Open Eyes on Trade

by Don Boudreaux on November 11, 2012

in Adam Smith, Trade

Democracy’s Herald doesn’t like my quotation today from Adam Smith.  Quoting Mr. or Ms. Herald (from an e-mail that he or she sent to me earlier today):

Smith’s quote [that "All commerce that is carried on betwixt any two countries must necessarily be advantageous to both"] is not justified on science grounds.  For instance how does Smith know that the psychic gains to persons who win by trade are always higher than the psychic losses of persons who lose by trade.  He cannot know that.  You cannot know it either.

Your case for free trade is much, much more weak and conditional than you are always presenting it here.

The issues raised by my mysterious new friend D. Herald – who, from here on in, I will assume for convenience is male – are large.  Nor are they new.  People have raised these and similar objections over the past few centuries.  And economists have addressed these objections thoroughly.

I have neither the time nor energy today to go over these objections in detail.  (If you’re really interested, you can find a longer treatment in chapter 5 of my book Globalization.)  Instead, I rest content here to point out that the specific objection registered above by Mr. Herald – like so many other objections raised by protectionists – isn’t unique to international trade.  Anytime consumers change the patterns in which they spend money – say, buying fewer donuts and more bacon because of the increasing popularity of low-carb diets – some producers ‘lose’ and others gain.  (For an explanation why the “winners” and “losers” language is inappropriate in discussions of trade, see this post.)

We can no more “know that the psychic gains” to those who benefit from some change in trade patterns that do not cross political borders outweigh the “psychic losses” to those whose economic fortunes are rendered less promising as a result of that particular change than we can know a similar thing about such gains and losses that result from changes in trade patterns that cross political borders.

You cannot legitimately argue against international trade by pointing to real or imaginary problems with trade in general.  An argument against international trade must isolate something unique about trade that crosses international borders.  That argument must then plausibly explain why that unique something renders exchanges that take place across political borders detrimental to the domestic economy.

Such arguments are made – for example, “free trade puts national security at risk.”  And while these arguments are nearly always found wanting, at least they focus on the legitimate issue at hand, namely, on the alleged uniqueness of trade that crosses political borders (rather than on alleged problems with trade generally).  (Note, by the way, that the fact that wages in a foreign nation are generally much lower than are wages in the domestic economy is not a relevant distinction.  Wages of teenagers within America are generally much lower than are wages of older workers within America, yet that vast difference in wages is not offered as a legitimate justification for trade restraints against the sale of outputs produced by low-wage teenage labor.  [Yes, I understand that minimum-wage legislation is indeed protectionism of this very sort, but - and this fact is here key - it isn't today sold to the public as such.])

So, the fact that some workers lose jobs because consumers change the ways they spend their money or because some producers (for whatever reason) become able to sell their offerings at prices lower than were possible in the past is no argument against free trade.  It might be an argument against trade in general, or against consumer sovereignty, or against innovation, or against competition – but it’s no argument against freedom of international trade because that fact isn’t remotely unique to international trade.

Put differently, the economist’s case for free international trade can be summarized as follows: Economics shows that whatever kinds of benefits and costs result from freedom of consumers to spend their money as they wish – and from freedom of businesses to compete in markets for that consumer patronage – attend all voluntary trades regardless of whether or not those trades take place across political borders.  Because consumer sovereignty and open competition generally promote widespread economic growth, there is no more reason to restrict international trade than there is to restrict intranational trade.

Before I close, consider the following hypothetical.  Suppose that for years government put special taxes and other restrictions on purchases made from all sellers with blue eyes.  Now government eases those restrictions – perhaps being so radical as to allow unrestricted trade with all blue-eyed sellers.  Some brown-eyed, green-eyed, and other non-blue-eyed sellers will, at least for a time, be made worse off because of this liberalization of trade.

Television cameras will film non-blue-eyed producers who lost their jobs as a result of this freeing up of trade. (Indeed, if we grouped voters not on the basis of geography but, rather, on the basis of eye-color, then it’s likely that politicians seeking to be elected representatives of, say, brown-eyed voters would thunder against the economic damage caused by free trade with blue-eyed voters.)  And academic papers would be written, of varying quality, attempting to quantify in one way or another the “gains” from this liberalization of trade as well as the “losses.”  Changes in non-blue-eyed people’s “trade balance” with blue-eyed people would be calculated and reported.  Discussions would ensue as if something economically (and ethically) meaningful distinguishes the trade of non-blue-eyed people with each other from the trade of non-blue-eyed people with blue-eyed people.

But, of course, all such discussion, analysis, measurement, reporting, and theorizing – despite some people’s contrary perceptions – would be foolish.  The reason is that there is absolutely nothing of any economic relevance that distinguishes the trade of non-blue-eyed people amongst themselves from the trade of non-blue-eyed people with blue-eyed people.

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