A friend points out that in my discussion yesterday of the list of "dangerous ideas" posted on Edge, I missed the post by Matt Ridley. I’m chagrined, for Ridley is truly one of today’s finest science writers — and this post of his is spot-on.
I paste it below in its entirety.
And regardless of the role played by ocytocin, pheromones, serotonin, adrenaline, or athletes’-foot fungus in guiding human behavior, history as reviewed here by Ridley teaches powerful lessons.
Government is the problem not the solution
In all times and in all places there has been too much government.
We now know what prosperity is: it is the gradual extension
of the division of labour through the free exchange of goods and ideas, and the consequent introduction of efficiencies by the invention of new technologies. This is the process that has given us health, wealth and wisdom on a scale unimagined
by our ancestors. It not only raises material standards of living, it also fuels social integration, fairness and charity. It has never failed yet. No society has grown poorer or more unequal through trade, exchange and invention. Think of pre-Ming
as opposed to Ming China, seventeenth century Holland as opposed to imperial Spain, eighteenth century England as opposed to Louis XIV’s France, twentieth century America as opposed to Stalin’s Russia, or post-war Japan, Hong Kong and Korea as opposed to Ghana, Cuba and Argentina. Think of the Phoenicians as opposed to the Egyptians, Athens as opposed to Sparta, the Hanseatic League as opposed to the Roman Empire. In every case, weak or decentralised government, but strong free trade led to surges in prosperity for all, whereas strong, central government led to parasitic, tax-fed officialdom, a stifling of innovation, relative economic decline and usually war.
Take Rome. It prospered because it was a free trade zone. But it repeatedly invested the proceeds of that prosperity in too much government and so wasted it in luxury, war, gladiators and public monuments. The Roman empire’s list of innovations is derisory, even compared with that of the ‘dark ages’ that followed.
In every age and at every time there have been people who say we need more regulation, more government. Sometimes, they say we need it to protect exchange from corruption, to set the standards and police the rules, in which case they have a point, though often they exaggerate it. Self-policing standards and rules were developed by free-trading merchants in medieval Europe long before they were taken over and codified as laws (and often corrupted) by monarchs and governments.
Sometimes, they say we need it to protect the weak, the victims of technological change or trade flows. But throughout history such intervention, though well meant, has usually proved misguided — because its progenitors refuse to believe in (or find out about) David Ricardo’s Law of Comparative Advantage: even if China is better at making everything than France, there will still be a million things it pays China to buy from France rather than make itself. Why? Because rather than invent, say, luxury goods or insurance services itself, China will find it pays to make more T shirts and use the proceeds to import luxury goods and insurance
Government is a very dangerous toy. It is used to fight wars, impose ideologies and enrich rulers. True, nowadays, our leaders do not enrich themselves (at least not on the scale of the Sun King), but they enrich their clients: they preside over vast and insatiable parasitic bureaucracies that grow by Parkinson’s Law and live off true wealth creators such as traders and inventors.
Sure, it is possible to have too little government. Only, that has not been the world’s problem for millennia. After the century of Mao, Hitler and Stalin, can anybody really say that the risk of too little government is greater than the risk of too much? The dangerous idea we all need to learn is that the more we limit the growth of government, the better off we will all be.
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I'm wowed. What a powerful, thought-rich statement.
Excellent post!
One comment re; "After the century of Mao, Hitler and Stalin, can anybody really say that the risk of too little government is greater than the risk of too much?"
The answer, unfortunately, is yes. If all the world's nations were to lay down their arms at once, then perhaps the answer would be no. But in this age of WMD, where even weak nations possess enormous stockpiles of weapons and explosives, the safest path is the path of overwhelming strength.
Certainly, I can imagine a better world. But it is unwise to make policy in any but the real world.
Much of the government we have today is due to the failure of capitalists to be honest and to honor the opportunity society they keep jabbering about.
Honest capitalism, less government. Easy.
Abuses by markets and firms are almost always committed with the help of government. Less government == honest capitalism. Easy.
nmg
Randy and Rustbelt, recall please what Adam Smith claimed the LEGITIMATE role of Government to be, namely, to provide for the National defense, to provide the infrastructure for commerce, and to enforce the Rule of Law. I would submit, Randy, that unilateral destruction of our WMDs (or even multilateral, for that matter) would NOT be in keeping with Smith's powerful proposal; rather, it would ENDANGER the nation. And, as for Rustbelt's point, Capitalism cannot legitimately be blamed for what it is, existentially. Self-interest, which is the engine of Capitalism, will always seek to cut corners, leading to winners and losers. When we witness capitalist excesses, it's not the failure of Capitalism, but rather its a failure of Smithian government to do its job.
But JABBER, here's the problem. I cannot imagine any govt powerful enough to provide good national defense and law+enforcement that would not abuse its privileges. Rent-seeking happens. So postulating an ideal Smithian small state is almost like assuming away the Heisenberg Uncertainty principle. It can't happen. Not in the long run. And probably not even in the short run.
ajb, I concur with your misgivings. However, I would argue that the function of (modern, or maybe of any time and place) Gov't that has always caused the bloating of Gov't that we so despise, is in the area of transfer payments, which are largely "non-Smithian."
I would also argue that we have some structural problems in our governmental form. Term limits would go a long way to solving them, as they would make politicians automatic lame ducks, and as such they would have a greater incentive to "do the right thing" rather than to pander for the next election.
Rustbelt, I would flip that argument around and say that government is corrupt. They often use their power to extort, and impose personal views on others. Honest government might lead to less government. Perhaps it is a combination of the two.
Jabber,
Agreed that national defense is a legitimate role of government. My point is that in the modern world, it takes a very large government to maintain the type of military needed for effective deterrence – or application.
Consider social security. I would contend that a secondary purpose (if not a primary purpose) of social security is to increase the funds available for national defense. Because without it, the funds for the programs it covers would have to be drawn from the defense budget. Remember that social security originated in Germany under Bismark – and that Patton trained his tank troops in cars with pipes welded to the top.
Randy, with regard to the size of government, I think we only differ in how we define very large. I think we would both agree that our current Gov't (all levels) is "too large," but it's difficult to say how much is "just right."
As for your point about Social Security, I'm not exactly what you mean. Seems to me that SS vs. National Defense is pretty much line on line with the proverbial "Butter vs. Guns" debate. I'm not sure how you can say that one supports the other.
Two points:
Firstly:
"No society has grown poorer or more unequal through trade, exchange and invention."
Um – read the history of trade between Britain and most of the world's countries in the nineteenth century. When a country can impose trading conditions on another country, the second can very quickly become much poorer. That's the point of Empire.
The sentence should really read "…through FREE trade, exchange and invention" – except, as far as I know, there has never been a period in history where a block of countries HAVE traded freely and exclusively with one another. So the whole sentence is merely theoretical and utopian.
Jabber,
In the absence of an extremely obvious threat, and given a choice, the people will choose butter over guns every time. A program like social security "encourages" the people to choose guns AND butter.
Sorry, Randy, that doesn't compute for me. Richie Rich gets taxed so that Peter Poor can get an SS check each month. Given your supposition that "people will choose butter over guns every time," why would Peter choose "guns"? Seems to me that Richie, who has far more to lose, would opt for the guns so as to protect his fortune, and if he didn't have to pay the tax for Peter's check, he'd have more with which to do it.
"The Roman empire's list of innovations is derisory, even compared with that of the 'dark ages' that followed."
Where does the writer get that from? Off the top of my head, I can think of half a dozen ideas that the Romans invented or improved: roads, viaducts, urban sewerage, central heating, plumbing, tenement housing… Surely most of the European dark ages 'innovations' were rediscoveries of lost knowledge? I concede them feudalism and crop rotation, but I can't think of anything else.
I don't think Mr Ridley has the knowledge to be able to make so many sweeping statements with much credibility.
"All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?"
Jabber,
Peter won't choose guns, but he will demand public services, and he will resort to disorder and violence if he doesn't get them.
I see social security as a system to collect massive amounts of money primarily from the middle class, skim off 20%, and give the rest back. The 20% is the money used to keep Peter content, and it would have had to come from the defense budget if social security did not exist.
So tell me again, what happened to all that money from the trust fund?
Monyet -
Plus, his points about free trade benefitting any of the old civilizations cited are irrelevant unless he also proves it benefitted their TRADING PARTNERS. The seat of an Empire usually benefits from trade (or it falls pretty quickly) – the real question is whether satellite states will do.
And God knows what his point about Ming China is. Several preceding dynasties had freer trade policies.
The writer is a pseud.
Max,
I think you mis-read the part about Ming China, but I agree with your first point whole-heartedly.
Matt Ridley's utopian history is laughable: how can he possible believe that in "pre-Ming China, 17th century Holland, 18th century England, 20th century America, post-war Hong Kong, Japan, Korea, etc etc" there was "surges in prosperity for ALL"???
Even if he ludicrously believes that no poverty existed in these countries – and even more amusingly that ANY of them practiced free trade – it wouldn't take long to look up the history of the Banda Islands in the 17th century, or Ireland in the 18th, to see how utterly fallacious his examples are.
I reiterate a point I made in a different talkback: if free trade is such a good idea, why do its proponents so often feel they have to misrepresent history and use false logic to try and convince others?
Randy, you disappoint me. Where did I ever write anything about the "Trust Fund"?
I also suggest you look up the most recent IRS data (which have largely remained constant over time) that shows that the top 25% of wage earners pay 80+% of income taxes, hardly an indicator that social security rides on the back of the "middle class."
I also commend to you this article…
http://moneycentral.msn.com/content/invest/extra/P140067.asp?GT1=7621
…which should effectively disabuse anyone of the notion that "poverty" in the US is anything of the sort.
Matt Ridley never says or suggests that no poverty existed in the civilizations that he singles out for praise. Economic growth, and even widespread economic prosperity, does not imply the absence of all poverty.
Moreover, freedom of trade isn't a toggle switch; trade is not either "not free" or "fully free." It's more or less free, along a spectrum.
I don't know about the Banda Islands, but I know a bit about Irish history. Britain's pre-1846 restrictions on trade in grain played a significant role in creating famines in Ireland.
And to Tom in particular: please identify instances of false logic used to justify free trade? I'll admit that some such instances exist — namely, when proponents argue that free trade will reduce the rate of unemployment — but among serious economists (almost all of whom endorse free trade) the logic of the arguments is quite strong.
Tom wrote: "I reiterate a point I made in a different talkback: if free trade is such a good idea, why do its proponents so often feel they have to misrepresent history and use false logic to try and convince others?"
First of all, you make an assumption that you take as a given, namely that free trade proponents "so often" misrepresent history. Does Ridley? I don't think so. Rome WAS primarily a "synthesizing" power, that took a little from here and a little from there, implemented it well, and imposed its will at sword point. That last is admittedly troubling if one's trying to make an historical free trade argument, but Ridley wasn't, not in the case of Rome.
The only example you need, Tom, which you seem to casually dismiss in your apparent refusal to buy the notion of Free Trade, is the enormous wealth of the Western Democracies who have largely (if not perfectly) practiced Free Trade with one another over the past 60 years.
Also, free trade theory is but an extension of the obvious and irrefutable benefits that accrue to those who specialize in what they do best and then trade their wares/expertise with those who provide them the things they need and want. If you deny this, sir, then you must be living in a cave somewhere.
Jabber,
Something is definitely getting lost in translation, because your comments don't seem to have anything to do with what I'm trying to say. Maybe we can try this again some other time.
Don,
Re; "Moreover, freedom of trade isn't a toggle switch; trade is not either "not free" or "fully free." It's more or less free, along a spectrum."
I was discussing this with Tom on a post below, but I'll address it to you here.
I think there really is such a thing as trade that is fully free, just as there really is a market that is fully free. It is true that there are layers and layers of crap tacked onto just about every economic transaction, but at the core there is a fully free transaction, and it is in this core transaction that 100% of the wealth is created. It isn't that there is no free market, its that there would be more wealth created by the free market without all of the crap.
And so a very long post…
(A) Firstly, in response to Jabber – yes I am well aware that western democracies have traded freely between themselves, and have accrued great wealth: the European Union is a great example. The European Union is not, however, an autarky, and imposes huge tariff barriers to limit worked goods coming in from third world countries, and subsidizes its farmers to compete with third world agriculture. Most western democracies do this. Which leads me on to:
(B) Don – your point about Britain's trade policies – not just on grain, but on cloth, beef and anything else which competed with British industries – having caused famine in Ireland in the 18th century is PRECISELY the point I am making. This was not, as Ridley suggests, "strong free trade" – and nor did it create "prosperity for all".
(On a side note – Ridley's phrase "prosperity for all" to me suggests "everyone was prosperous", which to me means "nobody was impoverished". Which definition of the word "all" are you using?)
Now, Britain in the 18th and 19th centuries imposed laws in its colonies which prevented them exporting goods produced by industries which would compete with Britain's; forced others, usually at gunpoint, to remove tariffs on British exports, erected huge tariff barriers to protect its own industries – and did so until they had established themselves as the world's superpower.
This is because Britain – which was not synonymous with Adam Smith – implicitly believed in dependency theory, well before Prebisch articulated it, and saw the best way of enriching themselves as being by taking from others. The whole point of their Empire was to benefit from the trade it afforded them, and ensure that its satellites did not. Having succeeded, they then promoted free trade.
In the words of Ulysses S Grant:
"For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade."
… and no doubt then join Britain and other industrialized countries in telling developing countries to adopt free trade too. Which – Good Lord! – they did.
I fully believe in free trade between Western democracies. I also believe that by promoting free trade to third world countries (with or without our own tariff barriers) – we are doing something very similar to Britain when it was a colonial power. I believe free trade is all very well when industries are already competitive, but that poorer nations will not benefit from free trade until they have developed under protectionism first. I can think of no industrialized nation – the US, Britain, Taiwan, Japan, South Korea – even India – which didn't have average tariffs of over 30% for the most part of its industrialization.
So Jabber – no – I do not "only" need to look at Western nations to see the benefits of Free Trade, as (a) these also show the benefits of past protectionism and imperialism, and (b) free trade is a multi-way process, and I need to see it brings benefits to "all" – not just US.
And I can think of historical example which does so.
Tom, your example of Europe defeats your whole argument. Post-WWII Europe was NOT an equal to the US, yet it prospered. Why is that? Could it be that Europeans had a great many skills and a modicum of sense when it came to organizing their institutions and Rule of Law?
Now, let's compare that situation with the Third World. Does the Third World have skilled people? Naturally skilled, yes, but undeveloped. We thus have "Priority One": unleashing that enormous capital.
Let's now move on to institutional acumen and the Rule of Law… Ooops, big problem, and so, "Priority Two." But there seems to be a problem in the Third World that is ever so intractable: Corruption.
The problem, Tom, isn't Free Trade. The problem is with the greedy bastards at the top who take advantage of their own people. You mistake the baby (Free Trade) with the bath water (unbridled greed). But if the greed can be bridled via the Rule of Law, ALL people will benefit, regardless of where they start out.
Jabber -
Two points:
Firstly, on what basis are you saying that post WW2 Europe was not the US's equal? The combined GDPs of France and the UK alone were greater than the USA's in 1950. That does not at all contradict my argument that free trade benefits already industrialized countries – it instead proves it.
In terms of what keeps the third world in poverty, I am surprised that you especially, Jabber, would pin economic problems so simplistically on corruption. Obviously that is a big problem, but let's be fair: corruption is endemic in China, but with a carefully planned economy, ignoring the advice of the West – and following Friedrich List, for God's sake – they nevertheless have had an average growth rate of 9% for the last 20 years.
Corruption is a constant in any country with weak law or little democracy – but some of those countries economically prosper, others do not. You need therefore to look for another reason to explain lack of prosperity.
As I say, none of the major world economies believed in free trade until they had industrialized, and all prospered under protectionism.
To paraphrase Matt Ridley, why argue with something that history has proved, again and again, to be a success?
"…none of the major world economies believed in free trade until they had industrialized, and ALL PROSPERED UNDER PROTECTIONISM." (my emphasis)
Wow, Tom. You speak with such surety! So, in other words, if I practice "personal protectionism," and refuse to trade with anyone else, I will prosper? That's effectively the argument you're making. Leave the history books aside for awhile and pick up some basic economics. You might start with David Ricardo and comparative advantage.
You continue to blame Free Trade for the deprivations that come with the baser nature of humanity. Now, if your argument was that Free Trade won't work to best effect UNTIL the institutional infrastructure, the Rule of Law, and the cultural mindset is in place, then I might agree with you. Sadly, your brush strokes are so broad that I can't see such subtlety.
@Jabber
"you make an assumption that you take as a given, namely that free trade proponents "so often" misrepresent history. Does Ridley? I don't think so. Rome WAS primarily a "synthesizing" power, that took a little from here and a little from there, implemented it well, and imposed its will at sword point."
On what basis do you say it was PRIMARILY a synthesizing power? Exactly what elements of the acquaduct did the Romans take from some other civilizations?
I now recall now that they did, in fact, trade outside of their empire. Where did the blonde haired slaves, amber and silk come from? None of those products were sourced from within the empire.
I still think Ridley is a cypher.
Tom says "I believe free trade is all very well when industries are already competitive, but that poorer nations will not benefit from free trade until they have developed under protectionism first."
Do you also believe that the moon is made of green cheese? C'mon, Ricardo died over a century ago, there's no excuse for still believing things he proved false. Comparative advantage is easily seen to be true, both in theory and in practice.
-russ
Jabber:
Oh Good Lord, read my post. I can't say it enough: FREE TRADE – DUE TO COMPARATIVE ADVANTAGE – WORKS FOR THOSE WHO ARE ALREADY RICH. Tell the politicians our country would be better off without protectionism, not me.
And Russ:
What a winning argument! If it has been proved in practice, give me an example of a country that has industrialized under free trade. Any country, any time in history. Your choice.
And Jabber,
Now I've dropped out of my immediate fury and read your second paragraph:
Yes, I am painting in broad brush strokes; let's be fair, that's what people do here – it's not a forum that supports detailed essays and arguments: look at Russ's post above. In drawing his historical argument, Matt Ridley was using large wax crayons, and it was that I am arguing principally against: the notion that historical precedent supports free trade. I've always said I'm open to persuasion on free trade; what I'm saying here is that displaying little historical knowledge isn't the way to go about it.
In terms of what system free trade best thrives under: I don't know. I've always felt that proper free trade and democracy are incompatible. Western political parties are reluctant to drop subsidies and extortionate tariffs as they fear the electorate's wrath for the short term unemployment and collapse of industries, even though the country would be better off eceonomically in the long term. Political and social realities don't really come into Ricardo, even as his ideas are mathematically correct.
Tom,
Re; "I've always felt that proper free trade and democracy are incompatible. Western political parties are reluctant to drop subsidies and extortionate tariffs as they fear the electorate's wrath for the short term unemployment and collapse of industries, even though the country would be better off eceonomically in the long term."
I think you've got this exactly right. So is the problem with free trade? – or with Democracy?
To return to our prior discussion, the responsibility of free trade, which is really just an extension of the free market, is to create wealth. It is the responsibility of the socio-political systems to decide how best to utilize the wealth created. I think it is unwise for them to begin by limiting the amount of wealth created.
Aren't statements such as "I am opposed to free trade and/or free markets", just another way of saying, "I am opposed to the creation of wealth"?
I'll reply in the original thread, Randy – this one ought to be about whether HISTORY supports the notion of free trade & marginal government, as that was what Don posted originally – not trade theory in general. The thread's getting a bit frayed already.
"FREE TRADE – DUE TO COMPARATIVE ADVANTAGE – WORKS FOR THOSE WHO ARE ALREADY RICH"
Tom, assuming you're still here and speaking to me…
Richie Rich makes capital equipment (specifically, hoes). Peter Poore digs potatoes with his bare hands. Richie comes to Peter and says, "Hey, Pete, I've got just what you need." Richie demonstrates the hoe and Pete's impressed. They agree to a trade, the hoe for a bushel of potatoes.
Now, suddenly, Pete can dig many more potatoes. In fact, he's got more than he could ever eat. He takes the extra to town and trades them for the other stuff he needs.
To your original quote I proclaim: Bull!
To use simple language then:
Peter Poor indeed goes to town to trade his potatoes for goods, but finds that Pierre Pauvre is there too, who grows, harvests and trades potatoes at a lower opportunity cost – and tomorrow he's going to Peter's village market too. Peter Poor has now neither a comparative advantage in potatoes or hoes, and his land won't support anything else. Migration laws won't let him move either to the town or Pierre's farm… So what the bugger does he do?
Ok, Tom, have your way. Peter is a nudge, a total loser. You tell me! What should he do? Beg from Richie and Pierre? Satisfy himself with his lot in life? Or trade, even at a lower-than-he-wants price, and be able to consume more stuff than just potatoes? You're so committed to your argument that you refuse to see that Peter and, by extension, poor countries, have a choice: Either practice protectionism and never catch up, or do whatever it is that they do best (and, rest assured, they WILL do something cheaper than someone else) and generate the income that will allow them to educate their kids, build their factories (which they can stock with cheap laborers), and start the cycle of wealth.
You're right: a country will produce SOMETHING cheaper than everyone else, but the question is how much of it the land will produce, and what demand there is for it in other countries: variables you don't take into account. (What happens to Peter Poor if the Riches are all on the Atkins diet?!?).
What though, to return to the historical examples that the thread started with, makes you think protectionism WON'T work for Peter Poor? It worked for every industrialized nation during their industrialization – and though I accept it would be a logical fallacy to therefore conclude it ALWAYS works, why not let PETER POOR – or his university-educated brother-in-law – decide whether free trade or protectionism will work best for them? Why insist you know better than a man of equal education, just because you live in the town and want to sell your hoes?
Tom, Japan is one of the poorest nations in terms of resources, yet one of the wealthiest. Why is that? Because it protects its industries and doesn't trade with other countries? For the most part, no.
But, as a matter of fact, it DOES practice protectionism, specifically for its rice farmers (no different than what we do with dairy farmers) – as Don noted, truly "free" trade doesn't exist.
So, anyhow, Japan protects its rice farmers for political reasons. But even you must admit that, while this is good for the rice farmers, it sucks for the Japanese consumer, just as it does for the American milk consumer (and I know, I've got three kids). If Japan allowed in cheap American rice, its consumers would have far more to spend or invest.
Hey, I worked for one of the Big Three for 12 years. I lived protectionism. But tell me, if you have a protected market, how do you ever improve? How do you ever become world class?
True, but Japan still had tariff barriers on automobiles at over 35% back in the 1960s, not to mention goverment subsidization of the industry and import quotas. They liberalized only when the industry was already competitive abroad. (And conversely, Japan didn't start to industrialize successfully until it abrogated the unequal treaties imposed upon it, and raised its tariff barriers from a 5% average in 1911).
Had Japanese economists who advocated the free market had their way, the automobile industry would have been aborted in the 1950s, and they'd have concentrated on their comparative advantage: silk. Would Japan have been better off today?
I have no doubt that had they CONTINUED protectionism on the autombile industry, neither it nor consumers would be better off – but a PERIOD of high protectionism before liberalization, historically speaking, has had repeated success the world over. Obviously it is dangerous to advocate x years of protectionism in any and every case regardless of market conditions, but I think we have to likewise be careful of claiming that free trade is a global panacea.
I wasn't trying to be smart when I asked Russ Nelson to give me an example of a country that successfully industrialized under free trade – I'm quite sure we could all conversely name loads that failed under protectionism. But I simply can't think of a single nation that didn't explicitly reject uncontrolled free trade until it already had competitive industries.
If one exists, I'd like to know, but otherwise I simply don't get why we now tell developing countries they must do so – in the face of historical example – except that OUR industries are subsequently able to better profit from their open markets, with less competition in the long-term.
I know this is a dead thread but…the argument that protectionism in poor countries is effective at building incipient industries with future trade liberalization and wealth in mind is nonsense. First, as Thomas Sowell noted in Basic Economics, the industries that have been coddled don't let the milk bottle be loosed from there lips very easily. Also, it is highly unlikely that a company could be very innovative when it is shielded from competition.
The Japanese example is, essentially, the government making a gamble: investing tax dollars (and the temporarily impovershing the Japanese customer by limiting imports) into a certain industry in the hopes that growth in demand for automobiles would outstrip growth in overall aggregate demand growth. Well…as you know, the car market went through an unprecedented boom and Japan rode that wave of LUCK to increased wealth.
Regardless of this gain in wealth, the moral right of government to partake in its own little investment schemes, which perforce benefit some (car manufacturers/workers) at the cost of others (tax-paying, consuming general public) is tenuous at best. Think of all the governments which did NOT have the foresight of Japan. I doubt that France's dairy "national champion", Yoplait, is the engine that drives French economic growth. And we must remember that in the 1980s and 90s Japan succumbed to a huge wave of corruption, the inevitable result of the volatile mixture of tax dollars, business, and a government willing to lend a "helping hand".
Finally, under free-society capitalism the government direction of capital shouldn't even be necessary! In a venue of free information, capitalists can make their own research efforts and subsequently gamble their OWN MONEY at much less risk than a government that appropriates (some may say "steals") billions of tax dollars and transfers them to certain businesses. Remember, for every Japanese government that makes a lucky bet on the auto industry in the 60s and 70s, there are numerous failures of this "protectionism for exportation" scheme, as seen in many textile-exporting countries in the 90s and today as China's absolute advantage in that area undercut the prices that Latin American or even other Asian nations could offer.
Also, I should note that protectionism is never synonymous with "New Economy" technology. While it may have been CLOSER to validity in a past time, where industry was simply a matter of building the appropriate factories, a quickly-evolving knowledge-based economy requires businesses to search for the best product, whether it is homegrown or not. If Argentine coders wrote terrible code, it would be self-destruction to limit "imports" of foreign software in order to "give the software companies a chance to improve". Education and exposure to competition are much more important to building wealth than feeding tax dollars to a certain industry. Betting the country's wealth on a "national speciality" like cars (with the decision made by a few government officials) is a terrible use of the millions of capable minds in any given country, who – with the right institutions and laws in place – could surely use this capital in a much more productive way. There may be lucky exceptions such as Japan, but in the end playing the dangerous game (remember, no country is isolated and there are harmful diplomatic repercussions of raising tariffs) of trade barriers is an extremely risky gamble, especially in today's economic environment.
OK, one more thing:
"But I simply can't think of a single nation that didn't explicitly reject uncontrolled free trade until it already had competitive industries."
Chile is doing exactly that right now. I know, because I am living here. Also, the Baltic Countries (Latvia, Estonia, and Lithuania) have been growing at unprecendented rates – and I doubt that you'd consider the immediate post-Soviet conditions in those countries as "competitive".
Don't forget that I was only discussing Japan in response to Jabber; it is not an isolated example by any means – although I likewise concede neither is Yoplait.
Chile is generally reducing most of its tariffs it's true, but it nevertheless puts up huge tariff barriers for both agricultural products and automobiles, and the importation of used automobiles is banned outright. Are you sure they're not using protectionism to try and grow certain domestic industries?
Well, there are no Chilean car companies: most cars are General Motors, Ford, Chrysler, Renault, Peugeot, Fiat, Nissan, Hyundai, Toyota, or SsangYong.
Here is the excerpt from the "trade" section of the 2006 Index of Economic Freedom, where Chile is in position #14, one ahead of Switzerland:
"According to the World Bank, Chile's weighted average tariff rate in 2004 was 3.7 percent, up from the 2.9 percent for 2003 reported in the 2005 Index. The U.S. Department of Commerce reports that "Chile generally has few barriers to imports." However, there are a few restrictions on agricultural products and processed food. Based on the revised trade factor methodology, Chile's trade policy score is unchanged."
Chile's free trade score is nearly perfect at 1.5.
http://www.heritage.org/research/features/index/country.cfm?id=Chile
Also, various FTAs signed with the U.S., Canada, the EU, and, very recently, China and India mean that the remaining tariff barriers you alluded to should be coming down over the next 10 to 15 years. I think that the main barriers are constructed for the benefit of a few noodle and food companies, and some voices in the Chilean government have advocated that these need to be chopped down sooner rather than later.
Still:
"Are there exceptions to the 6% import duty?
Yes, for certain agricultural products, luxury goods and software. Such commodities as wheat, edible oils, sugar, and wheat flour are subject to a price band to protect local producers. The price band results in additional charges that can effectively raise taxes on the import to as high as 29%, once the 6% duty is factored in.
Luxury goods carry surcharges ranging from 30% to 70%, for goods such as articles of gold, platinum and ivory, furs, high quality rugs, yachts, cigarettes. As of 2003, the 85% automobile luxury tax is applied to the CIF value of the vehicle in excess of $15,835."
http://www.mac.doc.gov/chileFTA/faq.html
The tariff barriers still in effect in the Chile-US FTA (the U.S. is Chile's most important trading partner) seem to be erected for 2 reasons, neither being an attempt to "strengthen" local companies in preparation for future international presence. First, Chile's soil – while optimal for grapes and other fruits – doesn't seem to be the best for wheat nor sugar; however, somehow wheat farmers wormed their way into government support, possibly under a EU-like claim of being "land caretakers" (this is just speculation on my part). The outrageous tax on luxury goods is an example of government abridgement of liberty in an attempt to direct capital to more "productive" uses than luxury goods, as well as an income-raising venture essentially taxing the wealthy, because there are no prominent Chilean yacht/rug/fur companies. I don't think this is a case of Chile trying to develop its own luxury-oriented companies.
The case with the used cars is also a frustrating one, although it is not true that their importation is strictly banned; it is allowed at the two "zona francas" (free trade ports) of Chile, Iquique and Punta Arenas. A warped scheme allows citizens of these regions to buy the imported used cars and then obtain (easily, I think) a special permit to use them in the rest of Chile as well as their "home region" (there are 13 administrative regions here).
I have found an article that talks about some of these car trading issues, if it interests you: http://www.findarticles.com/p/articles/mi_m0BEK/is_8_12/ai_n6189457
(BTW in the article a man says that new pickups here cost $150,000, which is complete balderdash – they are closer to $50,000 for nice models, and $20,000 for the lower end).
spome interesting stuff, rather