Thursday, October 9, 2014

Jacob G. Hornberger: The Virtues of free trade

  I find it absolutely amazing that there are still people around who look with disfavor on free trade. A recent example occurred in the New York Times just last Sunday in an op-ed entitled “Our Misplaced Faith in Free Trade” by Jeff Madrick. According to Madrick, “free trade creates winners and losers — and American workers have been among the losers. Free trade has been a major (but not the only) factor behind the erosion in wages and job security among American workers. It has created amazing prosperity — but mostly for those at the top.”

  What is free trade? It simply is voluntary economic exchanges between people. Why is it called “free” trade? Because it involves economic exchanges that are free of government regulation, interference, and taxation.

  It’s really that simple.

  Let’s assume that Peter, a seller of oranges, and Paul, a seller of apples, live next door to each other here in Virginia. Peter and Paul voluntarily enter into an exchange in which Peter gives Paul ten oranges and Paul gives Peter five apples.

  That’s free trade — that is, trade that is consensual and free of government interference.

  Notice something important here: In every economic exchange, both sides benefit. That’s because each of the traders is giving up something he values less for something he values more, from his own individual subjective perspective.

  Did Peter lose on his exchange with Paul, given that he gave Paul ten oranges and received only five apples in return? No! He actually gained because he gave up something he valued less for something he valued more. Both Peter and Paul raised their standard of living through the simple act of exchange.

  Now, let’s assume that Peter moves to Maryland while Paul remains in Virginia. They now decide to enter into the same exchange. Has anything fundamental changed owing to the fact that Peter and Paul now live in different states? Of course not. The principles remain the same. Both of them raise their standard of living by entering into the exchange regardless of where they live.

  Let’s now assume that Peter moves to France while Paul remains in Virginia. Any difference in fundamentals? Clearly not. Where Peter and Paul live is irrelevant. What matters is that they both raise their standard of living by entering into mutually beneficial exchanges with one another regardless of where they live.

  Let’s assume that Peter, the orange seller, becomes a French citizen. Any difference? Of course not. The same principles apply regardless of where the traders live or what their citizenship happens to be.

  The problem arises with governmental interference. Let’s assume that Mary, an orange seller in Virginia, wants Paul to buy her oranges rather than buy them from Peter, who is now a French citizen living in France. She offers Paul seven oranges in return for five apples. Since seven oranges aren’t as good as the ten oranges being offered by Peter, Paul turns down Mary’s offer and decides to continue trading with Peter.

  Furious, Mary turns to the government to help her out. She points out that she’s an American while Peter is a Frenchman. She asks the government to impose a tax equal to 7 oranges on Peter’s ten oranges. She shows how the tax will produce more business for her, thereby creating jobs for Americans in her business.

  The government, convinced by Mary’s logic and driven by a patriotic, pro-U.S. sentiment, imposes the tax. So, if Paul now enters into his deal with Peter, he’s now going to receive only 3 oranges rather than 10 oranges, owing to the 7-orange tax that the government has imposed at Mary’s request. Since Mary’s deal has now become more attractive, Paul buys the oranges from her rather than from Peter.

  Notice that while the tax has helped Mary and people in Mary’s business, it has hurt both Peter and Paul.

  As the tax continues over time, Mary’s business continues to expand. She hires more workers, and people in the community open up businesses that cater to her workers in their role as consumers.

  Along come libertarians and say: Peter and Paul have the natural, God-given right to enter into any mutually beneficial exchange they want. That’s what economic liberty is all about. The government has no more legitimate authority to interfere with their right to trade than it does to interfere with their religious decisions. The protectionist tax on Peter’s apples should be lifted.

  That’s when people like Jeff Madick, the author of that New York Times op-ed, pop up. They point out that if the government’s interference with free trade is lifted, Mary’s business will be harmed. Workers at her establishment will lose their jobs or have their pay reduced owing to the reduced income that Mary will now receive. Mary herself might go out of business. Indeed, people in the community who have become dependent on Mary and her workers will get hurt too.

  But what people like Madrick fail to see is that to the extent that Mary’s business and other businesses depend on the infringement of the fundamental rights of Peter and Paul to enter into mutually beneficial exchanges with one another, to that extent those businesses are morally illegitimate.

  What people like Madrick also fail to recognize is what is unseen: that once governmental interference with economic liberty is lifted, the increase in prosperity between traders brings into existence new businesses that are looking for new workers. So, while Mary’s business, which depends on a government privilege and protection, might lose market share or even go out of business, other businesses that depend solely on consumer satisfaction take her place. Those new businesses hire the workers who previously worked for Mary.

  The problem is that for decades, the U.S. government has riddled American society with protectionism, tariffs, subsidies, corporate welfare, and other such artificial devices, thereby creating an enormous apparatus of morally illegitimate businesses and jobs dependent on the government’s economic interference and welfare largess. Not only does that reduce standards of living, it also engenders lots of destructive governmental dependency.

  Then, when a libertarian proposes that that entire artificial apparatus of privilege and governmental largess be lifted, economic statists complain that that will harm the businesses and employees who have become dependent on the government’s apparatus.

  Nonetheless, the best thing the American people (and everyone else around the world) could do is dismantle all governmental interference with free trade. While many people will lose the artificial protection and largess of the government, the result will be prosperity for society at large.

  The dismantling of protectionism and other government-granted privileges and welfare would mean the embrace of the principles of economic liberty and free trade that are key to a dynamic, prosperous, and harmonious society.

  About the author: Jacob G. Hornberger is the founder and president of The Future of Freedom Foundation.

  This article was published by The Future of Freedom Foundation.

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