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When Is an Advantage Really a Self-Inflicted Disadvantage?

Here’s Doug Irwin – on page 457 of his monumental 2017 volume, Clashing Over Commerce – writing about the attitudes of U.S. policymakers in the mid-1940s:

In addition to reducing tariffs, eliminating quotas, and dismantling discriminatory trading blocs, American policymakers were deeply concerned about how state trading and state-owned industries had begun to crowd out private US firms in world trade.  In such a world, the United States, with its largely private enterprise economy, would operate at a competitive disadvantage in foreign markets.

I don’t doubt that every word that Doug writes here accurately reflects the thoughts and anxieties of American policymakers 70-plus years ago.  But what thoughts and anxieties they were!  Unpacking and reflecting upon them is useful.

If it really is true that state trading and state-owned industries can generally crowd out privately owned and privately managed firms operating in free markets, then we Americans collectively made the wrong choice to reject socialism in favor of free(r) markets.  Therefore, if American policymakers back then truly believed in the greater power and potency of government-run enterprises and economies, why did they not endorse socialism for America?

The answer, I suspect, is that American policymakers then, like most government policymakers anywhere and at anytime, were so caught up in the swirling details of the here-and-now – and so buffeted by political superstitions and pressures – that they didn’t think systematically or coherently.  A sensible American policymaker back then would have calmed his or her colleagues’ fears by saying something akin to the following:

Fellow American Policymakers:

We have every good reason to believe that private enterprise and free, competitive markets are far more productive than is socialism.  (There’s a new book out by an Austrian-Brit named Hayek; it’s titled The Road to Serfdom.  Let’s all read it.)  Therefore, the products, firms, and industries that will emerge and prosper in our market economy will generally be superior to those that are created and survive in socialist countries.  Those socialist producers will be coddled, subsidized, bureaucrat-run, and diktat-hobbled.  Most importantly, socialist producers will not have the advantage of being guided by competitive market prices in both their output and their input decisions.

If the above were not true, then we Americans should join with our allies in the Soviet Union – or at least with what I understand is soon to come down in Great Britain under Attlee – and adopt socialism.  The fact that we stick with capitalism – however alloyed it is with its own imperfections and those that we in government inject into it – means that we believe that private enterprise and competitive markets are superior to socialism in any of its flavors.  I believe that in this decision we are correct.

So given that we’ve concluded that capitalism is superior to socialism, why do you fear state-run economies and state-owned enterprises?  The result of all that socialism will be (if you wish to put it this way) less ‘competition’ for us.  Economies swollen and bloated with socialism will generally offer consumers across the globe – including, of course, American consumers – worse deals than our private producers will offer.  Compared to the outputs of our factories, farms, and mines, the outputs of socialist operations will be shoddier and generally also pricier.

In short, the socialism that you fear will pose competition that is ‘unfair’ for our producers will, in reality, create for our producers artificially and unduly propitious global markets in which to sell their outputs.  Those who are doomed to suffer from the socialism that is now all the rage in Europe – and (watch out!) likely also soon in both south and east Asia – are not us.  It’s the unfortunate citizens of the socialist economies themselves.

Now I don’t deny that foreign-government grants of special privileges to a subset of foreign producers might give that subset of producers an advantage in export markets that that subset of firms would otherwise not have.  But do not focus exclusively upon this small subset of foreign producers, for whatever artificial advantages they might gain through their governments’ assistance will necessarily come at the larger expense of the economies and societies of which they are a part.  For every socialist firm made artificially better able to compete in export markets, there will be two, three, ten, fifty – no one can know for sure the exact number – firms in socialist countries made artificially less able to compete in export markets.  This much is certain: the socialism that you fear – that you fear because you focus only on the tiny handful of such firms that might excel under state direction – will weaken and impoverish those economies.

The bottom line, colleagues, is this: If you really believe that socialism or any other heavy-handed means of state intervention, direction, and restriction gives foreign producers in general an advantage over our privately owned firms that operate in free markets, then embrace socialism.  Embrace it openly and proudly, for you really believe socialism to be superior to capitalism.  But if you really do not believe that socialism is superior to capitalism – if you really do believe that capitalism is superior to socialism – then focus not on whatever highly visible, paltry ‘successes’ socialist governments might be able to engineer; focus instead on the gigantic, awful price that such ‘successes’ will inevitably inflict on the citizens of socialist countries.

Hey, come to think about it, such advice remains relevant today.