Back to Basics

A columnist at the business magazine Forbes has agreed to that rarity of rarities: an actual debate on the merits of free trade! As the reader may have noticed, most free traders are so religiously committed to the doctrine that they can’t even imagine the possibility that they might be wrong. (Believe me, as a former free trader, I’m familiar with this mentality.) And the rest? They seem to be well aware that their faith doesn’t stand up very well to cross-examination, so they avoid debate.

My comments here are a response to this article by Tim Worstall.

Worstall is a Briton currently residing in Portugal.  I find this a sublime irony, as economic history records that Britain and Portugal were, in fact, among the earliest and profoundest victims of free trade.

Let’s consult the history.

Britain, prior to her adoption of free trade starting in the 1840s, was the world’s leading economic power, birthplace of the industrial revolution and center of a worldwide empire. But she had attained this position not by practicing free trade, rather under a now-largely-forgotten protectionist policy that has come down to us under the name “mercantilism.”

But after Britain embraced free trade beginning in 1846, this all began to fall apart, and Britain entered her long economic decline that has since reduced her to a minor economy heavily indebted to former colonies. In the words of one commentator,

The industries that formed the core of the British economy in the 19th century, textiles and steel, were developed during the period 1750-1840—before England abandoned mercantilism. Britain’s lead in these fields held for roughly two decades after adopting free trade but eroded as other nations caught up. Britain then fell behind as new industries, using more advanced technology, emerged after 1870. These new industries were fostered by states that still practiced mercantilism, including protectionism.

The rising powers of this era?  Protectionist nations like Germany, the United States, and later, Japan.

Economic history is an amazing solvent of the pretentions of theory. (Later, we can talk about fixing the theory so that it’s actually true.)

Now for Portugal. Portugal’s trade of wine for English textiles is, interestingly, the classic example of free trade given in economics textbooks. And therein lies a very revealing tale.

For in the era of England’s rise to greatness, textiles were produced there with then-state-of-the-art technology, like steam engines. The textile industry thus nurtured a sophisticated machine tool industry to make the parts for these engines, which drove forward the general technological capabilities of the British economy and helped it break into related industries like locomotives and steamships. It was an industry fruitful for growth, a key industry to be in.

Wine, on the other hand, was made by methods that had not changed in centuries. So for hundreds of years, wine production contributed no technological advances to the Portuguese economy, no drivers of growth, no opportunities to raise economy-wide productivity. And its own productivity remained static: it did the same thing over and over again, year after year, decade after decade, century after century, because this was where Portugal’s immediate comparative advantage lay.

The news has recently hit the press that China’s economy, measured on the purchasing-power basis that adjusts for price differences between nations, may surpass the U.S. in only another five years or so.

Surprisingly, China has still shown no signs of morphing into the cuddly liberal and democratic nation, devoted to American ways from Coca-Cola to democracy, whose eventual appearance has been assumed by American policy for thirty years now.

Our policy during this period has, after all, enthusiastically cooperated with China’s efforts to build up its economic power–which entails, of course, every other kind of power, including the military kind. So our assumption of a benign China had better be right, or else we have been abetting the creation of a monster. A hostile China will be arguably even worse than the USSR, because it will not do us the favor of sabotaging its economy by adhering to a dysfunctional economic ideology.

The above realities are the subject of Eamonn Fingleton’s book In The Jaws of the Dragon: America’s Fate Under Chinese Hegemony. Fingleton is a Tokyo-based Irish journalist who has lived in East Asia for over 25 years, and he has a long and distinguished record of telling truths about the region’s politics and economics that the establishment (on both sides of the Pacific!) would rather the public did not learn. This is one of those books that one wishes the President would read.

While it is hardly news that America is facing a Chinese challenge, the seriousness of this challenge is still poorly appreciated. For example–this was my big takeaway from the book–China is not just another despotism. It is the implementer of a systematic and sophisticated political philosophy, which Fingleton calls Confucianism, which will almost certainly constitute a serious threat to liberal democracy in the years ahead.

Confucianism, as the reader may recall from a comparative religions class taken long ago, is the political philosophy derived from the ancient Chinese sage Confucius. It was the official ideology of the state in Imperial China for thousands of years.

Now Confucius wasn’t a bad man, but he did base his political philosophy on taking authoritarian government as a given and trying to civilize it. He did not, as Western political thinkers since the dawn of democracy in Ancient Greece have done, base his political ideology on trying to prevent despotism in the first place. As a result, he simply wasn’t that interested in concepts like individual freedom or limited government.

The bottom line, after a few thousand years of history and some astonishing ideological twists and turns, is an approach to politics that is systematically opposite to liberal democracy.

It is the velvet glove on the iron fist, and increasingly a very sophisticated one. It has tamed capitalism and mastered modern media. It is not headed for collapse or metamorphosis any time soon. If anything, it is currently more successful at imposing its will on us than we are at the reverse.