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The Great Flaw in the Free Trade Theory And Other Vain Beliefs, Hoaxes, and Follies
As always, when Jesse discusses economic theory and politics, he clearly and concisely explains why the currently popular mind-numbing theories haven't worked, and will not work. The time spent debating the existing models could be better spent constructing a new vision of how society can best be served by the government and the financial system - not the other way around. - Ilene
The Great Flaw in the Free Trade Theory And Other Vain Beliefs, Hoaxes, and Follies
Courtesy of Jesse's Cafe Americain
There are several economic models and political memes that rely on an underlying belief in the natural efficiency and goodness of 'free trade' and 'efficient markets.' One can question whether these ideas promoted certain behaviours, or if certain parties promoted these theories to serve as justification for their policy objectives.
Whatever the case may be, let's take a look at the theories that seem to underpin the virtue of 'free trade,' meaning international commerce with very light national regulations and a centralized semi-autonomous authority as arbiter.
One of the theories in favor of free trade is the idea of comparative advantage, that is, that one country might have a natural advantage which they can exploit for their own benefit and the general benefit of the world. I am sure we all learned this in business school. I myself was quite a fan of Michael Porter in my day.
This theory is a universalisation of the idea that the naturally gifted pottery maker, for example, has an inherent talent that can be exploited, and can create and exchange pots for food, let's say, from a farmer who has the advantage of owning suitable farm land and has the talent and tools to exploit it.
Makes common sense does it? Everyone does what they do best, and through the free exchange of products the aggregate good is increased.
But the fallacy that is repeated over and over by the non-scientific thinker (like too many economists and politicians for example) is that one can extend things that might make sense anecdotally into general principles writ large on the face real world, or more properly OVER the face of the real world, that at the end have little real fundamental connection with reality.
This was Mandelbrot's great criticism of the neo-liberal school of economics, notably the Chicago School, for example. Their broad assumptions crushed the reality out of the math, and the application of their theory made the markets inherently unstable by miscalculating the risks which were allowed to grow to enormous levels, and then crash at the under-expected event, colloquially known as 'a black swan.'
There is some validity to this. Some nations, for example, are blessed with great natural resources such as coal and oil, and they can sell these items to other countries and regions in exchange for items like food, for example.
But like most efficiency arguments, most notably the efficient market hypothesis, these ripples in distribution or market anomalies are quickly exhausted, and in the classic impetus and peril of successful capitalism, the players start to create monopolies and other artificial advantages, such as frauds, which they can exploit more fully.
So for example, a nation such as China can devalue its currency substantially in the 1990's against the world's reserve currency, and thereby set up a set of artificial import barriers and export subsidies, simply by manipulating their currency.
By the way, this is basic math. There are plenty of people who were denying it, and most of them stood to benefit from this charade. But it is true. Anyone who travels internationally and changes money understands it.
The underlying basis of the currency wars is the ability to artificially manipulate one's currency, or even establish a pseudo-monopoly, for the advantage of one to the disadvantage of the others.
There are other methods to accomplish this and they are usually lumped under the title of industrial policy or mercantilism. A country has a set of laws and regulations that foster a certain stance towards issues such as worker's rights, environmentalism, savings and consumption, wealth distribution and even human rights.
The more trade becomes independent of public policy and regulation, the greater the movement of all countries to the least common denominator of the broader policy stances of the mercantilist nations.
In a very real sense, if you control the issuance and terms of money, you care not who makes the laws locally. And the exchange of trade mechanism is a subset of the control of a medium of exchange, which is the trade system, both international and domestic, the who and how people can buy or sell.
This principle seems to be the basis of the inclusion of gold and silver in the money system essays written by my friend Hugo Salinas-Price, and the age old understanding of the balancing mechanism of a harder standard of exchange to manage the tendencies of various participants to 'cheat.'
Anyone who believes that believes that markets and society do not require clear laws and impartial referees because people are naturally inclined to know and do the 'right thing' has obviously never driven on a modern American freeway.
If, for example, we were in a gold standard system for international trade, and the governance had allowed China and its multinational capitalist friends to game the system as they are doing now, eventually the flow of gold from the US to China would compel the US to devalue its currency against the Yuan, and thereby persuade China to release more of its reserves as gold back into the system by purchasing other things. If they used it to buy US debt for example, the dollar would continue to devalue in a cycle which would hamper and ultimately defeat the currency mercantilism.
It would have also restrained the US from manipulating the world by 'owning' the world's reserve currency and the 'exorbitant privilege' therein. It would have curtailed unfunded wars, and the exporting of jobs and production in favor of a 'service economy' that consists largely of pushing the reserve currency around the plate, and skimming the greatest portion for an elite group of policy leaders. No standard is perfect, and there are ways to subvert some external standard like gold, but it is more difficult to do, and it is more easily seen and exposed if the standard is resolute and robust.
We see a similar principle in action in the theory supporting efficient markets. On paper they sound good, but they are deeply flawed because of the nature of the assumptions they make about people and their rationality and selflessness.
As most gardeners can tell you, there is rarely such a thing as a naturally beautiful and weed free garden, especially the ones that look 'natural.' It takes a great deal of forethought, adjustment, and continual work to make anything sustainable in this world of ours. And so it is with markets, both local and international.
There are those, like former Fed Chairman Greenspan, who argue that the fiat regime of the Federal Reserve works if the Fed 'acts like a gold standard,' that is, with an unapproachable virtue. A similar theory underpins the World Trade Organization's function in international trade. But like all human systems, they tend to fall to the great truth observed by Lord Action some years ago, that "where you have the concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that."
I am not promoting a gold standard per se and understand the problems inherent with it, and do not wish to discuss that here.
But what I am attempting to do is expose some of the fallacies of the zombie economic theories that have led the world to the place where it is today, with too much discretionary power concentrated in too few hands, with a propensity to act in secret and with an excess of latitude behind the cover of those artificial constructs known as 'corporations.'
This notion that government and regulation is the problem is true only to the extent that government has become weakened and corrupted by gross abuses. Effective government takes planning, continual hard work, and the adjustment of renewal and reform.
Human constructs, if not continually managed and repaired and occasionally renewed, tend inevitably into disruption, dysfunctionality, and corruption.
To say, let's just get rid of it and things will somehow become naturally good is to attempt to build a castle in the clouds. It will not and has never worked to promote a harmonious and productive society on a large scale, ever, in all of human history. It is the law of the jungle. But it has its continual appeal to sociopaths, misfits, the naive, the frustrated, and psychopaths.
It is a tool of the false dialectic of extremes, that argues that the choice is between no government and bad government, and that if government is not perfect it is inherently evil. Because they are driven to extremes, those who argue this cannot see the great middle ground, of an imperfect government that nevertheless is capable of maintaining justice and order within the context of freedom. Failure is only certain at the extremes, of authoritarianism and anarchy, when by two different paths one turns society over to the wolves.
The longer this artificial construct of natural goodness and perfect rationality is maintained, the greater the forces against it will build, until countries and nations explode into revolution and wars, as a consequence of folly.
The model in my forecast says that meaningful reform to the status quo will not be readily accepted by the power elite. They will promote a 'new normal' which will span a leisurely 'five to ten years' for economic recovery, while they are comfortably standing above it all on other people's necks. The ability to set oneself aside and apart, as separate and above, from the rest of humanity is served in many ways and by many things. It is a dangerous delusion to feel naturally privileged for whatever reason. It can only be maintained through power, and power is a deadly narcotic.
We can be thankful that other crackpot theories have not become mainstream, such as eugenics, or the marginalizing and then disposal of the weak, the disabled, and the different to serve the economic advancement of the state. Or groupthink, and profound belief in national or racial exceptionalism that tends to lead groups to quick utilitarian solutions and Pyrrhic ends. So there is some room for optimism.
Change may not come until the powerful are standing in ashes, and therein lies a tragedy yet to unfold. Let us work on with hope that reform comes well before then.
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I'm totally fine with much less than we have now. Enforce the law, keep monopolies from forming, don't allow bribery. Most of the rest can be done privately. Happy?
Now, now! Don't force him/her to actually provide some reference point that can be exposed to scrutiny!
He lost me somewhere around...
"Governents can plan and be effective forces for the common good. That's how we got to the moon, for one of a million examples. Your problem is that you believe that selfishness is the only worthwhile value. You prop up that belief with magical thinking and ignoring the misery that that belief is causing everywhere."
One of the more bizzare things I've read on ZH.
He combines the words government "forces" and "common good" into one sentence somehow. He alone can then determine what a selfish individual is from that perspective...lol.
Then does the reach around on the "misery" government "forces" have done to the "common good" and walks away like a satiated pedophile.
Still working on an anology though ;-)
I was refering to the Randian doctrine of selfishness and "invisible hand" nonsense which underpins what he was talking about. Sorry I didn't draw it out in crayon for you.
"I was refering to the Randian doctrine of selfishness and "invisible hand" nonsense which underpins what he was talking about. Sorry I didn't draw it out in crayon for you."
Well now, I'm afraid you're going to have to take "crayon" and spell it out for me...you see, I'm just a simple country boy ;-)
How is it, in your mind, that the states interests are superior to the individuals interests who sustain it?
I don't believe that at all. I believe, frankly the opposite of that.
I am tired of oligarchs who propagandize against government on the one hand, and subvert and expand it on the other, for their own purposes.
Concentration of power in all forms is what causes oppression.I have no desire to be ruled either by Stalin or Rockafeller.
The role of government is to referee.
The role of government is to referee...and punish...correct.
The issue (as I see it) is no one has been punished for securitizing subprime mortgages...now why would that be?
In fact, the government digitized foreign accounts charged to the taxpayers credit card (ostensibly, which I renounce and refuse to pay). They then brow beat secured bond holders of corporations, charge the redit card again and again for FNM & FRE and shotgun wed financial firms into marriages of convience and somehow the people are to "obey the law" and go yee haw!!!...lets do a moon shot and build roads & bridges?...lol.
No.
They crammed socialized losses down eveyones throat to protect themselves and their cronies. They said this was "pragmatic". To whom?
They are fucking rapists & extortionists...don't defend them here with me, I'll have none of it.
Seeya
Who's defending them? I hate those fuckers. We discussing the abstract. Jesus dude, learn to read.
The more power you hand to politicians, the more power you hand to the people who control them (and no, it's not the voters who are telling our 'leaders' what to do).
Has it occured to you that without all the death and destruction and mis-allocated resources your beloved states have been engaging in, we might have got to the moon SOONER? And when did WE get to the moon, anyway? I've never been - a bunch of military types went there 40 years ago and all I got was this fucking T-shirt (and an enormous tax bill).
You're being distracted by the puppet show. Who is the government? Who writes the laws? Hint- it's not congress. Who enforces? hint- revolving door. It's incredibly frustrating that so many here, who claim to love freedom and personal responsibility can not see that the whole battle against government is a fraud.
"To concern yourself with surface political conflicts is to make the mistake of the bull in the ring, you are charging the cloth. That is what politics is for, to teach you the cloth. Just as the bullfighter teaches the bull, teaches him to follow, obey the cloth."William S Burroughs
No, the real fraud here is thinking that all you need is a change of government, that somehow, it's just this particular set of bad apples that is the problem.
You're the one following the puppet show, demanding a change of puppets. We're trying to get rid of the puppeteer(s).
That's not what I said.
You're attacking the government, and ignoring those who control it.
You're going after the puppets, and the fricken puppet stand. I'm the one saying go after the puppeteers.
God damn you are an idiot.
I'm not sure it's as simple as:
Governments don't need to plan SHIT. They need to enforce the law (don't murder, don't steal, don't trespass, don't assault, don't bear false witness) and protect the borders from foreign invasion. That's IT.
Would you have education only for the people who can afford it? Would you create a trap where only the wealthy can gain the education and skills necessary to get anything above a sweat-shop job?
If the answer is no, then that's another function of government - either central or local, but education provided by government.
What about disaster relief?
What if someone wants to build a nuclear re-processing site at the back of your house? Should the "free market" set the safety standards?
I think that government goes beyond the very simple couple of things you mention. Government should be as small as possible, but the problem at the moment seems to be that governments have been fucking BOUGHT. They serve the elite.
Right, because no-one ever worked their way up from the bottom to the top of a company. Also, there is no such thing as private scholarships, and there is no such thing as a school giving grants to poor students. Yes, it's a trap, and government funding is the only way anyone who isn't a billionaire can afford school. I mean, school has become so affordable now that the government has stepped in and made sure that everyone could take out an infinite amount of non-dischargable loans.
Disaster relief? What has the government ever done? Other than set troops on the bridges leading out of New Orleans, of course. Never heard of the Red Cross? Imagine how many more organizations like that we would have if people A had more money in their pockets, and B, we didn't have regulations preventing new organizations from competing with ancient ones for donation dollars.
If you are harmed, or if your property values are reduced by nuclear waste processing facilities, then SUE THE ONES RESPONSIBLE. But of course, such travesties as this only acutally occur in mixed markets, where government permission is given, and the little people are told to shut up and die. Of course, in a free market, we wouldn't have nuclear waste, because nuclear waste is valuable fuel. Free market nuclear reactors would only create short lived fuel that could be stored on site for 30-odd years and then disposed of safely.
What fools such as yourself don't understand is that the only way for a government to give you all those things that you want is for them to sell themselves to monied interests. They then spread all kinds of propoganda, and warp the definitions of words such that they can blame the effects of their fascism on the free market, even though any semblance of a free market is nearly 100 years in the rear view mirror.
so the most efficient way to fight crime is to abolish street police and simply hire trial lawyers to file civil suits against the burglars and murders?
I think trial lawyers fund all libertarians
Damn I love it when people can't understand your arguments, so they stick absurd words in your mouth.
Smells like victory.
yeah providing an analgoy as thought expirement is putting words in your mouth...rather I'm trying to equate common solutions to everyday problems and see how they play out, but I get by your tone you are not really into thinking about this, you got your idea, you are smarter than everyone else, and I'm just an idiot for providing a real world example of different solution.
I could go on and on about all the examples where a democractic enforcement is more efficient than each individual suing...but I made a quick analogy that I thought would provoke some back and forth...
I dont know what it is about libertarians, but they often seem so dismissively arrogant to me, like nobody could reject their ideas if someone has possibly thought about them... so anyone not a libertarian is obviously ignorant and uable to think outside the box...well I have thought about this often, and long and I have heard many arguments like yours before, I have considered anarchists, libertarians, read many books, reread history, and I just dont see stateless being best solution.
I know you don't agree, but why are do assume a quick analogy is the sum of my thoughts and take such glee in supposedly winning an argument...is that what this is about winning, being the smartest guy in the room.?...I just want things to work the best for the most folks, and I'm sure you do too, I just see unions of people in democratically controlled govt the best most efficient way to do that, you would rather rely on every man for himself with a little refereeing...but I'll let you define your philosoply yourself, in case you think I am putting words in your mouth...
In his first post, TMose said, when referring to the State, that: "They need to enforce the law (don't murder, don't steal, don't trespass, don't assault, don't bear false witness)" - where does he say there should be no police?
I have considered anarchists, libertarians, read many books, reread history, and I just dont see stateless being best solution.
Well, as he's pointed out what he considers to be valid roles for the State, he's not talking about statelessness, is he?
I just want things to work the best for the most folks, and I'm sure you do too, I just see unions of people in democratically controlled govt the best most efficient way to do that, you would rather rely on every man for himself with a little refereeing...
Just one straw man after another with you, isn't it?
If you are harmed, or if your property values are reduced by nuclear waste processing facilities, then SUE THE ONES RESPONSIBLE. But of course, such travesties as this only acutally occur in mixed markets, where government permission is given, and the little people are told to shut up and die. Of course, in a free market, we wouldn't have nuclear waste, because nuclear waste is valuable fuel. Free market nuclear reactors would only create short lived fuel that could be stored on site for 30-odd years and then disposed of safely.
Fools such as myself? Remember Bhopal? The Union Carbide incident? Ethyl IsoCyanate? Ring any bells?
http://en.wikipedia.org/wiki/Bhopal_disaster
Union Carbide poisoned a bunch of people who had no money - big corporation poisoned peasants. HOW THE FUCK COULD THEY SUE? How can people living in tin huts in Nigeria afford to sue when the oil companies pollute their environment? How can people with no money sue a corporation that fucks them over because the companies operating in an environment where they could get away with anything because there was almost no regulation? There are SO many examples of companies doing this. They do it more in countries where the general population could never afford to sue.
You say Free Market would make sure nuclear was clean? WHY WOULD THEY? You really believe this?
I hate over-regulation, but if you're saying that everything would be fine in the absence of any regulation then all I can say is that I really, REALLY hope that you and your kids end up in just such a society. You deserve it and I wish upon you the society that you wish upon yourself - but I bet it's not as nice and "everything-takes-care-of-itself" as you think it will be.
I'm no apologist for the bastards who are fucking us over right now - I would see them hang - but the idea that, for example, a self-regulating nuclear industry (or many other industries) would do the right thing is fantasy.
Fundamentals!
It's easy to start defending ANY position without having to go back and establish how it came to be. I argue that the likes of Union Carbide couldn't possibly exist/have existed without the aid of large governments. East India Company, let's start there and go forward?
NOTE: I differ from the others in the fact that I do NOT believe that "free" anything would make a fundamentally dangerous thing (concentration of power thing again!) like nuclear waste "good." Anything outside of nature's scale/sense of time is in violation of the natural law of things...
lol, you think that India or Japan has a Free Market. Again, you confuse the effects of government regulation with free market effects.
I guess you just don't understand that the corporate form is not compatable with the free market. Never has been, never will be. Until you understand that, you will forever be a slave. Bhopal never would have happened in a free market, because the owners of the COMPANY (not corporation) responsible would have not only been financially liable from thier own money, but also CRIMINALLY liable. Many of them likely would have been executed for conspiracy.
Why would free markets make nuclear clean? Because they MAKE MORE MONEY THAT WAY (long lasting nuclear waste is by definition fuel--fuel they are currently throwing away at enormous expense). Current regulations make it literally impossible to open up a new nuclear reactor. They have to make due with what they have.
Governments have created enough armaments to destroy the world dozens of times over. Yet governments have never once tried to feed or cloth the world once over even though it would cost far, far less and would actually make people freer, healthier, safer and happier.
That single observation is enough to tell me that trust in government is purely a delusion. The free market can feed and cloth the world because there are billions of hard working and good hearted people who are more than willing to trade with each other or engage in charitable efforts but government stops that from happening. Governments make enemies of people who have never met and never will meet. Government takes half of everything we earn and so we can hardly take care of our own family and friends let alone all the others we would like to help.
The government you describe cannot possibly fit any criteria of being small. It has to have total control over society to perform all of the roles you describe. And to do this it has to tax people even harder over time in order to provide them services that they then become dependent on due to their inability to gain wealth, which leads to more tax increases, which leads to less savings and more dependency, etc. If you try to remove personal accountability all you will be left with is a society of slaves run by an elitist class of looters.
Yup. The road to hell is paved with good intentions.
Unless someone can find an existing model in nature (remember: humans ARE part of nature, not APART from nature!) I'll wager against it as being sustainable. Decentralization and diversity, that's how nature works, like it or not, that's the reality...