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Free Trade, Managed Trade and the State, Part 4

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“The Protectionist creed rises like a weed in every soil,” lamented the English classical economist Walter Bagehot in the 1880s. “Every nation wishes prosperity for some conspicuous industry. At what cost to the consumer, by what hardship to less conspicuous industries, that prosperity is obtained, it does not care. Indeed, it hardly knows, it will not read, it will never apprehend the refined reasons which prove those evils and show how great they are; the visible picture of the smoking chimneys absorbs the whole mind.”

While the imagery of the smoking chimney may be inconsistent with the environmental consciousness of the Clinton administration, Bagehot’s lament can be echoed in our own times in terms of the mindset that dominates the thinking of the president and those who design policy options in the departments in Washington. Their conception of managed trade focuses upon the desired success of targeted industries viewed as essential to the nation’s prosperity in their conception of the global combat amongst the countries of the world. The cost to the consuming public in terms of higher taxes to subsidize preferred industries or in diminished trading opportunities because of limits on international freedom of exchange matters little to those in the Washington halls of power. What matters is that they see rise in front of them those industries and employments that they view as the most advantageous and attractive.

Forecasting Economic Trends

If the first error behind the thinking of the Clinton administration on the issue of international trade is their view of international trade as a war between nation-states, their second error is the one that serves as the philosophical underpinning for rationalizing the ability for and desirability of managed trade. Let us look at it more closely:

Governments Can Forecast World Economic Trends and Should Construct Policies to Create Desired Comparative Advantages for American Industry.

In spite of the failure of socialist central planning in Eastern Europe and the former Soviet Union, the planning mentality is alive and well in Clinton’s Washington. There exists the belief that it is possible for the government to estimate reasonably the direction and form of future technological and industrial developments in the world and construct a plan of action to assure that America comes out the winner in the international game of trade.

Actually, it is impossible to anticipate successfully the future of technological discovery or innovations for improvements in the methods of producing goods for the market. Every such judgment about the future shape of things to come is made from the standpoint of the knowledge and information in existence today.

But as philosopher of science Karl Popper pointed out long ago, it is a contradiction to speak about tomorrow’s knowledge today. We can never speak about what we will know tomorrow but only about what we think tomorrow may be like from the perspective of what we already know today. Tomorrow’s knowledge cannot be known until tomorrow comes, because part of what we know tomorrow will be the result of the experiences we have as time passes and the creative new ideas that people come up with on the basis of those experiences.

Thus, unless we assume that we possess perfect knowledge of the future, all judgments about the future — including new technologies, innovations, patterns of consumer demands and the strategies of competitors — are incomplete and personal estimates about what the future might hold in store from the perspective of the present.

I remember as a teenager coming across an old copy of Popular Science published shortly after the Second World War. The issue was devoted to what life would be like in America in the 1970s. The cover showed a suburban home with a white picket fence, with mom and the children waving good-bye to dad as he went off to work — in his one-man helicopter. The articles talked about the various home conveniences and appliances that the future held in store for the average American family.

But the one thing that was not talked about or even hinted at was the potentials of the personal computer and its revolutionizing effect on home and business life. Why? Because the microchip had not yet been invented and, therefore, all the projections about life in the late 20th century were incomplete.

The writers of the articles wrote their stories about the future under the constraint of the knowledge they possessed at the time in the late 1940s. It was impossible for them to construct the uses of a technology that had not yet been invented in the minds of some men, and, therefore, they were not able to conceive of its applications, because they could not image possibilities that would have to wait for the creation of the microchip.

To manage the economy requires The Planner to make the plans of a multitude of others subordinate to his own. And as Austrian economist Friedrich A. Hayek explained, this means that economic development is constrained and limited to what The Planner knows and can understand, since everyone else’s plans must conform to and be confined within the bounds of The Planner’s overarching plan. If the state taxes some in the society to subsidize the activities of others, those who are taxed are constricted in their own actions to the extent that their income has been reduced by the tax. The resources that might otherwise have been used and possibly applied in creative and unknowable ways are taken from their hands. Creativity, technological innovation and economic progress are limited to what The Planner sees as possible and worthwhile to support and fund.

The government-business partnerships and high-tech subsidy programs for America advocated by the Clinton administration are really proposals for a political centralization of the discovery and application of knowledge, and they channel their development according to the judgments of those who man the bureaucracies in Washington. They propose to figure out where the industrial innovations of the future are likely to be. Then, based upon their judgment about the shape of things to come, they aim to give shelter to American firms they want to be on the world market first with these new technologies and, thus, to preempt that new corner of the global market before anyone else can fill it.

Costs of Managing Trade

What is not discussed in these grandiose schemes for America’s industrial future are the costs of undertaking them. The costs involve more than the corruption that is likely to occur as special interests lobby for a fraction of the tax- and subsidy-plunder. The costs also involve more than the loss of economic liberty, as those individuals not on the receiving end of the government largess are restricted in their choices by both regulations and tax burdens to bolster and support the privileged sectors of the economy.

The costs also include the loss of all the innovations and creative possibilities that will not materialize or which will be delayed from coming to fruition, because those who might have come up with them will not have the income and financial wherewithal to realize them.

What idea equal to the microchip will we not benefit from because those in whose minds such an idea might have germinated will be denied the market opportunities that would have acted as the incentive for them to think such creative thoughts? Because the income, profits and wealth that could have been theirs from such creative thinking will be denied them by the state’s manipulation of the market, they may turn their efforts to less original ideas. And the world will have lost a profoundly important “might have been” as a consequence.

But precisely because it is a “might have been,” its importance will remain stillborn. It is an example of Frederic Bastiat’s famous example of “what is seen and what is unseen.” What will be seen are the industrial and technological projects subsidized into existence due to the actions of the state. What “might have been,” instead, will never be known precisely because the state assumed to know better, to see the future more clearly, rather than to allow each man to follow his own vision of a better future for himself and others through peaceful and voluntary transactions in the marketplace.

The market niches that the government creates for American industries through managed trade will be the industrial equivalents of the hothouse in which, under artificial conditions, plants are grown in an environment naturally hostile to their development. Their maintenance and further development will depend upon the continuance of the governmental policies that have brought them into existence. They will be the 20th and 21st centuries’ versions of the 19th-century argument for protecting the “infant industry.”

Protectionists in the last century would often argue that an undeveloped country could not afford free trade until it was as industrially developed as its more technologically advanced trading partners. Only then, when the underdeveloped country was sufficiently developed behind high tariff barriers to protect it from cheaper suppliers from abroad, could it afford to lower its trade walls and deal on an equal basis with its commercial neighbors. The only problem was that the infant industries never sufficiently grew up; they always clamored for continuing protection from their foreign competitors.

Having fostered the artificial emergence and development of certain high-tech industries and employment opportunities requiring particular government-subsidized labor skills, the proponents of managed trade will always find arguments for perpetuating the “temporary” taxing and tariff privileges needed for initially establishing these strategic positions in the global market. The American taxpayer and consumer will be permanently burdened with the costs imposed by those who believe that they possess the knowledge and wisdom to know the industrial and economic structure most desirable for America’s future.

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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).