THE DISCUSSION on free trade continues here, with comments from additional readers and a very lengthy response to his critics from Kristor, who concludes his argument with this:

From my point of view, protectionists are urging us to slap a big Ace bandage over an open gangrenous wound. The rot in our culture goes deep. In dealing with our fix, trade war should be the last weapon we use, not the first. The first thing we should do is eliminate the absurdities in our own system. Let the Chinese continue to fund the absurdities in theirs. Most likely, they’ll end up like the last unstoppable mercantilist Asian Tiger we used to be all worried about: Japan. Remember when Reagan and Thatcher were just rolling up their sleeves, and the common wisdom was that the Japanese were about to take over the world? Then Reagan and Thatcher tweaked a few things in a rational direction, and we took off – while Japan cratered.

Kristor’s comments appear below in full. Thank you to all of the readers who have taken the time to discuss this important subject so knowledgeably.

ART writes:

Jeff W. wrote:

“My impression of Kristor and others here is that they think it’s all right for Americans to earn $2 an hour. If that’s the outcome of free trade, then they think it’s right and just that Americans should be impoverished.”

I would consider it utterly fine for Americans to work on $2 an hour. We effectively labored for that wage at the start of this countries history, and I would argue we were in many respects better off morally and socially. I think we were quite arguably even better off in the medieval world with our Christianity and Cathedrals, when the standard of living was indeed medieval. I do not see any intrinsic social benefit of comfort and modern wages, and indeed think that children would probably be more valued in a world with low wages than one with high wages. The following chart will easily support that view.

James N. writes:

I have hesitated to jump in, because I disagree with Kristor, and Kristor is so much smarter and more eloquent than I that it keeps occurring to me that I must be wrong.

However.

It appears to me that the free traders have the advantage only if one takes a reductionist view of humans, Americans specifically, that reduces them to consumers. It is not an accident that the campaign to get American citizens to self-identify as “consumers” got its start in the 1960s and was principally organized by, and served the needs of, leftists.

Of course, if one’s identity as a “consumer” is primary, then Wal-Mart is the answer to all of your needs (or, more exactly, all of your downtrodden and increasingly impoverished fellow American’s needs).

But I am a man, a father, a husband, a son, a brother, a Christian, and, by God’s grace, an American. If my brother and sister Americans self-identify as “consumers”, and so seek out Wal-Mart (and others), with the result that their jobs go to China and their means continually diminish, I believe that they are making a mistake – or, better, that their leaders have made and continue to make the serious mistake of believing that it makes no difference to our national community whether a jacket is made in China or in New Hampshire.

To believe this, you must have a radically different view of what “national community” means. I love my fellow Americans, just because they are Americans. I love them better than I love Canadians or Mexicans, and I love Chinamen in such an abstract way that I’m not sure “love” is even the correct term.

Because I love them, with all their faults, I would (if I had the power) reward production here, and punish production overseas.

Kristor writes:

Aaron, Hannon and Chris make so many good points, and ask so many different good questions, that I think interspersing my replies in pared down versions of what they each said is the most efficient way for me to respond, or for the reader to correlate my responses.

Aaron S. writes:

Kristor’s remarks on free trade are mostly apt, and I have a great deal of sympathy for the things he typically writes. That said, I think he doesn’t appear to realize that he’s swallowed the liberal logic of negative freedom uncritically. [No. I truly haven’t. Freedom supervenes upon our proper order toward the good. It is a means to an end. This is quite clear to me. Freedom does not mean lack of constraint; it depends upon proper constraint of what would otherwise be mere chaos. Only in the context of such constraints can behaviour be orderly (or therefore either good or bad). Determining the nature and bound of proper constraint is the basic matter of political discourse. Mercantilists get the constraints wrong at one extreme; doctrinaire libertarians at the other. Mere liberty does not suffice to order a society, because it does not suffice to order a life. But central planning overdetermines on the basis of inherently insufficient data, and thus leads to grotesque errors of resource allocation. ] Greg Jinkerson begins to get at this in the “Global Free Market” entry: “free markets” versus “state tyranny” is a false binary. [I understood Mr. Jinkerson to be saying that there are all sorts of constraints upon trade that fall short of direct state intervention. With this, of course, I agree. Such constraints – moral constraints, mostly, felt by individuals – are what inform market transactions. My revulsion at China’s One Child Policy disinclines me to buy goods made in China. It devalues them in my eyes, so that I perceive them as less of a bargain. My personal moral objection to China’s policies thus affects the market price in the US of all Chinese goods. I have no problem with such constraints. Furthermore there are any number of ways that the state can and should regulate commerce, so as to make a market possible in the first place. I have no problem with tariffs as such, or with their domestic equivalent, sales taxes. These strike me as no more than fees due to the operator of a market for participation therein. But I think high tariffs erected to protect errant domestic firms from foreign competition is – usually – a bad idea. I would rather not be doctrinaire even about that, and would not strike so strident a note about it, if it were not for the fact that historically the knee-jerk reaction of the federal establishment to any problem whatsoever is to form a department, issue regulations, impose fees, and mess things up permanently that would on their own sooner or later have achieved a quiet, satisfactory resolution. Regulations are not necessarily vicious in and of themselves, but they do almost always create new economic niches for private actors, in which new sorts of moral hazard – i.e., opportunities to profit exorbitantly by gaming the rules, whether licitly or not – are introduced to the economy, creating new sorts of problems that call out in their turn for new rounds of corrective federal action.]  

I’ll come at this from another angle: what exactly constitutes the “freedom” in a free market? Is it simply absence of any restraint upon economic actors? No state involvement? The problem with this libertarian notion is that a host of mechanisms — governmental and cultural, formal and informal, legal and ethical — condition the transactions making markets effective. They need preserving, just as moral codes governing, say, sexuality do. [Agreed. There is a proper role for the state in providing the legal infrastructure for the market. Politics is the agora where the proprieties of that role are discussed, and decided. I have not intended to urge that the state should not act at all, but rather that the state should not act to protect domestic industries – usually, or even often, and perhaps (given the state’s natural stupidity and wrongheadedness and susceptibility to corruption) not ever.]  

Thus I’m a bit surprised to find Kristor defending economic liberty in terms he would never extend to other matters. Would Kristor accept the Mandevillean claim that manners are enough, and which religion we accept is a matter indifferent to the support of commerce? [I’m actually not sure what you are getting at here. I would defend any economic activity that is also moral. Where criticism, ostracism, bad PR, plummeting sales and civil lawsuits are ineffectual in curtailing immoral behavior – perhaps due to the great profits it generates – then certainly there may be room, and need, for a formalization of legal penalties. We ought not to be legally free to injure each other. All I have been intent on arguing is that, by the same token, neither should the state persistently injure us all, so as to prevent a failing or errant business from suffering the just consequences of its moral errors.

Certainly religion is not irrelevant to manners, or to the success and goodness of commerce. But provided our counterparties are mannerly enough, what cause have we to quarrel with the dictates of their consciences, howsoever religiously informed? I would, to be sure, prefer for their sake that everyone I met had accepted salvation from Christ; but I am not going to abjure morally hygienic business relations with those who have not (for, being such a great sinner, my own acceptance of that salvation is itself delicate, incomplete, errant, and dilatory, so that I am in no position to judge them).]   

Conservatives ought to see that choice, by itself, is a moral cipher. Are we magically to assume that it produces good outcomes so invariably when it comes to economics? Adam Smith certainly didn’t. [Nor do I. There’s never an assurance of good outcomes, in any case, no matter who is making decisions, or how. We’ve got the wrong universe for that. And human beings are not a good place to look for invariances of any sort. But we are safe in assuming that at least I am more likely to make a good choice with respect to my own life than anyone else, if only because I am better informed about it than anyone else (on Earth). A faceless bureaucrat who does not know me from Adam is far less likely to dispose of things in a manner satisfactory to me, however sagacious and just he might be. And the same analysis holds for every other agent in the economy – including the bureaucrat himself. Thus we cannot any of us, nor all of us, be as good or do as well as we might, were we deciding for ourselves, rather than he. We ought therefore to look upon any proposal that a bureau of expert strangers can solve one of our problems with an extremely jaundiced eye.]  

Next, another, related question: where is the “market”? Do we effectively have one “market” of the type Smith or even Hayek envisioned when the various players have radically different conceptions of their own actions and goals? [Unless the various players have different notions about things, they lack any reason to trade, and there will be no market. Where there are no differences of opinion, there is no discourse, but rather music.] Folks like Worstall get around this by claiming that individuals and the entire world are the only realities, and that those are the only perspectives by which we ought to measure well-being; the market is the globe. How is this not cosmopolitan liberal dogma? [Are there real economic wholes of which we are each a part, intermediate in extent between ourselves and the whole of mankind? Yes, I think, certainly. We may characterize them as communities of shared interests. As members of such communities, we are each interested in their justice and goodness – and the prosperity to which they give rise – because it will tend to promote the goodness, justice and prosperity of the smaller communities of interest with which we are more intimately related; the communities, that is to say, with which we share more interests. If my nation does well, my town is likelier to do well; likewise also my business, my family, and that immediately related community of interest: my self. And, the more interests we share with a community, the more intensely are we interested in its prosperity. So, while we are interested at least a little in the prosperity of the global economy – no man an island, none wholly free until all are free, in Christ there is no East or West, and so forth – we are naturally most interested in ourselves and our children. As a family may through the agency or direction of the paterfamilias execute its shared understanding of its best option, given its circumstances, so may larger communities of interest, such as nations, order their acts toward each other – domestic social policy – and toward other communities – foreign and trade policy. Nations, then, are through their deliberative and executive agencies economic actors, at least effectually; and if Aristotle is right that to act effectually is to have actual existence, then nations are somehow real beings. Perhaps it is not more difficult – or easy – to understand just how a nation might be a real being, with properties, a point of view, intentions, and so forth, than it is to understand how several trillion human cells can be such a being. Nations then can have interests of their own that, while derived somehow from the interests of their constituents, are not necessarily coterminous thereto. A nation may intend or want something that none of its members intend or want, and indeed may need or intend to do things that none of its members would prefer. To say then that a nation is just a set of individual people is, not wrong, but grievously inadequate. It is like saying that a man is just a set of quarks. It is more accurate to say that a nation is at least a socially ordered collection of people, as a man is at least a socially ordered collection of quarks.

Nations are real. So, they may really act in their own interests. From that capacity to act follows the duty to act; and from the duty to act follows the duty to act justly (for, from that duty, and from the logic of morality, we may infer what it is just for nations to do, whereas absent such a duty, to speak of justice of and among nations would be to employ an analytical term simply inapt to the subject). From that duty follows also the right to act. So upon the actuality of nations hangs their sovereignty, and their legitimate authority to operate upon each other (and upon their constituents). They may trade with each other, or war, as men may (and they may deprive their constituents of life and leisure when need be, at least for a time, as men do when they train or fast for combat, or for the sake of overall vigor). Thus I do not at all reject the notion that it is legitimate for a nation to have a trade policy, or even to make war by trade. Trade war is to trade as war is to diplomacy.

From the actuality of nations it follows further that statistics describing the national economy describe real properties of a real actuality, so that there is really such a thing as the GDP, and a balance of trade – in just the same way that there is really a price, and a value, of IBM stock, or a weight of a man. And, just as IBM and men are real factors of the global market place, so are nations. As with men, the differences of perspective among nations are the motivation and reason for their trade. If we valued our products and possessions to exactly the same degree as our counterparties, we would not sell. So long then as communities of interest differ, there will be trade among them. There is no way to recuse a whole community from commerce altogether, and permanently.

If China intends dominion over us, we cannot simply overlook the fact – it would be a failure of duty for us to respond to an organized attack in a disordered fashion, or to refrain from response altogether. So there is a coordinating role that the federal apparatus should play in our trade with China. From this it does not however follow that mimicking the Chinese mercantilist tactic is the best way to deal with it, or to respond to their inimical long-term objectives. Rather than meeting them blow for blow in a trade war – like two untrained boxers flailing at each other – it might make more sense for us to employ something like aikido, whereby we would through our response subtly direct the impetus of the Chinese mercantilist attack so that their own momentum causes them to topple and fall. It may be that the best way to cut them down to size is to let them overextend themselves by their compounded diseconomies, and then implode.]     

What if our “partners” intend to overtake us by enslaving their own populations? Is this a “market”? Will our “free” behavior save us? Will the fact that they’re “giving us stuff practically free — don’t you see that controlling this will just make us both poorer!?” save us? [… I am betting that if we rationalized our policies we’d thrash China no matter how little they paid their people. Think how it would be if all the incentives in our society were aligned so as to reward work and investment – i.e., so as not to penalize them, at all, or to subsidize sloth. Then, add what would happen if regulatory relief (and resultant tax relief) reduced the cost of all domestic labor by, say 30%, without reducing real disposable income. The explosion in growth and productivity would be staggering. And it’s productivity that is the statistic to watch when it comes to the competition between nations. The greater the productivity of labor, the wealthier the laborer, and the more powerful his nation.] The important matters at hand are just where a proper market begins and ends, and just whom it is serving. These questions can’t be answered by adverting to the market itself any more than moral questions can be settled by pointing to choice and freedom. [This is a great insight.] Traditionalists should know better. [Yes. Ends, not means; that’s the ticket. Our transactions in the markets are means to achieving our personal moral and aesthetic objectives. Where those ends are good and proper, our transactions will likely be good and proper, and have a good chance of turning out well, provided we are in our practicing “wise as serpents.” My plea in everything I have written so far on free trade in these threads is, not that the state refrain altogether from intervention in the economy, but that it refrain from taking special measures to protect domestic firms or industries, or prevent them from locating facilities overseas, except when it really is crucial to the general welfare that it do so. For, such special interventions almost always have vicious results.

But I think you might be asking a different question. I think you might be asking the question, “How do we tell when our counterparty’s cheating has reached the point where we ought to cease trading with him?” Or, even, “How do we tell when war is a more appropriate response than trade?” Tough question.]           

Yes, free trade is often — maybe even usually — better. But the exceptions are of critical importance, and not as rare as we are typically led to believe. [This is precisely the question. I think the exceptions are more rare than we are typically led to believe.] Are we prepared to sell our souls for a cheap pair of jeans?

Hannon writes:

I know that Kristor is not a libertarian, so I am left wondering what he sees as the proper shape of things at the interface between actual free trade and the consumer. What should the state properly regulate with regard to international trade? For example, if we know a country to be “illegally” or unethically by our account using child labor or prison laborers to make goods destined for the United States, who should make it their priority to take action? [There are all sorts of such problems: environmental abuses, the One Child Policy, and the slavery practiced by Muslim societies. And what about trade with countries that are threatening our military hegemony, or otherwise controverting our national interest? Shouldn’t they be made to pay higher tariffs than our allies? What about countries that produce opium? Or countries that have political systems we view as horribly unjust, or that oppress minorities, or gays? You see the difficulty: where should one stop with this sort of thing? Making trade policy the lever of choice for anything but trade opens up endless opportunities for meddling in other societies. And meddling with other societies is the beginning of war.

Using taxes to effect domestic social policy has the same problem as using tariffs to effect foreign social policy. Taxes and tariffs should be used only to raise revenue. Interventions in the social order – ours, or those of other countries – should be effected through separate means, explicitly and directly. Tariffs and taxes ought to be made as simple and easy to collect as possible, so as to minimize the friction that mere compliance imposes on transactions. They should be set at a flat percentage of the value of transactions that maximizes the net present value of the revenue stream thus created – i.e., the percentage at the threshold where increases thereto increase revenues less than they reduce them by penalizing economic activity.   

Meanwhile, if we want to stop child labor in China without going to war, we should have a policy specially and explicitly designed to do only that. We could tell firms that they may not sell products in the U.S. manufactured with child labor, whether here or someplace else. Don’t regulate anyone, just promulgate the law, with its attendant penalties. Then, set up a whistleblower program, so that anyone who reports products being sold in the U.S. that were manufactured with child labor shares in the considerable financial proceeds of the terrific penalties (more on those in a moment) that would be imposed upon conviction for having done so.]

Should the government play no role at all? What about preventing defective or unsafe products from arriving at our shores to begin with? [This can’t be done; likewise the government can’t prevent a domestic manufacturer from selling such products. But there are already severe civil and criminal penalties for selling defective or dangerous products, and I think that’s generally the right way to handle the problem, albeit that I think we could stand to make the penalties a lot worse (again, see below on terrific penalties). It’s not perfect, but nothing (earthly) is.] Absent the Christian ethos that appears vanishingly scarce today it seems most unlikely that these issues could be abated by private interests whose everyday material focus is making money. [So, rather than forcing compliance upon good actors and bad, set things up so that private interests stand to make a lot of money by serving the public good.]

If businesses cannot manage their own scrupulousness with high marks– does anyone believe they would do better at this if regulation was gutted?– and consumers are (understandably) unable to take on a regulatory role, where does that leave us? [Almost all businesses are at least trying to be good actors; as with people, few are intentionally injuring their counterparties. Indeed, there is little opportunity to cheat except in a situation of prevalent honesty and fair dealing. The cheaters ruin the whole shooting match. The question, then, is whether one is going to try to control cheating by regulating everyone – this is rather like forcing Muslims and everyone else to go through airport security – or by penalizing the cheaters once their cheats have been discovered. Government regulation takes the former course, and forces honest businesses to prove their compliance with rules (that may pertain to their businesses legally, but not really – as with investment companies that are not mutual funds being forced to comply with the regulations pertinent only to such funds). Such proof is costly to generate, each and every year. The problem is compounded by regulations that require firms to prove that they are taking proper steps to ensure compliance with regulations, and then regulations that require firms to prove that they are proving that they are ensuring compliance; and so forth, ad infinitum.

Much better, and more precise, I should think, to hit the actual cheaters (those who intentionally harm others), when they are discovered, with terrific criminal penalties (negligence is best handled by the tort system). How terrific? How about confiscation of all their property, 40 lashes, and permanent expulsion from commerce? You couldn’t administer 40 lashes to corporations, but it would have much the same effect if corporate officers were required to stake their personal assets as collateral against corporate debts, the way that the Names at Lloyd’s of London must do with the risks they underwrite.]  

The modern collusion between corporate and governmental America should not be underestimated. Sarah Palin recently shared her thoughts on this subject and I tend to agree with her message here. [Agreed; Hannon here makes my case. Where government is intervening in the economy, you can almost guarantee that corruption is happening. That’s because it is the intervention that opens the opportunity for corruption. Corruption then opens further opportunities to influence further intervention. It’s a vicious cycle. Increase of Laws => Decrease of Public Virtue => Increase of Laws …. ]

As another commenter remarked, American banks must be considered, too, since money is a vital aspect of “free trade”. These institutions have time and again proved that they need to be regulated to protect depositors– the savings and loan scandal of the 1980s comes to mind– yet the federal “regulation” today is even worse than any industry shortcomings. A reminder here, if anyone needs it, that what banks do with money every day to create artificial wealth is both obscene and alarming: [Regulation creates moral hazard. It makes uneconomic behavior profitable – it subsidizes bad business decisions by reducing their cost – and you get more of whatever you subsidize. Regulation is not the source of bad decisions, but it does increase their frequency by reducing their immediate cost. Crises occur when a people discover pervasive uneconomic choices that have pushed their economy far from equilibrium, and correct them by making choices on the basis of this new information. Regulations obscure the poorness of the choices, deferring such discoveries, thus worsening the crises when they finally arrive. The S&L crisis was a creature of federal regulation that had obscured from S&L executives the true costs and risks of their decisions. Same goes for the credit crisis of 2008, and many other financial crises since 1900. ] 

[The] focus of doing business is to thrive financially and we should not be surprised that this dominant material prerogative should be in conflict with other values at times. We all play a regulatory role to the extent that we are active participants, and the more robust our involvement the more likely we are to scale back the federal behemoth. [Bravo! Totally agreed: we all play a regulatory role: we regulate ourselves. And, we must remember always that conflicts of values are inherent in every decision – that’s why one must make decisions in the first place; conflict between divergent opportunities is the raw material of choice. At every transaction, every participant in the market must decide whether to be honest and make good money over the long run, or dishonest and make better money right away. There’s no way to escape the requirement of this choice. It is ubiquitous in human affairs, because it is built into the basic structure of the universe, which is inherently moral (physics is a department of morality). We want to improve the ratio of honest to dishonest choices at the moment of decision. We can discourage dishonesty by regulating everyone, thus raising the cost of honesty (and lulling everyone into undue complacency about the integrity of their counterparties), or by terrific penalties for dishonesty, thus enormously increasing the cost thereof. NB that both options are forms of state intervention in private affairs; in advocating the latter option, I am not advocating a libertarian recusal by the state.]

Chris writes:

[Kristor] claims that our Chinese competitors are selling us goods below their price of production …. It would be more accurate to state that while they may temporarily subsidize production to the point that they lose money on a particular good or class of goods, they do so only until they capture a market so to speak. [Subsidizing production to the point that they lose money just is selling goods at prices less than the cost of production. I said nothing about how long the Chinese planned to do it, or their strategic intentions, which are obvious.]

More generally however, they manipulate the terms of trade and their currency so that they continue to produce goods at a profit while making our own industries uncompetitive by keeping the purchasing power (real wages) of their consumers/workers low via these currency and trade manipulations. […..i.e., they subsidize production/sell for prices lower than costs.]

Additionaly, once an entire industry leaves a high wage nation such as ours, it is very hard to rebuild it. … The longer they have been gone, the higher the costs. …  Also, with production facilities comes engineering capacity. There is often no substitute for on-site engineering ability, so it is not something easily outsourced back to us, as free traders might like to imagine. Eventually this is followed by even higher “value chain” activities, like the design and basic research to design and make high tech products. This brings them industrial leverage with which to move into higher value industries later for their mercantilist designs. [Understood. But if we start acting like the Chinese, we will put government bureaucrats in charge of industrial policy. Central planners in Washington would decide what industries the US government would invest in. And central planning doesn’t work. History is quite clear about this. Central planners are always fighting the last war, with insufficient data. Rather than putting more power to mess things up in the hands of bureaucrats, we should take that power away from them, reducing the cost of doing business in the US; and, we should start treating business as if we like it, and want businesses to be prosperous. Let’s first see how that affects the balance of trade. If it isn’t enough, then let’s start tweaking tariffs up across the board, increasing the cost of imports, thus marginally increasing the already very strong logistical and economic incentive to produce locally.

I’m betting that if we got our regulatory system right, we wouldn’t end up needing to tweak tariffs by very much. As I mentioned in another thread, banks now have more employees dedicated to compliance than to banking. The ratio is not that appalling for other industries, but for some (pharmaceuticals) it is probably worse. As a society, we are allocating somewhere between 5% and 50% of our private sector labor resources to regulation and compliance, directly increasing the costs of all goods and services. This doesn’t count the labor allocated to regulatory agencies. Free up 80% of that labor now expended on compliance and regulation by intelligent regulatory policy, with concomitant cost savings and price cuts, and we would be a behemoth. ]    

They will have permanent pricing power, provided they don’t exploit it too vigorously and we never erect tariffs. Eventually, as our economic situation deteriorates, our human capital deterioration will also accelerate. Granted, the ongoing deterioration of overall American competency has many causes, but the de-industrialization happening now is not helping. [I’m not arguing we should have no tariffs. I’m arguing we should not have central planners directing the economy. They’ll get it massively wrong. So, tariffs should not generally target specific industries, companies, or countries. If we want business to be done here, let’s just please first make sure the US is the best place in the world to do business. Do that, then set tariffs to optimize revenue, and they’ll be plenty high enough to discourage uneconomic foreign outsourcing. ]  

[When China imports] high technology from us, it is often only for as long as they need before they can reverse engineer said technology. Punitive tariffs seem as good a punishment for such behavior as I can fathom. [Reverse engineering and industrial theft by one’s competitors is a hazard of doing business for any enterprise. International patents, trademarks and copyrights are the way to handle them.]

The fact that China also builds vast public works that will prove to be wasteful boondoggles to the Chinese economy is a different matter not directly pertinent to the trade issue, although it is a good example of how government direction of economic activity goes horribly wrong in the vast majority of cases. [Right. Like I said.] Promoting their private industries and manipulating their currency to gain advantage over ours does not truly fall into that category, given their motives for doing so. [Central planners fail, except when their intentions are right? How does that work?]  

A generalized tariff combined with a more targeted tariff against the most egregious abusers of our openness (China) will not in any appreciable way increase the economic power of the feds. [How do you figure? The Feds will write, enact, sign, and enforce the tariffs. At every step in that process there are opportunities for US companies – or China, for that matter – to influence the outcome in their favor. Where the state has power, it may be corrupted. Reformations of corrupt systems are themselves opportunities for corruption. ] 

[Sometimes] economists … get so into the theoretical details of the field that they begin to miss the forest for the trees in my humble opinion. Free trade fundamentalism and open borders mania fall into those categories. [So does mercantilist fundamentalism. The devil is in the details.]

From my point of view, protectionists are urging us to slap a big Ace bandage over an open gangrenous wound. The rot in our culture goes deep. In dealing with our fix, trade war should be the last weapon we use, not the first. The first thing we should do is eliminate the absurdities in our own system. Let the Chinese continue to fund the absurdities in theirs. Most likely, they’ll end up like the last unstoppable mercantilist Asian Tiger we used to be all worried about: Japan. Remember when Reagan and Thatcher were just rolling up their sleeves, and the common wisdom was that the Japanese were about to take over the world? Then Reagan and Thatcher tweaked a few things in a rational direction, and we took off – while Japan cratered.

Kristor adds:

Steve M. writes:

Kristor writes that “The Portuguese were outcompeted by the British. It’s that simple. The British were better businessmen. And they were, famously, far, far more industrious and enterprising.”

This is the foundation myth of free trade belief, the lynchpin of the entire edifice. Britain, the theory goes, achieved unprecedented economic growth via the application of some brilliant economic theories. And the rest of the world can have the same prosperity by following those same theories.

It’s difficult to see how anybody can take any of this seriously. Britain was very famously an empire, an exceptionally large empire. Um … so was Portugal. Britain’s economic policy between the mid 1600’s and the mid 1900’s was colonialism, not free trade. This was true for Portugal as well. The colonies exported their raw materials to Britain (and only Britain) where they were either made into finished products and sold back to the colonies (and sold to other European countries) or in some cases, such as spices, simply sold directly on the European market. The Portuguese did the same thing. One of the causes of the American Revolution was the Americans desire to establish their own industry and to compete with British manufacturers. The Portuguese were, as I said, less enterprising than the British. This was not entirely their fault – in fact, it was the natural, common-sensical way for them to go, because the fruits of their empire were incredibly precious, easily transported spices, gold, and silver. I.e., finished products, that the Portuguese (and likewise the Spaniards) could simply take and simply sell, with little effort, for whatever manufactured goods they wanted from Britain. It didn’t pay for the Portuguese to be ingenious hard-working manufacturers; it didn’t even pay for them to be particularly canny traders. Britain, on the other hand, imported mostly raw materials from its colonies, and then manufactured them. So Britain got good at producing and trading wealth, while Portugal got good at spending and consuming it. The Portuguese didn’t have to try as hard. They lost the habit of enterprise, that had won them their enormous, globe-spanning empire.

We used to be like the British, and not just because we once simply were British, but because our territory was rich, not in spices, gold and silver, but in raw materials. Like our forebears, we got good at manufacture. Like the British, we got rich, lazy, and sloppy. Today, we are, many of us, like the Portuguese – and so are many of the British. The solution is not to erect barriers around our sloth, so that feedback from the world – that world that includes more enterprising nations – fails to reach us, and we never learn to amend our foolish ways. The solution is to amend our foolish ways. The children of successful entrepreneurs, born to wealth, are often lazy. Sometimes a family must fall from fortune in order to learn again to pay proper attention. The bigger and badder the Chinese get, the more shall we pay attention, maybe.

The British did not “outcompete” the Portuguese, the Spanish, and the Dutch: they outfought them. Last time I checked, fighting was competition. Success in war depends more on morale, pluck, enterprise and audacity than raw physical power – fortunately for the British, who were a fractious, fragile third^rd rate power when the rag-tag British fleet (and the weather) destroyed the vastly more powerful Spanish Armada and brought the Spanish colossus – the most powerful nation on Earth – to its knees. NB that Britain had no real navy at the time; the fleet that fought the Armada was assembled at the last minute, almost entirely from private vessels, many of which were not men of war, but merchantmen. The British tried harder. They had no choice.  Then they established near monopoly control over the production and supply of various valuable commodities, ranging from nutmeg to slaves, to the rest of the world. Precisely as the Spaniards and Portuguese had done with their own empires. Ceteris paribus, power is a sequela of virtue, weakness of vice. This isn’t economics; it’s common sense, that good parents have always taught their children.   

Kristor should read up on the history of the East India Company, or read “Bad Samaritans,” to correct some of his misconceptions. And the Portuguese were saintly, righteous men, wise, prudent, humble and overflowing with Christian charity toward their adversaries, counterparties and imperial wards? I’m not suggesting that the British were immaculate, just that they were naturally somewhat more inclined, whether through temperament or circumstance or both, to more enterprise and wit. A marginal advantage of virtue is all it takes for a nation to prevail against its adversaries, for the virtues and vices tend both to compound.

I should add that I don’t mean to pick on the Portuguese. Portugal is a noble civilization, and will, I feel sure, contribute much more to history, as its fortunes recover.

A reader writes:

Economists have spectacularly failed to predict or forestall two massive economic bubbles, two recessions and worsening unemployment (that’s just in the last 10 years). No; it was politicians who thus failed us. Plenty of economists had warned us about our idiotic policies leading up to the Crash of 2008. The handwriting was all over the wall. Nevertheless, economics is not intended to predict the future, but to understand the world. Understanding economics, one can understand bad policy when one sees it, and can explain what makes bad policy bad. But no matter how great one’s understanding of economics, one cannot predict the future of the economy. So-called “predictions” of the behavior of complex systems like humans, economies, or the atmosphere are really only predictions of the future behavior of models of such systems, that are inherently inadequate to a faithful representation of the phenomena they interpret. Thus predictions about the economy are as prone to error as predictions of the weather. Those who blame the weatherman for his inevitable errors of prediction misunderstand what he is doing, and how, and what his job is for. My own view is that the discipline is corrupt. Name a discipline that is not corrupt. Name a human that is not corrupt. It should be easy, for there are only two.   

[There] are fundamental problems with us opening our markets while others do not. [No; there are fundamental problems with opening a sick economy to competition from other sick economies that are not thus open. But there is no problem with opening a healthy economy to competition from sick economies, whether open or closed. That way lies supremacy. If we want to be rich and powerful, we must either be very virtuous, or very wicked. Like welfare, protective tariffs are a way of deferring our confrontation with this fact of our world, that cannot forever be avoided, and will certainly sooner or later collect its due. The wages of sin is death. Wouldn’t it be much nicer to be virtuous?   

Japan wanted power. Japan has no natural advantage that makes it adept at producing cars. But it produces excellent cars because it decided to gut our auto industry. The causation runs in the other direction: they gutted our auto industry because they made better cars than we did. If their cars had been lousy, they could never have conceived of an industrial policy to overtake Detroit. Automotive excellence was the forecondition of that policy. As you say, before they started trying to make cars, they knew nothing about it. But neither did we. No people on earth had a natural advantage that made it adept at building cars. But many peoples have natural advantages that can contribute to that aptitude. Do you really mean to say that the legendary Japanese nisus toward excellence had nothing to do with their excellence? These are a people who try to make high art of everything: serving tea, fighting (with chopsticks!), arranging flowers, folding paper. And you are saying that this basic, ubiquitous feature of their aesthetic culture played no part in their industrial activities? Don’t you think that’s pretty far-fetched?

Japan did indeed use mercantilist industrial policy to try and overtake us. Even though their products were the best of their kind in the world, they failed. 

The Chinese … can oppress [their] people, [so their] Central planners can do what they want in terms of trade. So we should have some central planners that oppress our people, like they do? You want the American businesses that are succeeding despite the Chinese (and despite the best efforts of the Federal government) to fork over some of their profits to American businesses that are losing to the Chinese? Probably you don’t want that, but that’s what protective tariffs will do.

In my opinion, economies are organic … expressions of particular cultures and people in a particular place. An economy is part of a complex web of social structures. They are not a series of summed up supply and demand curves. I totally agree. Supply and demand curves are useful abstractions from a complex whole. It doesn’t follow that different organic cultures should be prevented from trading with each other. Nor does it follow that the best way to preserve an organic culture is to isolate it from the rest of the world. It doesn’t even follow that organic cultures ought to be preserved. The Aztecs were an organic culture, and I’m thrilled that it was destroyed. If we are good, and with a bit of luck, we will survive, and indeed prosper. If we are not good, we don’t deserve to survive, or prosper.   

[Not] everyone can be a knowledge worker or a Free trade columnist. We need to be able to provide jobs for everyone. No matter how high our trade barriers, that won’t happen so long as we have a government that does its best to prevent business. So let’s free businesses to create jobs.

Yes protectionism distorts the market and increases the price of goods and services. It also helps ensure our neighbors have jobs and prevents the growth of a permanent underclass. No; labor mobility in a dynamic economy does this. A static economy, protected from external stressors, is more likely to stratify in a rigid class system.  

Jeff W. writes:

[When] countries trade with each other, wage rates rapidly equalize. The greater the volume of trade, the faster they equalize. … [“Free trade”] with China will rapidly cause Americans’ wages to equalize with those of the Chinese. [But there is no reason in the real world why pay scales in both countries could not equalize at a far higher level of disposable income than either country has ever enjoyed. Both nations could be far more prosperous than either of them ever has been. The logistical obstacles to a stably prosperous future for both China and the US will take work and ingenuity to overcome, but they are not insuperable. It is, not the concrete reality of things, but mistaken ideas that prevent that prosperity from happening. Errors of thinking wrongly limit our notions of what is reasonably possible, and carried into practice they misinform our decisions and misguide us, e.g., lots of Americans – unlike Jeff W. – are so ignorant of economics or the real world or both, that they think socialism is a great idea. The result is repeated failure to attain stable prosperity, and these repeated failures tend to reinforce the erroneous notions that created them.]

My impression of Kristor and others here is that they think it’s all right for Americans to earn $2 an hour. If that’s the outcome of free trade, then they think it’s right and just that Americans should be impoverished. [How do you get that from my saying that I want to cure our viciousness and become stronger and better economically, rather than papering it over with a bunch of tariffs and transfer payments and pretending we won’t have to pay for our wickedness sooner or later? In thinking this, you are working on your own psychological material, your own prejudices and lacunae. I’d like to see us all making $200/hour, and motivated strongly to do better nonetheless, for the mere joy and pleasure to be found in good, hard work.]  But I do not take that view, and I am sure that I have at least 90% of Americans on my side in not wanting Americans to be ground down into third-world style poverty. [But apparently large swathes of the American electorate are not at all averse to a socialist grinding down of America. Maybe we should stop the American socialists next door grinding us down, before we get all heated up about the Chinese socialists on the far side of the planet grinding us down. Trade wars pose the danger of global depression, that would surely take us down along with everyone else. Freeing the American economy poses the danger of tremendous economic growth, and the final eclipse of socialism. That’s why most protectionists are socialists, and vice versa.]

                          

                                                             — End of Initial Entry —

Eric writes:

Japan cratered right about the time that China was permitted to compete with them. Previously, American markets had been open to Japan and closed to China.

If reform of government creates economic booms, then China’s autocratic, bureaucratic, inefficient, corruption-ridden government must somehow be better than ours. As bad as our government is, it can’t be worse than China’s. Germany has a large public sector and a booming economy.

Kristor writes:

Japan cratered just as China was taking its first baby steps toward capitalism, and away from Maoism. At that point, China was not a serious industrial competitor. They were a 3rd world country; they are still considered an emerging market, rather than a developed economy, even today. Japan cratered because their real estate values boomed and crashed, and because they responded to the crash by doing nothing to change their industrial policy, or to get rid of it. They didn’t let any of their large firms, that were insolvent, go out of business. Too big to fail, you see? Ten years later, they finally started to allow some bankruptcies and reorganizations, and to liberalize their financial system, but they didn’t do nearly enough. We are doing the same thing right now: dealing with the housing crunch, not by closing down Freddie and Fannie, not by letting a bunch of firms go out of business, but by doubling down on the stupid policies that got us into trouble in the first place. None of the moral hazards that created the busts of 2008 have been eliminated; more of them have been added to the mix. But, don’t get me started. 

China’s system is much worse than ours, but it is so much better than what they used to have under straightforward Maoism that the delta in their economic efficiency and rationality is huge. Of course they’ve been growing fast! But, remember that they started from a poverty of almost North Korean bitterness, and it’s always easier to grow a new enterprise quickly than a large, established outfit. As they approach full development, it will be harder for them to maintain the torrid growth that comes from just setting up the infrastructure of a modern industrial economy. 

They’d boom even more if their policies were more rational. So would Germany. The Germans are doing great even with the albatross of the EU around their necks, and a large socialist welfare state. Think how much better they’d be doing if they didn’t have those impediments! Then we’d really have to start worrying about the Germans again, wouldn’t we? Is social democracy a CIA plot to keep Germany down? 

If Germany and China, and Russia, were to adopt sane domestic economic policies, that allowed markets to work properly and without distorting the signals that markets send, we would be in big, big geopolitical trouble – unless we had done the same. In that event, all four countries would get amazingly prosperous – and the rest of the world would get better, too.

Greg Jinkerson writes:

Chronicles Magazine has tended to take a position strongly advocating measures that protect American industry and keep jobs here. Several of their writers have shown a remarkable ability to explain and defend policies of economic nationalism that are perfectly congruent with traditionalism, and which strike a reasonable balance between economic freedom and political stability. (Tom Piatak, who has written on these issues extensively, had a short piece about the issue last month here. There was an excellent example of just such an argument put forth today by editor Thomas Fleming. His statement is so succinct and eloquent, I thought it might also interest your readers. (The article itself is also quite good.) At Comment Four, replying to one reader [Mark Hyams] who was attacking tariffs as “bad economics,” a popular objection to calls for protecting American jobs, Fleming had this to say:

“Mr Hyams gives the standard libertarian/liberal response. Of course, they can never prove their theories because economic life is not a laboratory and none of them studies history carefully enough to draw convincing conclusions. But even if they could, they leave out all the information that is essential. They assume, 1) that we do not and should not care more about our own people than we do about the Chinese, and 2) that the current winners in manufacturing-China, India, and Mexico-are not nightmares for the working classes. It is possible to argue that blue collar workers in the U.S. have been paid much too much-I think they have-but the only alternative is not slave labor or the disgusting working and living conditions that prevail in other countries. Finally, what he also ignores, is the difference in tax policies that give a strong competitive edge not just to Third World countries but to Japan and EU countries, which reward their own countries and punish importers. Until we force them to level the playing field or level it ourselves, it is utterly fatuous to make high-minded statements about free trade. There never has been free trade and there never will be.

The rich and powerful always set the policies to benefit themselves. So long as the rich and powerful belong to one nation, that nation tends to benefit, but when the ruling class becomes transnational, then policies are set-as they are in the USA-exclusively for the transnationals who are happy to move their money-and if necessary themselves-offshore.”

Art writes:

Fleming writes:

“It is possible to argue that blue collar workers in the U.S. have been paid much too much-I think they have-but the only alternative is not slave labor or the disgusting working and living conditions that prevail in other countries.”

The problem is that too many of us are bound in modern and postmodern assumptions about the good life. We must remember that physical suffering is not the greatest evil. We also need to remember that the suffering of workers overseas may be better than their alternatives. I suggest that low wage physical labor here may be a good alternative to simply not working at all, which is the trend if current economic conditions keep up. We need to be willing to assume an America without the television, without air conditioning, because that is what the North Indian wage laborer has to deal with. And the North Indians find themselves in a society that is strong rather than week, and still possesses the ability to resist the radical policies of their governments and their leftist radicals. We cannot resist those trends even in our homes, so I cannot see our superior wages providing a justification for themselves. We need to be willing to question the current definition of the good life if we are going to have real progress and a real return to virtue.

Steve M. writes:

I found Kristor’s response to me to be curiously non-responsive.

I pointed out that Britain did not achieve it’s unmatched economic status by 1900 via the “free trade” doctrine which Kristor is advocating. His response is that “competition” comes in many forms and defeating other countries in war is one such form. Which is true enough, up to a point, except that “competition” and “free trade” are two very different things.

Under “competition” as defined by Kristor, anything goes. Defeating other countries and taking possession of their natural resources is allowed. Though Kristor does not say so, China’s trade policies are also allowed as “competition.” The point I’m making to him is that these things are NOT allowed under the theory of free trade. Free trade has rules. And the larger point flowing from that is that Britain (and America) did not achieve their economic prosperity via free trade.

Kristor seems to think that there existed an older, better America where people were more industrious and competitive than they are now. Perhaps such an America did exist. What is inarguable is that this older America was a protectionist one.

He offers up this bizarre non-sequitur, showing that he has completely missed the point I’m making:”the Portuguese were saintly, righteous men, wise, prudent, humble and overflowing with Christian charity toward their adversaries, counterparties and imperial wards?”

Hannon writes:

I just want to express my gratitude to Kristor for his thoughts on my questions. His clear explication of the idea of using law and punishment to raise the cost of dishonest dealing for a few players, as against invoking regulation to raise the cost of fair dealing for all players, makes a lot of sense. It also speaks to essential ideas of justice and rebuilding a society with trust as a firm cornerstone.

I’m curious what Kristor would think of a flat national sales tax (10%?) and elimination of all income taxes?