Free Trade, Protectionism, & the Limits of Economic Analysis

Economics deals with statements of “is,” not of “ought.” It can tell you the consequences of particular public policies, but it cannot itself demonstrate the rightness or wrongness of such policies…

Some debates on economic matters seem destined to recur in the public square. The minimum wage is one. Rent control is another. With several recent announcements and executive orders from the Trump Administration, international trade is another that has once again captured widespread public attention.

The issue is the desirability of “free” trade. Proponents hold the removal of many barriers to the international mobility of labor and capital are beneficial to the public. Opponents hold these barriers are essential protectors of domestic workers’ livelihood. As is frequently the case, both sides make recourse to questionable arguments.

The errors of free trade’s opponents are easier to identify. Advocates of protectionism claim that trade barriers, such as tariffs, protect American jobs. At best, this is unclear. Focusing on jobs created or protected by tariffs only scratches the surface of the economic forces at work. As the nineteenth-century economic journalist Frédéric Bastiat noted, to evaluate policy, we must not stop our analysis at the effects that are “seen,” but reason through to the “unseen” as well. Suppose a tariff is placed on foreign automobiles. This will make foreign automobiles more expensive relative to domestic ones. Consumers will purchase relatively more domestic automobiles as a result. This will contribute to the demand for domestic automobiles, and indirectly the demand for the labor that makes automobiles. The seen effect is increased employment in industries related to domestic automobile production. What is missed, however, is the unseen benefit to American consumers of purchasing cheaper foreign automobiles had the tariff been absent. Consumers will save money, since the foreign automobiles cost less. Consumers will thus have more left over to spend on other things. This will contribute to demand for other goods and services in the domestic economy, and indirectly the demand for the labor that is necessary to supply these goods and services. Once we take account of the unseen but no less real effects, the net change on employment is ambiguous.

Similar to the one just discussed, the vast majority of protectionist arguments are flawed at a basic level. But economists go too far when they assert—as they unfortunately do too often—that economics shows that free trade is “good.” Economics, as a science, shows no such thing. First of all, economics deals with statements of “is,” not of “ought.” It can tell you the consequences of particular public policies, but it cannot itself demonstrate the rightness or wrongness of such policies. Second, economists often contradict the basic tenets of their theories when they assert the efficiency of free trade as a basis for its desirability. One of the foundational propositions of economics is that value is subjective. This means what matters is not goods and services in themselves, but what people think and feel about them. In order to remain scientific, economics cannot privilege any benefits or costs above others. To arbitrarily exclude some benefits or costs from efficiency considerations would be to smuggle a value judgment in through the back door. How, then, do you compare the benefits to American consumers of cheaper goods made available by free trade, against the costs to individuals who do become unemployed, such as loss of self-esteem, the erosion of local social capital, and resource costs associated with switching jobs? Economists usually only pay attention to the last of these, because they are material: switching jobs consumes real resources that could be used to produce other things. But there is no reason to privilege only material costs and benefits; indeed, if economists believe their own propositions, there is no such thing as a “material” cost or benefit. To put it another way, so-called psychic costs and benefits, such as despair over losing a job, are just as real. We quickly confront the troubling fact that value scales cannot be compared across individuals; unqualified assertions of the objective efficiency of free trade (and, in fact, any particular policy stance) fail.

Sometimes economists fall back on the argument that free trade increases efficiency in the sense that it maximizes the dollar value of society’s scarce resources. This is true, but irrelevant. Remember, the subjectivity of benefits and costs means that, by the standards of economists’ own theories, the psychic disutility of someone who loses their job, expressed in dollars, cannot be directly compared to the psychic utility of someone who can now consume goods and services more cheaply. Efficiency can be a useful concept when it is regarded as an unintended result of market exchange, but as a criterion for policy that exists “out there” in the world aside from these exchanges, it can do more harm than good.

Too many proponents for free trade are thus making normative statements under the pretense of making purely positive statements. To argue for free trade on the basis of any conception of efficiency is an ethical argument. Economic theory by itself cannot take you there. Value judgments are inexorably wrapped up in advocacy.

So which side is “right?” I am an economist, so it probably will not surprise you to learn that, despite their often-unexamined equivocation between “is” and “ought,” I side with the economists. I am a free trader. My reasons have nothing to do with economic efficiency. Instead, I rely on a simple maxim—a heuristic, if you will—for what I believe is sound public policy: It is wrong and harmful to prevent benefits accruing to the general public due to fears about the costs borne by a relatively small subset of the public. Although the benefits and costs of free trade cannot be quantified and compared across individuals, it can be said at a general level that the benefits are widely dispersed, while the costs are narrow and concentrated. Almost all Americans are consumers of automobiles; relatively few are producers of automobiles. Even if done with the right intentions, and with full consciousness of the consequences, it is an abuse of the public trust to privilege small interest groups at the larger public’s expense.

There are a host of other reasons to oppose protectionism. Peace between nations is one. A quote attributed to Bastiat goes, “When goods don’t cross borders, soldiers will.” Civic virtue is another. Preventing trade closes off a moral space in which individuals can develop their talents and exercise the ethical habits that make them good citizens, and good human beings more generally. The dignity of man is still another. Protectionism involves the initiation of violence against otherwise peaceful persons, reducing them to cogs in a nationalist machine. Each one of these explanations draws on a rich and normatively sophisticated portion of humanity’s, and the West’s in particular, “great conversation.” None has anything to do with efficiency, except in the trivial sense.

Public debate about free trade will probably never be settled. Economists perform a valuable role when, each time the issue arises, they educate the public about the actual consequences of the public’s naïve policy preferences. This is a proper function of social scientists in their capacity as teachers and citizens. But economists also impugn the integrity of their discipline when they make uncritical statements about efficiency and its desirability. Such claims are not only rhetorically unpersuasive; they also lower the esteem of economic science in the eyes of educated students of the humanities, as well as the public at large. Economics can only protect the public from itself if economists recognize the limits of their discipline.

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