Are free trade and free markets quaint ideas from the past?

Prof James Haskett of HBS poses this evergreen question in economics: Are free trade and free finance really so important as econs tells us? There is a parallel debate going on in The Economist on Capitalism which also in a way looking at this issue.

Haskett reviews recent books by Dani Rodrik and Robert Kuttner who point to other side:

Free trade as a component of a free market philosophy has been an article of faith among many economists for years, extending back to Adam Smith’s “invisible hand.”

While many members of the management community generally accept the notion of free markets and trade, those unable to compete with imports are sometimes quite willing to request protection, often in the form of tariffs on competing imports.

Now a new look at the issue makes the case for selective protective acts as a way of avoiding the disruptions to businesses and labor associated with a free trade policy that rewards and penalizes businesses with increasing speed. (These acts, by the way, don’t include the broadly based tariffs—equivalent to taxes—we are currently witnessing.)

It reflects the fact that “global” market freedom for capital and goods may work, but market freedom for labor does not. As a result, labor suffers at the expense of the owners of capital and productive capability under globalization and free trade policies. At the risk of oversimplification, the argument is that globalization combined with free markets has created disruptions that have led to social costs. This has fostered populist governments who are promising to reverse the costs by invoking trade restrictions, a process that threatens democracies.

Recent books by Dani Rodrik and Robert Kuttner generally support these notions. In his book, Straight Talk on Trade, Rodrik argues that penalties inflicted on labor, especially the less educated, by free global trade leads directly to the inequality that fuels social unrest and its associated costs. These effects are often underestimated.

For example, he points to flaws in the economic analysis underlying the proposed Trans-Pacific Partnership that led to a faulty belief that the Partnership would not produce job losses. He cites the significant gains made by Far Eastern economies in the 1970s and 1980s in spite of significant trade barriers at the time. He also argues that the social value of “good” manufacturing jobs warrants their protection.

Rodrik rejects the notion that efficient markets for capital, goods, and labor will always regulate themselves, producing the appropriate “price” of various inputs to the productive process. He advocates new trade agreements that allow individual nations to employ selective protections such as subsidies, investment regulations, domestic content requirements, anti-dumping rules, and, if necessary, even selective tariffs to protect industries and workers. In other words, something far short of what we generally define as free trade or the invisible hand at work. When combined with an increased safety net of improved job training and relocation incentives for workers, he sees a future of continued market expansion, business profitability, greater social equality, and the increased social stability that this can produce.

Kuttner argues that global capitalism, fueled by free financial markets and organizations such as the International Monetary Fund and World Trade Organization, has increasingly influenced the functioning of nation states to the detriment of labor and society. He argues for a kind of economic nationalism in which nation states are free to create “mixed economies” where profit-making businesses function alongside other institutions such as labor unions in an environment in which all are subservient to democratically elected governments.

Are free trade and free markets quaint ideas from the past? What do you think?

These are hardly new topics at all. Each time a crisis hits, we are debating this very topic. The difference though is earlier most crises were limited to developing and emerging economies. Most such criticism was dismissed saying “oh these are developing economies who do not have institutions, depth of markets and so on”.

With the 2008 crisis hitting most parts of the developed world and much of the action based there (like Brexit), one just can’t hide behind the developing world excuse. The Queen could add this question as well to plethora of qs in case she revisits LSE.

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