Many of those who claim to support free markets are actually advocating something else...
FREE TRADE is a crucial economic policy in the program to restrict the growth of socialism, writes Gary North at Whiskey and Gunpowder.
Ludwig von Mises never wavered from this view. He recognized the threat of all arguments for protectionism: they help to expand the power of the state. They move in the direction of central economic planning:
"Where there is free trade, foreign competition would even in the short run frustrate the aims sought by the various measures of government intervention with domestic business. When the domestic market is not to some extent insulated from foreign markets, there can be no question of government control. The further a nation goes on the road toward public regulation and regimentation, the more it is pushed toward economic isolation. International division of labor becomes suspect because it hinders the full use of national sovereignty. The trend toward autarky is essentially a trend of domestic economic policies; it is the outcome of the endeavor to make the state paramount in economic matters."
~ Ludwig von Mises, Omnipotent Government (1944), p. 4.
I have known for at least 50 years that the central dividing issue economically in the right wing movement is the issue of protectionism. People who believe that they are defenders of the principle of free enterprise at some point face a moment of truth. They have to decide whether they are in favor of tariffs or free trade. They have to face the reality of the arguments in favor of free enterprise. Do they believe in free enterprise, or do they believe in the mixed economy of the modern welfare state?
In speaking of tariffs I have used the metaphors of badges and guns and invisible lines known as borders. I have been attempting to get people to think carefully about the underlying economic principles of free enterprise. I am asking people to think through the presuppositions and implications of their views regarding the way the economy really works and the way the economy ought to work.
The difference between the statist and the libertarian has to do with methodology. The statist begins his discussion of the economy from the perspective of the collective enterprise known as civil government. He equates the state (the monopoly of coercion) and society (voluntary institutions). He also identifies the state and the nation. He sees the state as the agency which alone legally represents the nation. In some cases, he actually believes that the state is the same as the nation. Rousseau is the best case. He argued for the existence of the General Will – collective humanity, but stripped of intermediate loyalties and bonds – which is represented by the state.
There is no doubt that there is a legal entity called the United States government. It is a judicial construct. It is marked by its proponents' assertion that it has final jurisdiction over the use of badges and guns inside its borders. It has a monopoly of violence that cannot legally be challenged by any other entity. It has the final say over who gets to point a gun at whose belly.
If we do not think of the state in this way, we will not understand what the state really is: legalized coercion. The state is the agency that asserts and enforces its right to stick guns in people's bellies.
There is a great debate over the legal and moral foundations that undergird this judicial assertion, but the right of lawfully holding a gun and sticking it in somebody else's belly is the essence of the state.
The case for free trade is based on an assumption: that an individual has the legal and moral authority to make an offer to somebody else to buy what he owns. It is the legal right to make a bid. There are many ways to defend the free market economy, including its efficiency, but the starting place, according to libertarian theory, is the moral and legal right possessed by an individual to own property, which implies the right of an individual to disown property. It is ownership and disownership that serve as the foundation of libertarian social theory, and also serves as the foundation of free-market economic theory.
The collectivist begins with the concept of the state as the final authority. Libertarian theory begins with the concept of the individual as the final authority.
(In my view of economics, I begin with God as the final authority, but as I have spent the last 45 years attempting to show, the God of the Bible is overwhelmingly the defender of private property rights. This is encapsulated in the commandment: "Thou shalt not steal." I keep contrasting this concept with the assertion of all modern welfare-state economists: "Thou shalt not steal, except by majority vote.")
Adam Smith is correctly regarded as the most successful defender in history of the idea of free trade. This is one of the reasons why, in the view of those who believe in free trade, that Adam Smith's acceptance of the job as the senior collector of customs (tariffs) for the British government is one of those classic ironies in history. Adam Smith sold out his economic principles for the sake of a high income.
Murray Rothbard has exposed what we can legitimately call the myth of Adam Smith. Smith was not the greatest defender of free markets, nor was he anywhere near the greatest defender of economic theory. But he was unquestionably the most famous and most influential early defender of free trade and free markets. As a publicist, he was the master. Why this should be true, I do not understand. His book, The Wealth of Nations (1776) is a bloated book, and rare is the person who sustains the exercise of beginning on page 1 and finishing it.
Smith did make one claim that, in his day, was the most important claim that he made. It laid the foundation of modern economic theory. He claimed that the free market system is autonomous. It would exist apart from legislation by the state. He called this "the system of natural liberty." He described how the free market would work if the state did not intervene to pass special-interest legislation that benefited one group or another. What Rousseau claimed for the General Will, Smith claimed for the free market. But Rousseau's General Will needed a representative institution to express itself. Smith's theory of the free market was its own interpreter.
The system of natural liberty would maximize the wealth of nations, he said, but far more important, it would maximize the wealth of individuals. The central idea of Adam Smith's book is this argument: the pursuit of individual self-interest, when pursued by all the residents of the nation, will result in an increase of the wealth of the nation. His link between the pursuit of individual self-interest and the maximization of the wealth of their nation is the essence of Smith's logic, and it is also the essence of the argument of most free enterprisers.
This is surely the single most important idea that socialists always reject. The essence of the socialist outlook is this: individual self-interest cannot be trusted, because it leads to exploitation of the weak. In order to defend the weak, the socialist claims that the civil government must interfere with private property rights, and plan society from the point of view of the nation as a whole, or the people as a whole, or the vanguard of the proletariat, or whatever group is identified as representing the best interests of the nation.
The socialist wants to capitalize the word "nation." The Nation is his starting point, and it is also his ethical end. He equates the state with the nation, and he insists that the proper way to look at the economy is to see it as an extension of the state, which somehow incorporates the nation.
Free enterprisers say that they reject this outlook. So do most political conservatives. They say that they do not believe that the state is the same as the nation. The problem is, most of them still operate in terms of the collective entity known as the nation. They still cling to the idea of the nation-state as the final source of guidance for the economy.
This outlook in the West has been associated with mercantilism. Mercantilism is the system in which politicians gain control over the state, and then use the state to grant monopolies of trade to special interest groups. It was against this outlook that Adam Smith wrote his book.
To the extent that people say they believe in Adam Smith's concept of the free market, they ought to oppose mercantilism. The problem is this: the mercantilist mentality is best represented in the defense of tariffs. Tariffs are sales taxes imposed on imports of foreign-made goods. Yet most people who insist that they are defenders of the free market, meaning defenders of Adam Smith's economics, are overwhelmingly in favor of tariffs. They think they are free marketers, but they are mercantilist. They think they are defenders of private property, when they are in fact defenders of the welfare state.
The reason why conservatives say they oppose the welfare state is that the state interferes with the free market. But when you press them to defend the free market, and ask them to oppose all tariffs except as revenue-generating devices, they refuse to do this. They insist that the tariff system is necessary to defend the free market. What failure? Unfair competition from across the invisible line: the national border.
Then, when you show them that Adam Smith's logic was applied against tariffs and mercantilism, they may backtrack from his view. They may say that the benefit of the tariff system is to make the nation wealthier. Once again, the anti-mercantilist points out that this idea of wealth through sales taxes on imports was the essence of mercantilism.
Then the defender of tariffs says his critics are anti-patriotic and want to destroy the high incomes of American workers. They want to destroy the jobs of high-paid Americans. They want to reduce Americans to the economic level of Third World peasants.
This is mercantilism. It has always been mercantilism. It is statism. It is welfare statism. It is a gun in your belly in order to benefit the income of a minority group that wants to extract wealth on the basis of violence. This is the essence of the welfare state. This is "thou shalt not steal, except by majority vote."
Protectionists seek to find economic arguments to justify tariffs. They also seek an ethical defense of this position. So, they insist that the state's authorized agents should have the right to stick a gun in your belly and collect a sales tax in the name of the People.
Their concept of the People is inherently collectivist. They see the People as best represented by the state. They see the state as having an obligation to impose sales taxes on imports in order to benefit inefficient producers of goods that most customers do not want to buy at the prices asked by the sellers.
The mercantilist will adopt any argument at hand to defend himself. Here are a few of them:
The nation has the obligation to protect its people against [terrifyingly efficient] slave laborers.
The nation has the obligation to protect its producers against export subsidies, just like the ones our government provides, by foreign nations.
The nation has the obligation to defend itself against goods produced in nations that do not have higher environmental standards than ours are.
The nation has the obligation to defend itself against economic warfare by other states.
The nation [not the military] has the obligation to protect industries that might be needed in a war against an exporting nation.
The nation has the obligation to...
Hold it! I have some questions.
What do you mean, "the nation"? What is this nation?
How does special-interest legislation favoring a handful of domestic manufacturers defend the vaguely defined entity called the nation?
How is it that the interests of a handful of manufacturers that cannot persuade customers to buy from them, for whatever reason, are the best interests of the nation?
Why is it that the interests of this collective entity known as the nation are best understood by a group of politicians who have the support of a small minority of manufacturers who are in direct competition with manufacturers outside the country? We are not talking about most manufacturers. As recently as 1970, only about 5% of the United States gross domestic product was a result of international trade. Today, it is closer to 25%, but any way that you define it, the vast majority of Americans do not work for companies that are in direct competition with foreign manufacturers.
How is it that the relatively few special-interest groups that are in competition with foreign manufacturers possess a special position as representatives of the collective entity known as the nation, despite the obvious fact that the vast majority of people who live in the nation do not work for these companies, invest in these companies, own these companies, or even know the names of these companies? Who has designated them as the representatives of the people? Politicians, of course.
What is it about special-interest legislation in the name of the nation that persuades people who say they believe in the free market to rally behind the programs recommended by these special interest groups namely, the imposition of sales taxes on imported goods, so as to hike the price of those goods, so as to force customers inside the nation to buy from these inefficient producers, who could not otherwise persuade customers to buy from them?
There is a true bait-and-switch operation going on here. Defenders of tariffs present themselves as defenders of the nation, when in fact the nation, from the point of view of economics, is not a collective entity. The nation, from an economic standpoint, is simply a convenient name that we give to people inside invisible judicial lines known as national borders. These people own property, and they make bids to buy other people's property. The defender of sales taxes comes in the name of the nation, and claims that the nation's real economic needs are best obtained by imposing sales taxes on imported goods. But the whole idea of the nation, from an economic standpoint, rests on the concept of the right of private property and exchange. How is it that anyone speaks for this nation – someone who wants to impose the threat of violence in order to keep property owners from using their property as they see fit?
The defender of tariffs is a collectivist. There is no escape from this. He is a collectivist because he wants to use the state's power of coercion to interfere with the decisions of property owners. He does so in the name of a supreme entity: the nation. The nation is sovereign. The nation exists, economically speaking, as an entity above and beyond the outcomes of a series of exchanges. The defender of tariffs begins with the concept of the supreme sovereignty in economics of a collective entity: the nation.
Protectionism is a bait-and-switch operation. The defender of tariffs says he believes in the free market, but he begins with a mercantilistic concept of the nation. He begins, not with the concept of private ownership, but with the sovereignty of the state over the terms of exchange. He does not begin with the individual, as Adam Smith did. He begins with the concept of the state and nation that Adam Smith opposed in his book.
What amazes me is the extent of the self-delusion of free enterprisers who call for tariffs in the name of the nation, and then insist that they believe in libertarianism. If you begin conceptually and methodologically with the sovereignty of the state over economic affairs, you are at best a mercantilist, at worst a communist, and always a statist. You are a welfare statist, because you believe in the forced redistribution of wealth by the state. You believe in this principle: "Thou shalt not steal, except by majority vote."
But it is worse than this. The protectionist really means this: "Thou shalt not steal, except by hoodwinking the voters."
In what way does the protectionist hoodwink the voters? By coming to the voters in the name of the nation, when he in fact is an advocate for inefficient, uncompetitive manufacturers who cannot persuade customers to buy their goods.
A few of these advocates are actually on the payrolls of trade groups whose members cannot compete, and who therefore seek favors from the government. But most of them are simply self-deluded individuals, who never understood what mercantilism was, and who never understood the arguments that Adam Smith presented against mercantilism. They have not learned after over 200 years of economic writing that intervention by the state reduces the wealth of those customers who are no longer allowed to buy the goods that they want to buy.
The mercantilist looks at these excluded customers, and he thinks this: "They do not count." Really, he is thinking this: "They should not count, but they do, so we have to cut them off at the border." The fact of the matter is this: customers are a majority of people inside the nation, and if this were not true, there would be no need to impose sales taxes on imported goods in order to reduce trade. The only reason why the sales taxes are imposed, other than to collect revenue, is because the special-interest groups that are unable to compete in the free market are well aware of the fact that most customers do not want to buy what they want to sell on the terms that they want to sell it. The special-interest groups need tariffs because they do not represent the nation.
Protectionists insist that they are acting on behalf of of the nation. They do not respond to the arguments of defenders of the free market, who argue that individuals should be left alone to make whatever exchanges they want. The free market's defender denies that there is any collective entity called the nation that in some way best represents people who make voluntary exchanges. The defender of the free market begins with the right to private property.
The defender of protectionism begins with a collective entity which supposedly represents the people, and which passes special-interest legislation against private individuals who want to make purchases. How is it that the best interests of the nation are best represented by special-interest groups that cannot compete in the free market?
The entire concept of protectionism depends on a series of propositions, none of which is true, and which few if any protectionist are willing to defend in a clear and forthright manner. These false propositions include the following:
The nation is best represented by the nation-state.
The right of private property is not the foundation of the free market.
The supreme sovereignty of the state is the foundation of the free market.
Special-interest groups that cannot compete effectively understand the needs of the vast majority of citizens far better than property owners do.
Special-interest groups that pay off politicians to vote for tariffs are acting on behalf of the nation.
Politicians best understand the needs of the vast majority of citizens.
There is some way for a politician to assess accurately the costs and benefits of voluntary exchange.
Politicians can add up the national benefits and add up the costs, and then will usually vote in favor of whatever maximizes the net national benefits.
Politicians are not self-interested at the expense of a majority of property owners.
The opinions of customers who want to buy from foreigners should be ignored.
Badges plus guns plus sales taxes increase the wealth of nations.
Protectionists never start their analysis with acting individuals. They always start with the collective entity known as the state. They insist that the collective entity known as the state best represents the interest of the collective entity known as the nation. (This idea goes back to Plato, but it was most powerfully argued by Rousseau.)
They never define what the nation is, and they never show how special interest-legislation on behalf of inefficient manufacturers increases the wealth of a nation.
Millions of conservatives who insist that Congress is not to be trusted to assess the economy domestically also maintain this exception: Congress's collective ability to impose sales taxes on imports. Here, they say, voters can and should trust Congress.
Here is the assumption of all defenders of tariffs as protection. The pursuit of profit by self-interested individuals leads to national poverty when they pursue their self-interest across a national border. Inside the borders, Adam Smith's logic is sound, they say. The pursuit of self-interest does increase the wealth of nations. But this principle does not apply across national borders.
Smith argued for the extension of the logic of his system of natural liberty across all borders. Protectionists, in his day and now, refuse to accept this. They say that his logic stops at a national border.
I do not expect to change the mind of any protectionist. But I would like those people who are the targets of protectionists' taxation program to recognize that the person making the argument for sales taxes on imports is a mercantilist and a welfare statist.
The protectionist will not admit this to himself, and he surely will not admit it to anyone considering his arguments. He will staunchly deny that he is a mercantilist or a welfare statist, but his arguments are those of mercantilism and welfare state economics, so his denials should not be taken seriously.
I want protectionists to come clean. I want them to admit that they are defending mercantilism and therefore defending the welfare state. I want them to admit that they do not believe in the right of property owners to make voluntary exchanges across national borders without paying a sales tax. I want them to fess up to the fact that they believe in this formula: badges plus guns plus sales taxes increase the wealth of nations.
Most of all, I want them to stop claiming that they are believers in Austrian school economics and are staunch defenders of libertarianism.
The protectionists often include this sentence in their responses: "But what about...?" Here is my answer: "Put away your badge, put your gun in your holster, and stop trying to tax me." Or, more philosophically: "You do not speak for the nation." Or, more personally: "Stop acting as a shill for a small group of businesses that can't meet the standards imposed by customers."
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