Ian Welsh - Why Free Trade Isn’t Efficient

As Paul Craig Roberts says, if you offshore the jobs you offshore the wages, and then demand falls. To think of all those ships going around the would wasting fuel when most if the goods they carry could be made at home. KV

For the past few weeks I’ve been reading a raft of literature by lawyers, economists and bureaucrats involved with the World Trade Organization (WTO) and other free traders. It’s been a fascinating journey into an alternate world, one in which frictionless trade and money flows; and unified regulations and laws are considered to be a good thing.

The reasoning behind this virtually unquestioned acceptance is as follows: if there are no barriers to trade, whether financial or regulatory, goods and services will be created (or done) wherever they cost the least. If they are done in the lowest-cost place, they are being done in the most efficient way, and that means more is created and consumers also pay less.

It is thus a good thing, virtually always, to reduce barriers to trade and services. If it can be done for cheaper somewhere it should be. Some people may lose, but overall more (or the same) is created for less, and this is good.

This is basically an article of faith in everything I’ve been reading from people who make their living around the WTO.

But you may have caught the error in the thinking. It assumes the lowest cost is equivalent to the most efficient.

But it isn’t. When manufacturing moved from the US to China, it cost less to do in China, yes, but it produced more carbon (climate change); it took more people to produce the same amount of goods, and it generally used more materials, as well.

In other words, in every way except the monetary cost it was less efficient.

The rejoinder to this might be that those people who were manufacturing those goods would be better employed elsewhere: people were being wasted. If it can be done for a few dollars an hour, rather than $20 or more (if unionized), then the higher paid workers should do something else.

But everyone knows now, and trade advocates admit, that the people who lose the jobs to outshoring and outsourcing mostly either weren’t employed again, or never had as good a job again. People are not fungible, they don’t fit into any spot.

Moreover, as those jobs moved away, those people earned less money, and local businesses got less money from them. Everyone’s employees are someone else’s customers: when everyone cuts wage “costs” they’re also cutting demand.

The core problem with capitalism is that it assumes that money measures benefit: if someone’s willing and able to buy something (is “demand”) then that something is good.

But the cheapest cost and the highest profit don’t take into account actual efficiency or actual good in the world. Producing less climate change gases to produce the same stuff is more important than saving 5 or 10% cost, or making 5% or 10% profit. Using less resources that are limited is more important than the lowest cost. And good wages are also important, because they measure good lives. (There is an argument that China’s industrialization required America’s de-industrialization. I don’t think that’s true, but it’s too large for this piece.)

The core assumptions of capitalism are wrong. They are simply wrong. But that doesn’t mean they don’t create a very effective system, where effective means “good at sustaining itself” and “good at telling people what to do.”

Capitalism is really very simple. It’s an algorithm for directing human behavior, and it works because it makes sure that the people who obey the algorithm are the people who have power.

Until they run the world off a cliff.

More later, but for now the point is simple: the lowest price, or the highest profit doesn’t automatically equal the most efficient thing to do in any way except with respect to money.

And money, while it’s lovely, is not actually food, water, or a livable environment, nor will it be able to buy those things for everyone (or perhaps anyone) when there just isn’t enough to go around.

Ian Welsh - Why Free Trade Isn’t Efficient