fairbairn’s liberal spirit, but no doubt English prejudice, made him presume that the one language would be English, the one religion Anglican, and the one nation the British Empire. But while some of the 19th century’s liberals may have allowed themselves to be excessively carried away with flights of fancy, it remained very much a fact that the success of free-trade ideas transformed the world of the last century.

In 1899, the liberal economist C.F. Bastable could write in his book The Commerce of Nations,

“One of the most striking features of modern times is the growth of international relations of ever-increasing complexity and influence. . . . This more intimate connexion is reflected in all the different sides of social activity. International law, that two hundred years ago was almost wholly confined to the discussion of war and its effects, now contains a goodly series of chapters treating of the conduct of nations during peace. . . . Literature, Science and Art have all been similarly affected; their followers are engaged in keenly watching the progress of their favorite pursuits in other countries. . . .”

“But, as might be expected, it is in the sphere of material relations that the increase in international solidarity has been most decisively marked,” Professor Bastable explained.

“The barriers that in former ages impeded the free passage of men and goods from country to country have been — it cannot unfortunately be said removed, but very much diminished; and more particularly during the last fifty years the extraordinary development and improvement of transport agencies both by land and sea have gone far towards obliterating the retarding effects of legislative restraints and national prejudices. . . . In spite of temporary checks and drawbacks, the broad fact stands beyond dispute, that the transfer of human beings from country to country which is known as ‘migration,’ as also the similar movement of goods described as ‘commerce,’ is not merely expanding, but, if periods sufficiently lengthy for fair comparison are taken, expanding at an accelerated rate.”

World War I: A Turning Point

Free trade among nations and fairly unregulated free enterprise in domestic policy had made the world of the 19th century a time of individual liberty, economic prosperity and almost a century of relative peace in Europe from the defeat of Napoleon in 1815 to the outbreak of the First World War in 1914. At the dawn of the 20th century, Professor Bastable was concerned that

“Were we to confine attention to the last twenty years, it would be hardly possible to escape the impression that protection was likely to be the system of the immediate future” because of growing protectionist policies in Imperial Germany, the United States and some of the self-ruling dominions of the British Empire during the last two decades of the 19th century. But he was still confident that while “improvement may be slow, and there have been and will be periods of reaction . . . we can hardly doubt that . . . there will be a fresh effort to gain commercial liberty. . . . [T]here is no likelihood that nations will permanently endure the loss that restriction inflicts on them.”

But all such hopes of a return to the path of free trade were killed on the battlefields of World War I. Because in the pursuit of total victory, each of the belligerent governments resorted to total war; and with total war came the total state. German economist Gustav Stolper explained the consequences:

“Just as the war for the first time in history established the principle of universal military service, so for the first time in history it brought national economic life in all its branches and activities to the support and service of state policies — made it effectively subordinate to the state. . . . Not supply and demand, but the dictatorial fiat of the state determined economic relationships — production, consumption, wages, costs of living. . . . [A]t the same time, and for the first time, the state made itself responsible for the physical welfare of its citizens; it guaranteed food and clothing not only the army in the field but the civilian population. . . .”

The Growth of State Control

And what began in the war was continued in the years that followed. Because despite the end of the war, state control and interference into economic affairs were not reduced to their pre-war levels. To the contrary, the period between the two world wars saw state power massively increase. Indeed, by the 1930s, there was not one major country devoted to and practicing the principles of classical liberalism — the principles of individual liberty, free-market capitalism and free trade. As the Swedish economist Gustav Cassel lamented in 1927, “The whole world today is engaged in finding out all sorts of devices to restrict the free division of labor and render its application less profitable” through the imposition of various trading prohibitions, regulations and controls.

But these restrictions on international trade were the logical consequence of the new ideology regarding the domestic affairs of each of the world’s major nations. This ideology was the belief that the state had to become the predominate arbiter and planner of economic affairs. And once the state took on the responsibility for managing and guiding the internal economic affairs of its subjects, barriers to international trade were required to follow soon. In 1944, the Austrian economist Ludwig von Mises explained why:

“A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together, they condition each other. Economic nationalism is the corollary of present-day domestic policies of government interference with business and of national planning, as free trade was the complement of domestic economic freedom. When the domestic market is not to some extent insulated from the foreign market, there can be no question of government control. . . . The trend toward [protectionism] is essentially a trend of domestic policies; it is the outcome of the endeavors to make the state paramount in economic matters.”

If governments choose a course of domestic interventionism and control, interference with international trade inevitably follows. Privileges and regulations to benefit producers within a country are constantly threatened by foreign competition under free trade; hence, to guarantee those privileges for domestic producers, the government has to impose trade barriers against foreign imports. When trade unions are allowed to use the strike threat to push wages above world-market levels, and when welfare benefits make unemployment a reasonably comfortable way of life, immigration restrictions have to be imposed to prevent those in other countries from entering the nation and offering their labor services at a lower wage and filling the jobs shunned by the domestic labor force. When governments resort to inflation to finance their domestic expenditures, the result is monetary nationalism manifested in government paper currencies and foreign-exchange controls and regulations.

The 20th Century

In the 20th century, the politicization of domestic economic activities, therefore, has led to the politicization of the international economic order. To secure markets and prices for domestic producers, governments are tempted to threaten or wage trade wars with other countries, with import tariffs and export subsidies being among the chief economic weapons, as well as a host of non-tariff restrictions such as quotas, prohibitions, licensing and technical and domestic-content requirements. Manipulation of the value of their respective currencies on the foreign-exchange markets also serves as an economic weapon by which governments try to influence the amounts of imports and exports and, hence, the market shares and profits to be earned by privileged sectors of the domestic economy.

There is only one way out of this “economic armaments race,” as the Swiss economist William Rappard once referred to it in the 1930s: a path of non-intervention in domestic affairs — the unregulated, uncontrolled free market. Otherwise, economic conflicts among nations will always threaten to degenerate into global economic warfare. “Government control of business engenders conflicts for which no peaceful solution can be found,” Ludwig von Mises emphasized long ago. “All the oratory of the advocates of government omnipotence cannot annul the fact that there is but one system that makes for durable peace: a free market economy. Government control leads to economic nationalism and this results in conflict.”

Unfortunately, this path to economic peace and prosperity is not the one that the Clinton administration is bent upon following. Rather, its stated intentions in both domestic and international trade point in the direction of an increasing economic armaments race, with economic warfare on the horizon.

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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).