Dear friends of Istituto Acton,
The Trump administration’s current engagment in what it calls multiple “trade wars” – the raising of import tariffs in retaliation for higher tariffs on American exports – offers us yet another opportunity to reflect on the role of economics in contemporary society.
This is a good thing because economists are not particularly eager to explain why economic efficiency is so choice worthy. Economists usually premise their theories on abstract human beings (homo economicus) who want cheaper, better or simply more goods and services and don’t care where they come from. Voluntary exchange is a “win-win” transaction because each side knows its own interests and no one would willingly choose to be worse off in dealing with the other. The division of labor and following one’s comparative advantage lead to ever-increasing efficiency, with the general benefits to society overcoming any short-term disruptions to particular individuals and industries.
Of course, it’s an exaggeration to use the term “war” when It comes to matters of international commerce but it’s a telling one. There are no bombings raids or naval battles taking place between the US and China, let alone Canada, Mexico and the European Union. Defeated cities are abandoned instead of razed to the ground. The retaliatory tit-for-tat nature of raising tariffs, however, lends itself to military terminology. More importantly, there are clearly defined sides in war, always an “us” vs. “them”. Trade wars mirror military ones in making distinctions among human beings, something economic theory is reluctant to do.
Like pacifists, economists tell us there are no winners in war, just pain (namely, higher prices for consumers) on all sides, which is why so many economists are critical of Trump’s trade policies. The Trump administration admits that the economists have a point: Its ultimate objective is to have zero tariffs, at least with the European Union. “Free and fair trade” is how the president puts it.
The “fair” part of the equation is the tricky one for economists, because it raises questions of justice, equality and other non-economic goods. Once upon a time, left-wing labor unions and environmentalists used to insist that developed nations trade only with countries that share their labor and environmental standards, which would make trade with developing nations less likely. Now right-wing nationalists insist that we should take care of our own before worrying about the poor of other countries. If that means paying more for beer, so be it.
The protectionists will always be with us, it appears. From the economic point of view, trade barriers are irrational, the vestige of a past when governments decided what was best for their peoples. Those governments didn’t stop at tariffs; sometimes they enforced religious beliefs and other matters of identity, which often lead to conflicts and wars within and between countries. Liberal theories of government therefore began with an abstract human being in a “state of nature”, stripped of all his particularities, desiring limited governmental authority and the promotion of commerce in order to encourage peaceful cooperation.
Is this current bout of protectionism and economic nationalism a refutation of liberal democratic capitalism or a revelation of its inherent tensions? Economists are not so naïve to believe that businesspeople will not seek to gain unfair advantages over others, using the government to protect their market dominance and lock out competition. Such rent-seeking behavior and cronyism is as constant as concern for the working class and patriotism, so the right institutions and rules are needed to check bad behavior. These measures can make cheating expensive but imply that there are times cheating may be in one’s interest.
As the dominant social science, economics abides by the fact-value distinction; economists can tell us how to allocate scarce resources most efficiently but they can’t say anything about their intrinsic worth or purpose. Individual tastes and preferences are taken as givens, not something to be questioned or improved upon. De gustibus non disputandum est is the economist’s answer when it comes to questions concerning the best way of life. The mixed results are social peace and material prosperity on the one hand, moral relativism and eventually nihilism on the other.
We’ve seen this all before in the West. Rising nationalism and protectionism brought the first era of globalization to a crashing halt in World War I. The reluctance and inability of Europe’s ruling elites to deal with their political problems reflected a deeper crisis brought on by the “death of God” and the lack of any transcendental vision for society. Following World War II, the European Union sought to bind formerly warring nations together through trade and cultural exchanges, neglecting the political and religious aspects of society. The influx of immigrants, especially Muslims, has been a challenge for the European vision, to say the least.
The ambivalence of “free and fair trade” reflects the uneasy relationship between economics and politics in liberal democracy. Trump says he wants freer international trade, which implies letting markets function without undue governmental interference. He also wants to see more goods and services produced in America and is willing to use tariffs to this end. We put most of our time and energy into business and tend to be disgusted with politics, even as we clamor for governments to “do something” when things go wrong.
All of which is to say that economics, politics and even religion remain vexing issues for us. We’d like to keep each in its place, if we only knew what those places are.
Kishore Jayabalan
Director
