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Published on May 18th, 2012 | by RLn Staff

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Free Trade Doesn’t Work

By Lionel Rolfe

There’s been something wrong in this land for several decades now–most people have been sensing that but haven’t been able to put a name to it. Finally, economist Ian Fletcher wrote a book called, “Free Trade Doesn’t Work” which pretty effectively says it all.

He also, never modestly, offers up some beguiling simple solutions to the problem.

I would have never expected an economist to come up with any answers. I rarely ever turned to proponents of the “dismal science” because I always figured that was too generous a description of whatever it is they do. For me, economists have always had more in common with the clergy who dominated most of human history up until the last century or so than real scientists. Psychology and economics and other pseudo-sciences have moved into the fray in the last century or two, with new explanations of things. Not necessarily better ones.

It always struck me that what we had here wasn’t science but rather “revealed truth and ideology,” not so different than the theology of old.

Since Ronald Reagan got in power, the party-line in academia has been that unfettered capitalism works best with “free markets” and “free trade.”

This is considerably different than the party line I grew up with, namely that robber baron capitalism, unregulated and unfettered, always seemed to end up in some sort of disaster where a generation of people get wiped out. Then after millions of people had died on the economics battlefield, it all starts over again. But I was of the generation molded by the Great Depression. I was born in 1942, a bit later than the Great Depression, but Roosevelt’s idea of a regulated capitalism was still the norm.

I remember back in Reagan’s day and even with his personal endorsement, a cadre of rich folks began endowing chairs of economics and building schools of business in the ‘80s. The purpose of all this was to dismiss forever as quaint the idea that regulated capitalism works best. It was only after the meltdown of 2008 that many began to suspect that perhaps the old sheriff was pretty corrupt.

Fletcher’s focus is on the “free trade” aspect of today’s current revealed wisdom.

He argues that you can’t reform free trade by a “level playing field.” Asking for a “level playing field,” he points out, “is just another way of asking for fair trade.”

Fletcher has no problem with fair trade. He argues there is no other choice for the free trade but fair trade. This is because free trade requires that every one plays by the same rules on the international level. But that argues that every one “adopts the same notions about domestic economic policies, which, of course, will never happen.”

Countries, he says, will always operate according to their own lights and culture and history.

Americans, for instance, are proud of the innovations that we have produced. Creativity is an expression of our much vaulted individuality. And indeed American has produced many notable examples of things–including the things that other countries now do better than us–such as high-speed trains, radar, Internet, incredible communication devices, solar energy, aviation and now even space exploration.

But free trade has even cheated us of the benefits of innovation. “Two thirds of American computer software used in China is stolen,” he wrote, “and up to 20 percent of China’s growth is connected in some way to theft of intellectual property,” Fletcher notes.

Fletcher then makes a very profound point–free trade is meant to prevent nations from adopting their own industrial policies. American economists and politicians can talk “free trade,” for instance, but we’ll never get rid of our agricultural subsidies. And food is a major export of ours.

Fletcher says without reservation every nation which has succeeded did so with a combination of “protectionism and industrial policy,” which he defines as “the deliberate manipulation of the domestic economy to help pinpoint which industries to grow.”

Fletchers laughs off the notion that you can morph free trade into something that really works by “putting in environmental rights and labor rights.”

“Canada already has higher standards in both these areas.” And Mexico, he says, in theory has better environmental standards, but they are never applied as a result of corruption and greed.

Americans have been burdened with the ideology of “free markets” and “free trade” ever since Milton Friedman, the godfather of monetarism.

But the idea is darker than that. It really is nothing more than the rekindling of an ideology adopted for a while by the British Empire in its own best interests.

The ideology goes back to the likes of Adam Smith and David Ricardo. America had a revolution against the British King because they wanted to deny him hegemony over our destiny. Thus as far back as 1820, the American statesman Henry Clay proclaimed that free trade “has never existed, does not exist, and perhaps never will exist.”

Unless you’re enrolled in a prestigious academic institution studying economics, the rest of us don’t have to act like the high priests of the temple of Mammon and praise the idea of “free markets.” If you want to succeed in academia now, you have to learn to praise “the free market” with loud voices if you seek a long career. Such is always the problem of having to follow a party-line.

But having a party-line doesn’t mean it’s necessarily true. It just means you have a party line. You have a belief, an ideology–albeit one peculiarly benefiting the rich only–and I’m convinced of that in part because of my friend Ronald Van Ammers.

Van Ammers was born in Holland, grew up in Curacao before coming to Los Angeles, where he became a Libertarian and hence a free trader as a result of the revealed world of Messieurs Friedman and Reagan.

Ronald is an avid reader of The Economist, the English magazine founded in 1843 to push the free trade ideology. Ronald and I often quarrel over the idea of free markets and free trade because I say they simply don’t exist, never have existed, and never will exist.

When we sit on his back porch in the Silver Lake hills overlooking the San Gabriel Mountains in the distance, it seems I’m always arguing with Ronald. I begin pontificating like an old Marxist. Marx taught that capitalism invariably abandons free markets when there’s an opportunity to dominate the market. The truth is, despite all of Ronald’s Libertarian talk, capitalism abhors competition.

I’m always struck by the almost religious nature of his proclamations about the market showing the existence of some kind of invisible hand of God. To me that sounds like a fairy tale, a theology, an ideology at best, and certainly not a science. It’s pretty much religion.

Before Reagan and the assault on academia by and for the free marketers and free traders, academic economists tended to be if not outright Marxist, Keynesians. There was a lot more talk of surplus labor value than free trade. And the Keynesians really did believe that capitalism works best when it is regulated, a notion that grew out of the Progressive era at the beginning of the last century.

As a result of the successful right-wing assault on academia, Fletcher now estimates that more than 90 percent of all academic economists will list themselves as free traders, even if they hedge a lot on specifics. Not surprisingly, an outsize minority are also militant proponents of robber baron economics.

But then, the tides of shifting ideologies have always been a characteristic not only of economics but religion and even such soft sciences as psychology. And sometimes even the hard sciences are not immune to money pressures. Folks who dwell in the academic world often are forced into embracing the prevailing wisdom, if for no other reason than their careers.

It’s an open secret that today’s economists seem to be particularly jealous of the real sciences, in part because every one else but them suspects that their prognostication abilities are little better than chance. One of the methods used to dress up their credentials as scientists is to use an extreme amount of math.

The use of lots of sophisticated math gives their work “the appearance of hard fact,” Fletcher says.

The purpose of this, Fletcher argues, is to imply that the use of math shows this is not just all a matter of opinion. It’s a way for the free trade, free market economists to declare that economists are engaging in something that “looks distinctly like something people don’t understand so they should keep their mouths shut.”

Yet, Fletcher says that “sophisticated math” is overrated as an economic tool. He notes that hedge funds which liked to employ a lot of such math fared no better than those that didn’t during the 2008 financial meltdown.

Fletcher points out that “theories which favor free trade tend to be mathematically neat–mainly because they assume markets are perfectly efficient, which makes their outcomes predictable.”

Arcane mathematical equations do nothing if they don’t at least provide the appearance of “intellectual rigor,” but he points out, “unfortunately intellectual rigor can only guarantee the reasoning is internally consistent; its conclusions comes from its premises; it cannot guarantee these premises were right in the first place.”

The other thing, Fletcher notes, is that by using lots of abstruse mathematical formula one can obscure the basic truth of things behind a blizzard of symbols. Sort of like Newt Gingrich is a dumb guy’s idea of a smart guy, math and cheap symbols make “it easy to wander into falsehood unaware of the lack of a sanity check.”

Anecdotal Detour

Now please excuse me a small anecdote in trying to find and trumpet the larger truths of things. So let me tell you about my ex-father-in-law who ran a furniture factory in the South Bay area of Los Angeles that employed about 100 people–mostly Mexicans, probably mostly illegals, but all very familiar with woodworking. He started making furniture in his factory when furniture was still made of real hardwood and not pressboard or pine. He was proud he was still using real wood, but toward the end, even he had to turn to pressboard with plastic hardwood surfaces pasted on.

Had he been less proud of what it was he was making, and had shifted to producing crap instead of real furniture earlier on, he probably wouldn’t have been so desperate trying to cover his payroll each week.

Some times I would ride along with him when he’d take his receipts to the money lender who would take the receipts off his hands–for a considerable fee–and give him money to meet payroll right away. As he drove, his fists would get white because he was clenching them so hard. And he was pissed off. He was doing all the work and the money lenders were getting all the profits of his hard work.

Way before the financial collapse of 2008, he learned early what many people learned later–the financial industry is seriously akin to the highway robber men who controlled the countryside in 18th century England.

I saw my former father-in-law’s life as a metaphor, even if the telling of it is as an anecdotal metaphor. Like Kurt Vonnegut’s protagonist, he had been a war hero, flying more than 50 bombing missions over Dresden. He was a pretty tough, motorcycle riding dude from the Great Generation and as a student at UCLA, he had studied and loved Dresden as one of the great old European cities. The irony that he became a war hero bombing the city he had admired as a student was too much for him, and he finally collapsed in a hospital in London, and when he got out, brought the pretty young English girl who had taken care of him in the hospital to America.

After the war, he was offered a desk job at the Pentagon, but instead came home to Southern California to start a business out of his garage. It became relatively successful for a few years, but in the end it was his financier who made the money.

I often wondered what all he was thinking as I watched his knuckles getting whiter and whiter as his anxiety increased. Probably the only other time his knuckles were like that was when he was flying a bomber over Dresden.

Under Nixon, he turned to the Small Business Administration. Under Dick Nixon, the SBA was turned over to the Mafia. That had been the price of their support during his first election. Through the SBA, the mob had access to small, desperate businesses, like my ex-father-in-law’s, which they wanted to launder money.

Desperate as he was, he said no to that, and went straight to the loan sharks.

During the war in Vietnam, my ex-father-in-law was a big peace lover. As an old military guy–he mustered out as a colonel–he had had his fill of war. As an American citizen, who seemingly lived the American dream, who built things with his own hand and with his own ingenuity and hard work, he was ultimately done in by free market and free trade principles, the same principles which resulted in the decline of the nation’s manufacturing sector, and the concomitant growth of the financial sector.

It was not an accident that between 1945 and 1985 the nation’s financial sector never made more than 16 percent of all U.S. corporate profits. But by 2005, that 16 percent had risen to 41 percent. Then in 2008, the financial sector unraveled. The country was left holding the bag, the debris from all the “creative financial products” all around our feet.

Fletcher sees our global overdraft as one financed by debt and by selling off the nation’s assets. America has not been living by the sweat of its brow for too long now. In the meanwhile, a few people have been getting richer and richer as the the system began devouring itself, but still paying off handsomely for a few.

The notion that the market always knows best might be sacrosanct to most contemporary economists, but not Fletcher. Mind you, he is no Marxist. He derides Marxists, in fact, and says that even among the most intelligent communists, none of them really believed in Marx. But he does effectively poke holes in free market madness and methods.

Fletcher’s argument isn’t against trade, “if it’s an equal exchange between people and nations.” Most of the population supports that. They do not particularly believe in free trade and most people are willing to accept some kind of protectionism where it is necessary to save the country’s own infrastructure. It might be that for “free traders” protectionism is evil. But not for anyone else.

Most people are perfectly willing to accept some kind of “protectionism,” he says.

Americans subsidize the giant agribusiness corporations. They’re doing so because of laws passed during The Great Depression designed to prop up the family father. When the corporations took over from the family fathers, they got the subsidies.

So there you have it. Free Traders say nations should not subsidize any thing and let the market determine the price. But that ignores, says Fletcher, a nation’s own peculiar history and development and culture. It also ignores the fact that a nation can use its currency as an effective tariff–witness China. Or in Japan, a kind of tariff is created by the manner of distribution in each country. Thus the title of his book, “Free Trade Doesn’t’ Work.” Distribution of products in Japan is done by connections and tradition–which are never going to be modified for the benefit of American products.

Fletcher peppers his manuscript with illustrations that free trade rarely works as it was intended. For example, he notes that Boeing and General Electric have both been pulling back from outsourcing. Boeing famously made its new generation high tech, light-weight composite 787 all over the world. The wings were made in Japan, the fuselage in Italy, and so on and so forth. Boeing also laid off workers who could have done the same thing here, as it turns out, with far fewer expensive delays and problems.

Fletcher says that the country’s insistence on free trade has become a paralyzing crisis for the country. It is making us hostage to a centuries-old ideology that really was developed for the interests of the mother land of the British Empire.

Fletcher also demolishes many of the comforting myths of free trade. There was the one, for example, where America would switch from low tech to high trade. This floundered on the fact that we are now losing jobs in both arenas, and other countries are proving quite adept at developing their own high tech.

He also denies the Free Trade notion that American workers must learn to live with the same wages workers get in third world countries. Corporations have been unseemly anxious to break unions and the working class at home by using cheap labor elsewhere.

American workers should not have to “live in dangerous horrible conditions we haven’t had here in a century,” he says. Nor does he find good for anyone in a world where “Charles Dickens has moved to Asia.”

Yes, it gives China an advantage in the price of its products because many of its factories are run “on industrial grade coke with no pollution protection.”

But that is not a reason to do so in this country. And if we need to protect ourselves in this arena, we have every right to do so–even if free trade ideology says we do not.

All nations have to seek strategic and not unconditional integration with the world economy, and of necessity this bars the the quaint free trade and free markets notions from ever working.

He sums up by declaring we need “fairly open trade,” not absolute free trade, he says.

Also, he says, free traders would have nations abandon industrial planning. We have done that, since Reagan, and the results have been disastrous.

President Obama practiced a bit of industrial planning when he saved the country’s automobile industry. It was successful and Fletcher suggests we need do more of that.

We pretend our trading partners are participating in free trade, but that has never really been the case. There is nothing wrong with the country trying to protect its own national priorities rather than leaving it up to the unseen hand of God.

America has largely de-industrialized itself in order to satisfy the ridiculous ideological requirements of so-called free trade and free markets. And now with the collapse of the financial sector, it is apparent that the financial sector was always a house of cards.

Nor, he says, will retraining and education provide the answer.

While spending more on education will “make America more competitive, our rivals are aware of the advantages as well.” And many of them are already way ahead of us.

Fletcher rather neatly sums up free trade by saying what it has done is “squeeze the wages of ordinary Americans largely because it expands the world’s supply of labor, which can move from rice paddy to factory overnight, faster than its supply of capital, which takes decades to accumulate at prevailing savings rate.”

The result of having free trade run amok, the bargaining position of capital has been strengthened relative to labor. “People who draw most of their income from returns on capital (the rich) gain while people who get most of their income from labor (the rest) lose.”

Ironically, Fletcher points out, Karl Marx, the man whose adherents Fletcher dismisses as stupid, himself favored “free trade,” but for a revealing reason.

“The protective system of our day is conservative,” Marx wrote, “while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentleman, that I vote in favor of free trade,” he said.

Considering the state of capitalism in America today, you can argue that both Marx and Fletcher have made some succinct points.

Lionel Rolfe is the author of “Literary L.A.,” about which a documentary is being made. Many of his books, including “Literary L.A.,” “Fat Man on the Left,” “The Menuhins: A Family Odyssey” and “The Uncommon Friendship of Yaltah Menuhin and Willa Cather” are available digitally in Amazon’s Kindlestore and other electronic purveyors.

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