I said in a previous post to Ed Weick "The whole comparative advantage
argument for free trade is bogus, even from the point of view of national
economic development (a subject for a future post)."
Here is that future post, in the form of an exerpt from my new book, The
Myth of Canada.
"Not every myth writer has been so disinterested, though. Henry Tudor
certainly wasn't and neither are today's mythmakers in the corporate world.
There is no difference between the way in which today's giant business
corporations use the mythology of the market to buttress their political
power and to create a new international charter for capitalism, in the form
of the MAI, putting them on a level with nation states, and the way in
which Henry Tudor and the Parliamentarians of 1640 used the myths of
previous golden ages.
Margaret Thatcher continually harked back to the First Industrial
Revolution as a golden age of free markets for Britain to emulate. Yet it
reflected social reality then no more than it does now. The English cotton
industry, the driver of that Revolution, was protected in its home market
by an embargo of Indian cottons and supported in its export markets by a
subsidy on printed goods. Goods imported to Britain could only be brought
in English ships, a rule enforced by the British Navy. The great Carron
ironworks in Scotland, where Watt began his experiments with improving
Newcomen's steam engine, was heavily subsidized and supported by generous
contracts for artillery from the British Army and the British Navy (the
heavy naval gun, the carronade, was named after the works, where it was
made). Henry Maudslay's specialized cutting and boring machines, which
were the first machine tools on which manufacturing industry came to be
based, and made identical parts which could be assembled without fitting -
another innovation of modern manufacturing (often attributed, incorrectly
to Samuel Colt), was all done under contract to the British Navy which
needed to rectify a shortage of blocks (devices used in great quantities in
the running rigging of sailing ships). That is to say, the state played a
heavy handed role in the first Industrial Revolution.
Moreover, it was achieved by ruining the Indian cotton industry through
trade restrictions, and heavily subsidized by cheap cotton fibre produced
by black slaves on plantations in the Carribean and the Southern United
States. Nothing much free market about any of that. The financial capital
which made all this possible was obtained from the production of sugar in
the West Indies again using slaves and from the exploitation and plundering
of the Indian subcontinent by the East India Company. As the historian
William McNeill documented in The Pursuit of Power, the European Powers
expanded economically by using superior military technology to wrest
control of existing production and trading systems in the Indian Ocean, the
China Sea and the Americas from native rulers and traders. The gold and
silver earned from the sale of sugar ultimately came from Spanish mines in
South and Central America which were manned, again, by slaves who died in
their millions. Again, not much of the free market about all that.
Modern capitalism grew by exploitation of military technology by the state
for the benefit of traders and industrialists and by rigging markets
through state power. Britain in her time and the United States now have
only adopted free trade policies when they dominated the world economy and
had made it play by their rules on a precipitously slanted playing field.
Trade in free markets, poppycock.
The classical economic theory of comparative advantage, which is the
central myth used by the free traders, suffers, like all myths, from having
been abstracted from its original context and thus presents a distorted,
abstract and unrealistic view of the world. It was first proposed by the
English economist, David Ricardo in his Principles of Economics in 1817.
He based his discussion on an example of trade in wine and cloth betweeen
Portugal and England, an example which has been faithfully followed in
every economics textbook in the English language ever since. It has been
used to argue that free trade will always benefit everyone, even a country
which is a low cost producer of all goods. Ricardo's example of trade
between Portugal and England had a basis in a historical controversy over
the Anglo-Portuguese trade treaty of 1703. But let us begin at the
beginning, as we must if the issue is to be understood properly.
The real beginning of the story is a 1654 treaty between England and
Portugal which England gained use of Lisbon as a naval base and access to
the Portuguese market for cloth. By the treaty, Portugal gained England as
an ally in its war of independence from Spain. Portugal was a satrapy of
Spain at the time, though it had its own king, and had been in revolt since
1640. Spain eventually recognised Portugal's independence in 1668.
England gained an ally in its own efforts to prevent Spanish hegemony in
Europe. England's allies in the war were France and Sweden. It was
essentially a cleaning up operation from the Thirty Year's War (1618 to
1648) which was about religion and politics in the Holy Roman Empire (most
of present day Germany plus sundry other bits of Europe) which was ruled by
the Hapsburgs who also ruled Spain. The Spanish Hapsburgs had been put in
their place regarding the Holy Roman Empire, now they were being put in
their place in regards to their ambitions in the rest of Europe. England
sought the quid pro quo of exporting cloth to Portugal to help pay for the
war and the defence of Portugal. Spain eventually backed off it's
ambitions in the Treaty of the Pyrenees signed in 1659. Having Lisbon as a
naval base materially helped the alliance defeat Spain.
The Portuguese, once they had independence, reneged on the deal. This was
highly inconvenient for England at the time. It was fighting a series of
wars to contain the expansionary ambitions of the French under Louis XIV.
The linch pin of this whole strategy was the subsidies which England paid
to its allies, the Austrians and the Dutch, who fielded most of the armies.
Gold and silver on the barrel, so to speak, and Portugal had England over
it, for that was its primary source, through the abrogated trade deal. The
wily old King Manuel of Portugal by a commercial treaty of 1703 got from
the English a promise to allow Portuguese wine into England for two thirds
the duty paid by the French, who were the Portuguese wine trade's biggest
competitors in the English market. In return, exports of English cloth to
Portugal could resume. Everyone at the time thought that the English had
the short end of the deal.
Adam Smith, framed his discussion of the 1703 treaty entirely in terms of
the benefit to England from the flow of specie, though he did not mention
the background I have just presented. He framed it entirely within the
context of the mercantilist theory of economic development which states
that the country with the most gold wins.
The whole business of comparative advantage doesn't enter the discussion
until 1817 when David Ricardo published his Principles of Economics. It
was Ricardo who proposed that England didn't get the short end of the stick
after all. He reasoned that England gained in the deal because it was
exchanging a good which it produced comparatively efficiently for one which
it produced comparatively inefficiently in contrast to the trading partner.
It's scarce resources would thus provide a bigger bang for the buck if they
were diverted to cloth production from wine production and the cloth
surplus exported in exchange for wine.
All of this, was, of course quite abstract, as while England had been a
major producer of wine from the 9th through 14th centuries (and was in fact
accused by French wine producers of dumping cheap wine on the Continent!)
when the climatic warming known as the Little Optimum made it practicable,
she was not producing wine in 1817. Where the real problem emerges
however, is that free traders ever since have used the theory to justify
free trade on purely economic grounds, completely ignoring the political
realities that have always surrounded it and directed it in practice. It
is quite correct and all very nice to say that comparative advantage proves
gains from trade, but it totally ignores the fact that trade is never in
fact free and that it always serves a higher political purpose. And that
is as true today as it ever was.
More importantly, it only applies to established, stable economic regimes.
It does not apply to the turbulent periods during which new economic
regimes or economies are being created. An understanding of this point is
best approached through Complexity Theory. In Complexity Theory, there are
four possible states for a system: State One in which there is a single
equilibrium; State Two in which there are two or more equilibria between
which the system continually cycles; State Three in which the system falls
into chaos; and State Four in which the system bootstraps (self-organizes)
itself into a new State One or State Two. When a new regime is being
created, we have a State Four situation. Future growth is mazimized during
such periods by being in a position to influence the new rules of the game
and that in turn is influenced by how influential a player you are. To be
an influential player, you have to have leverage, which in the past has
meant denial of your market to others and being at the cutting edge of new
technologies (which gives you economic and military muscle).
The Theory of Comparative Advantage shows how you maximize wealth (ignoring
externalities) within an established State One economic system like Modern
Industrialism. It has absolutely nothing to say about how you maximize
wealth during a State Four. That is far better described by the German
School of economic development, started by Friederich List in the 1830s
after he carefully studied the way in which England had risen to her then
economic preeminence. It is the way in which Germany, the United States
and Japan caught up and then surpassed England. (As an interesting
historical sidelight, Richard Ely and John Bates Clark, who founded the
American Economic Association, received their economics educations in
Germany and set up the Association as a vehicle for the German School of
economics in the United States. They were also leaders of the Progressive
Movement, which sought to impose social rules based on Christian values on
the robber barons of America's industrial revolution of the late 19th
century and early twentieth century. There are interesting and compelling
parallels between the Progressive Movement and the Civil Society which was
behind the Seattle protests.)
So, comparative advantage is an example of a state one science. It is a
neat piece of Newtonian clockwork which ticks away in its case, isolated
from the real world of the dynamic social and political and ecological
context of the State Four situation we are now in. Like all state one
science it describes a temporary way station in a dynamic world.
Moreover, it contains an unstated assumption of the Enlightenment, the
notion that it is a natural state of affairs founded on natural advantages.
You will recall the fascination that Polynesians and Amerindians had for
savants like Rousseau, seeking "natural" human societies, before
civilization spoiled them. A large part of the fascination with science
was the conviction that answers lay in "nature" and could be found by
observing it. The English radical sects were convinced that God was to be
found in "nature". God had made nature and he could be found and
understood in it therefore.
But England raising sheep and producing cloth was not "natural". It was
founded on a long history of happenstance and deliberate human action, from
the introduction of sheep to England by humans, to the development of
advanced sheep raising and cloth production by the Cistercians hundreds of
years before. The Cistercians got into these activities not for economic
but for religious reasons. They were disgusted with the old sybaritic
monastic life and determined to live an ascetic life remote from the
temptations of civilization. Living remotely they had to be economically
self sufficient and efficient. England became the European centre for
woolen cloth production because the Cistercian originated industry was
there to build on and because of Edward III's need for revenue to fight the
French and his observation that the Dukes of Burgundy were wealthy because
they could tax the Flemish cloth merchants. He therefore established an
export tax on raw wool and from time to time banned exports altogether
(know in Flemish history as the Wool Famines), deliberately undermining
the Flemish cloth industry and stimulating it in England. He was helped by
the greed of the Spanish monarchs who drew revenues from wool and
encouraged sheep husbandry to such an extent that huge flocks of sheep
overtaxed the pastures and eroded the Spanish landscape to such an extent
that sheep farming dwindled to insignificance, laying the way open for
English domination (a pre modern example of ecological damage caused by
humans constraining a society economically).
What the relation of these events clearly shows is, that like all state one
models, the theory of comparative advantage does not describe the dynamic
circumstances which led to the emergence of the state one condition in the
first place, or the conditions by which it will descend into chaos, and
undergo a dynamic of self-organization to be replaced by another state one
solution (which will likely be ruled by an entirely different myth). That
all lies in the ecological effects of changing landscapes through new
economic activities (like sheep farming or three rotation agriculture or
deep plough cultivation) and in natural climatic cycles which can turn
England from an exporter of wines to France, to an importer from France and
Portugal, as happened between 1300 and 1400 AD, and in the inventiveness of
human beings which, as we have seen, is closely entwined with the history
and development of human consciousness (the nonconformists and the
technical innovations which drove the Industrial Revolution of the 18th
century, or the the Cistercians and the innovations which drove the
Medieval Industrial Revolution).
It also ignores the organic dynamic within the larger economic process. As
Portugal specialized more and more in wine it would have to put more and
more arable land and pasture into vines, thereby reducing sheep herds
(which provided most of the fertilizer for agriculture) and the production
of grain for bread (the staff of life). Other things being equal, these
events would cause the price of bread in Portugal to rise. Whether or not
Portugal would benefit from concentrating on wine production for the
English market thus depends on what happens to things like soil fertility
and the cost or living flowing from the concentration on wine production.
Moreover, in the long term Portugal would become locked into agriculture
and lose it's capacity to develop manufacturing industry, the wave of the
future, because the trade deal undermined the cloth industry out of which
the industrial manufacturing era was to develop. This in turn would
relegate it to the status of first a second class and then a third class
military power incapable of influencing the geopolitical events which would
set things like the ratio of agricutural to manufacturing prices and the
whole regime of trade and production and prosperity. In essence the treaty
locked it out of the next great state one to state four to a new state one
transition of the European economy. It is only just joining it now, 250
years later.
What we should not lose sight of is that the mythology of Modernism is just
that: a mythology. Modern myths like Locke's myth of property, or
Ricardo's Theory of Comparative Advantage, on which modern capitalism are
based, are no more complete and justifiable a picture of how the world
works or ought to work than their mythological twin, Newtonian science,
which we have seen to be an equally incomplete view of reality. The issue
always is: does the prevailing mythology fit the times ? Does it help a
society to move beyond where it is to a more desirable future which is
better in tune with reality ? Where does it place it in the power stakes
(and therefore its relative capacity to determine its own future)? These
are all questions which Canadians should be asking themselves as they
ponder what mythology will work best for them in a Post Modern world."
The prime issue for us now is that we are the middle of a State Four. Any
country which locks iself into a free trade agreement now, under rules
established essentially by the United States, will find itself repeating
Portugal's mistake of 1703 and it will pay the same price - it will be
locked out of the main industries which are the cutting edge of the new,
emerging State One/State Two and, like Portugal, be selling its future for
a mess of pottage.
So, I repeat, free trade poppycock !
Mike
