"Wherefore We must interrupt a silence which it would be criminal to prolong, that We may point out...as they really are, men who are badly disguised." Pope St. Pius X, September 8, 1907, Pascendi Dominici Gregis

Sunday, February 19, 2012

The “Free” Trade Fallacy

Kevin Casas-Zamora asks, in his childishly argued article with the same title, “why the discomfort over free trade?"

Directly to the point, the cause of free trade is virtually unknown in the world today. When it is discussed, the label is often misused by the over-educated, over-paid retainers of the American pseudo-elite to refer to a system in which the costs of doing business for large, well-established, well-heeled corporations are lowered in foreign countries by treaty or executive fiat. Actual free trade, as it will be seen, is never on the mind of policy makers, although they are happy to cloak their efforts in the theoretical veil of actual free trade theorists in order to give their policies a feel of intellectual legitimacy.

We can look at three different general indications that the present-day efforts normally grouped under the header of trade liberalization are actually the self-serving edicts of a corporate system out of control.

First, many foreign countries are acutely aware of the costs of "free" trade policies. Unlike the beauty of the truth that is to be found in David Ricardo’s theory of comparative advantage, which indicates that under true trade liberalization a country that is a relatively inefficient producer of all things can still benefit from trade with those countries more efficient, “free” trade as practiced by established interests in the West often only amounts to an enabling of Western financial institutions to lend freely

Because Western financial institutions are primarily a financial oligopoly enforced by the Federal Reserve system and backed by the ability of the Fed to create unlimited amounts of new credit, Ricardo’s theory is perverted: Western banks, having a comparative advantage in lending, which does have an air of superficial credibility due to the greater amount of overall capital accumulation in the West, inevitably push lending to an unhealthy level in the country where capital flows are liberalized, as they are enabled through the creation of new credit to push interest rates below that of the otherwise naturally occurring interest rate in that particular country. 

As we have seen previously, this causes people to feel richer than they are and to concomitantly misallocate resources. Beautiful apartments that sit empty because they are not situated in such a way as to be affordable to those who might use them, if correspondingly well-paying jobs were available or if the skill level of those in the area were sufficiently higher to justify the relocation of such jobs, are just one very visible example.

It does not take much imagination to see clearly the misallocation that takes place under “free” flows of artificial capital as advocated by Western banking interests. Instead of well-governed capital investment guided by inartificial, market-set interest rates, which would have allocated scarce resources to the types of investment which have the highest long-term return, such as industrial technology, and the improvement of intellectual capital, the resources flowed quickly to people who did not yet have the skill level to maintain such luxuriant infrastructure. While Spain in the aftermath of the 2008 financial crisis now contains many beautiful housing communities, the residences sit empty as the investment in productive facilities necessary to create the employment opportunities to support and make affordable these residences was never made.

A widened gap of wealth, between bankers who cannot efficiently unload these properties, hoarding them with no need to sell them at more affordable prices because they are kept in business via bail-outs by Western governments, and a class of  semi-permanently, structurally unemployed, whose future is constantly kept at bay because the Fed and their cadre of fellow central bankers never allow interest rates to adjust to natural market levels which would force a renewed reallocation of resources to more efficient uses, such as on-the-job retraining, is the result of the pursuing of  the pseudo-elite’s notion of “free” trade. Record unemployment is the result, as opposed to the benign effects of Ricardian exchange, which would otherwise lead us to a state of fuller employment. Does Mr. Casas-Zamora honestly have to wonder why what his institution advocates is “increasingly unpopular in the US and even more so in much of the developing world, certainly in Latin America?”

“The perception that the whole discourse and architecture of international trade smacks of double standards and hypocrisy,” as Mr. Casas-Zamora words it, is not mere perception. And the “serious economic and social disruptions” that accompany pseudo-elite sponsored “free” trade, which Mr. Casas-Zamora would parlay into an excuse for his colleagues in government to manage further tax-payer hand-outs to other similarly situated lackeys, are an inherent part of the very liberalization of capital flows that the interests Mr. Casas-Zamora represents covet. Indeed, Mr. Casas-Zamora goes as far as to admit that the policies of the ‘Washington Consensus’ are “seen as an orgy of corruption.” Perhaps if Mr. Casas-Zamora would open his eyes, he would see as well.

Second, we must address another theoretical façade used by the academic apologists of the pseudo-elite to help cover for why the gains of “free” trade are never realized by the typical citizen. Even with the misallocation of resources that comes with a free flow of capital based on the current Western model, such policies as decreased tariffs should indeed lead to gains in standards of living for all those affected. But why are these gains never felt sufficiently as to increase the public preference for increased legitimate free trade policies?

The human mind is often a very efficient estimator and is largely capable of seeing how a diffuse benefit to all may be worth a specific expense to an individual. Why is it then that academics speak of a ‘collective action problem’ in the case of free trade, arguing as Mr. Casas-Zamora does, that “the winners of trade liberalization – consumers, for instance – tend to be dispersed and unorganized?” If such academics had even a basic grasp of economics, they would realize the entire market edifice is created and governed by consumer preference. So well organized are consumers that they dictate the rise and fall of corporations, products, and even industries. Why would such savvy consumers be rendered unable to perceive the enormous benefits that follow from increased free trade of the Ricardian variety, even if, as in the case of the bankruptcy of Kodak, progress does impinge on the most immediate comfort of a few members of the consumer class?

Once again, as we have argued elsewhere, gains in overall productivity do consumers very little good if the Fed, through the creation of additional money supply, does not allow such gains to be realized by the public at large. If the money supply were fixed and due to a increase in actual free trade, resources are allocated more productively such that total output of an economy increases by a certain percentage, one would expect prices for such output to decrease by a corresponding percentage. In short, as supply increases, prices will fall. However, if this increase in abundance is met with an overall increase in the supply of money, given to such wealth-consuming entities as federal bureaucrats via the purchase of treasury bonds by the Fed, then the additional wealth generated will be bid away and consumed before it reaches consumers at large, leaving consumers paying inflated prices, feeling like the benefits of free trade are nonexistent.

The only collective action problem then is the collective actions of those in the pseudo-elite who prefer to corral the benefits of free trade for themselves alone.

The third point is an elaboration of what we asserted earlier in this essay, the “free” in “free” trade is reserved only for those already entrenched in the existing corporatist apparatus. Let’s say I wanted to start a bank or an insurance company amongst my friends, free from regulation by established interests. Aside from the many laws that prohibit such unregulated (read: unapproved by the pseudo-elite) financial arrangements and the unnecessary compliance expenses that present an artificial barrier to free entry into this industry, I would most certainly not be allowed to offer my banking or insurance services across the border, regardless on any “free” trade agreement in place.

However, “free” trade does make room for Monsanto to foist questionable products on unsuspecting foreigners and genetically modified foods on the world’s consumers. What is in need of regulation more, my desire to start an untested insurance company that could fail, preventing my small amount of clients from eventually receiving payouts, or Monsanto's attempt to redesign the genes of the world's corn crop, having completely unknown consequence's to the entire world's food supply?

Additionally,while Western banks and related corporations may be enabled to straddle the world with their fly-by-night operations, it is increasingly difficult for the U.S. taxpayer to open bank accounts overseas. And while the U.S. employment rate hovers at record highs, why is there no talk about increasing the ease with which laborers can exit the United States to seek out opportunities in the booming economies of Hong Kong, Singapore, Brazil, Chile or Australia?

There is indeed much discomfort with actual free trade today, but it is found amongst the pseudo-elite corporate structure. Until legitimate academic debate uncovers the one-sided, “free” trade policies promulgated by the Western pseudo-elite for what they are, entirely self-serving in effect and motive, Mr. Casas-Zamora’s only legitimate point will be that “free trade will be doomed to live dangerously…prevailing in scholarly debates and in little else."

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