A Case for Competitive Markets

Jim Carlton speaks at the launch of Richard Morgan’s “Lessons of the Global Finance Crisis: The relevance of Adam Smith on morality and free markets” HERE

“…this book is the most effective antidote I have seen in a long time to the inanity being peddled by those with a deep mistrust of the marketplace, usually coupled with a naïve confidence in the capacity of governments to produce results in areas outside their sphere of competence…

… The usual form of attack is to define free markets as laissez faire, anything goes forms of economic activity. As anyone who actually bothers to familiarize themselves with what Adam Smith actually said, and as Richard Morgan demonstrates, on no account does Smith advocate laissez faire. To quote Richard Morgan on page 47, “For Smith, a ‘well governed’ society provides for free competitive markets, law and order and infrastructure. If these elements are not in place, he warns, living standards will decline and indeed in extreme cases ‘go backwards.’

The use of the phrase “free competitive markets” is instructive. When we use the shorthand “free markets” we do leave ourselves open to willful or ignorant misinterpretation. Markets are not, in fact free, in the sense we mean it, if they are not regulated to ensure competition. Enemies of the market economy also seize on the word “deregulation” to suggest a descent into laissez faire…

… Another aspect of the Morgan book that appeals to me is that he has drawn from both Smith’s great works, The Theory of Moral Sentiments, and Wealth of Nations, to stress the underlying morality, and dare I say it, the deep compassion for the underprivileged, inherent in Smith’s writings.”

Comment
These few quotes from Jim Carlton’s speech at the launch of Richard Morgan’s new book are a blast of fresh air in Australian political economy.

In parts of the speech not reported here, Jim Carlton discusses the long term problems of the Australian economy and political policies followed by successive governments that shaped the legislative illusion that markets do not matter and can be replaced by lawyers and vested interest (a down-under version of the corporate state, if I may say so), until reality intruded and wage determination by courts, not free bargaining between employers and labour was gradually re-introduced in the 80s and 90s, leading to the strong economy Australia has today (unlike Britain, for example, which is now not the ‘sick patient’ of Europe, it having graduated to the 'sick man of the global economy' with pretensions that Britannia stills rules the waves) under the ‘spend and tax’ ‘labour’ government of Blair and Brown, since 1997.

As an example of the truth about Adam Smith’s intended legacy, which includes his Moral Sentiments, 1759, as well as Wealth Of Nations , 1776, Jim Carlton’s speech, and Richard Morgan’s “Lessons of the Global Financial Crisis”, are first rate introductions.

Buy Richard Morgan’s book from Amazon.

A Modern Moral Attrocity

Samuel Gregg post in Public Discourse (The Witherspoon Institute) HERE:

“Free Trade, utility, and the Good”, a response to Stefan McDaniel’s comments on Gregg’s “Free Trade”:

“No reasonable conception of the good can be limited to the economic realm, let alone utility. Unfortunately many contemporary economists do not see this, precisely because they are more-or-less utilitarian and positivistic in their outlook. In this regard, they differ from the founder of modern economics, Adam Smith. This much is evident from reading the corpus of Smith’s works, which traverse jurisprudence, philosophy, astronomy, and rhetoric, as well as economics. But while prepared to countenance particular forms of protectionism in a very small number of instances, Smith was not convinced that significant restrictions of trade within and between nations would help facilitate human flourishing within communities. Neither am I.”

“As a form of economic and social organization, guilds often began with a concern to produce a certain product of a certain quality. But they invariably became preoccupied with determining who could and could not engage in certain occupations or produce certain goods and services. Being what we would call today “closed shops,” they disliked free trade and competition—domestic or foreign—because it threatened their monopolies and often made available to consumers better, newer, and less-expensive products than those produced by guilds. A similar logic was recently at work with the recent effort of organizations such as the United Steelworkers to persuade the Obama Administration to raise tariffs on Chinese-made tires for the next three years.

The same insularity encouraged by various forms of protectionism also actually discourages nations from worrying about other countries’ economic problems. A good example is the fierce resistance of European and American farming lobbies to permitting developing countries wider access to European and American markets. Many developing nations would escape their poverty far more quickly if the highly protected American and European agricultural markets were “de-insularized.” But this would mean removing the legal and economic privileges presently accorded to many American and European farmers. They will never give up these privileges without a fight, no matter how much such measures impede developing countries’ emergence from poverty…

Smith was deeply conscious of the moral challenges posed by the emerging commercial society of his time. Rather than seeking to resolve real and imagined conflicts between human flourishing and market-oriented economic development through government intervention, however, Smith sought to achieve a similar end through infusing this new society with a synthesis of commercial, classical, and Christian virtues. As Ryan Patrick Henley illustrates in his excellent book, Adam Smith and the Character of Virtue (2009), Smith was convinced that human flourishing was possible for people living in modern commercial societies that embraced free trade with relatively few caveats. So am I.”

Comment
I agree with much of Samuel Gregg’s post. Particularly, the moral attrocity of the European and US protectionist policies against the poor world's agriculture. It's also bad long-term political eocnomy.

I recommend that you follow the link and read it.

Ryan Patrick Henley is a foremost US authority on Smith’s Moral Sentiments (I have heard him lecture twice on TMS and on both occasions was impressed by his authoritative content and his excellent communication style). I await high expectations the arrival of his new book, Adam Smith and the Character of Virtue, 2009.

Did Britain Ever Adopt Free Trade?

John V.C. Nye’s paper, “Political Economy of Anglo-French Trade, 1689-1899: Agricultural Trade Policies, Alcohol Taxes, and War” is published by the American Association of Wine Economists, as AAWE Working Papers, no 38 Economics, HERE:

From the Abstract:

“Britain – contrary to received wisdom – was not a free trader for most of the 1800s and, despite repeal of the Corn Laws, continued to have higher tariffs than the French until the last quarter of the century.

War with Louis XIV from 1689 led to the end of all trade between Britain and France for a quarter of a century. The creation of powerful protected interests both at home and abroad (notably in the form of British merchants, and investors in Portuguese wine) led to the imposition of prohibitively high tariffs on French imports -- notably on wine and spirits -- when trade with France resumed in 1714. Protection of domestic interests from import competition allowed the state to raise domestic excises which provided increased government revenues despite almost no increases in the taxes on land and income in Britain. The state ensured compliance not simply through the threat of lower tariffs on foreign substitutes but also through the encouragement of a trend towards monopoly production in brewing and restricted retail sales of beer (which began around 1700 and continued throughout the eighteenth century).

This history is analyzed in terms of its effects on British fiscal and commercial policy from the early 1700s to the end of the nineteenth century. The result is a fuller, albeit revisionist account of the rise of the modern state that calls into question a variety of theses in economics and political science that draw on the naive view of a liberal Britain unilaterally moving to free trade in the nineteenth century.” (JEL Classification: F13, H20, N40, N43, N53, O13, Q17)

Comment
I received this paper this morning and was immediately attracted to it by the abstract.

Regular readers may have noted my occasional comment that Adam Smith’s free-trade reputation is often exaggerated and as often it is associated with claims that Wealth Of Nations ushered in an age of free trade policies in Britain. The mercantile political economy, of which Wealth Of Nations was heavily critical, is supposed to have been replaced by grateful legislators persuaded by Smith’s arguments.

I have long suspected that this picture is not just over done; it is absolutely wrong.

The end of the first British empire following the loss of the British colonies in most of North America (Canada, a prize won from the French, remained under the jurisdiction of Britain – from 1789 France turned in on itself; and the Caribbean island prizes remained slave colonies) did not usher in an era of free trade.

The old mercantile habits continued, and with them the lust for empire was nurtured.
In 1788 the penal colony of New South Wales was founded, to which New Zealand was added and the rest of Australia followed, by which time the disgrace that was India under the East India Company was taken over directly by London and the elements of the second British Empire took shape.

Into this mix, the idea grew that British foreign and domestic policy was one of free trade and the end of mercantile political economy with its regulations, restrictions, special interests, and jealousies of trade. I suspect this picture is untrue and I look forward to reading John Nye’s paper as a contribution to correcting part of the image.

I doubt if mercantile political economy has ever really gone away from Britain despite Adam Smith and the Wealth Of Nations and all the talk of major changes in the 19th century. The so-called industrial revolution – more like slow and gradual partial industrialisation – which produced the illusion of success affording the governments of the day the means to practise ‘business as usual’.

I shall keep you posted.

Trade is Beneficial But Not Free

Peter Cresswell writes in the (exciting) Not PC Blog (. . . promoting capitalist acts between consenting adults’) HERE:

‘ANZAC WEEK: The Horsemen of non-apocalypse’

Trade. Trade works. Trade is simply the voluntary exchange of goods and services to mutual advantage. In the words of the economists, when I trade my apples for my neighbour's oranges, it is because I value the oranges more than my apples, and my neighbour values my apples more than his oranges. We both see mutual advantage in the exchange, and since both sets of goods are each moved from a 'lower value' to a 'higher value,' the nett result of this and every voluntary trade is that both traders win - everyone kicks a goal! -- and from each trade new wealth is created thereby: the economy is greater for the sum of the higher values achieved, and my breakfast table is richer by some freshly squeezed orange juice -- and my neighbours by my apples.

It us thus that men live by production and voluntary exchange, not by plunder. This is the benevolent 'invisible hand' of which Adam Smith spoke. It is a hand of peace, since as Frederic Bastiat observed, "when goods don't cross border, armies will." Countries that trade with each other don't go to war with each other: there's too much to lose.

"Free trade helps quell government's passion for war. It creates powerful lobbying groups on all sides that demand the preservation of peace and the triumph of diplomacy over hostility. International trade networks create intermediating structures of business relations that work as a barrier to bombs and belligerence.

Trade trumps conquest. Rather than seeing trade itself as a conflict, as something involving embargoes, sanctions and aggressive 'trade wars,' we should realise that peace and free trade are mutually dependent."

Let those who are actually concerned with peace observe, for example, that the free trade era of the nineteenth-century trade brought to the world the most peaceful century yet known. And in the twentieth century, post-war trade brought benefits to twentieth-century Germany and Japan that their earlier destructive attempts at conquest never could.

Comment
I agree with much of this article but a few caveats are called for.

‘This is the benevolent 'invisible hand' of which Adam Smith spoke’.

An exaggeration surely. I refer new readers to several article on Adam Smith’s use of the metaphor of ‘an invisible hand’ (you can down load my paper, ‘Adam and the Invisible Hand: from metaphor to myth’ from the ASLL home page; ‘click’ on message).

Bastiat was right in theory, but wrong historically, as is Peter Cresswell:

‘Countries that trade with each other don't go to war with each other: there's too much to lose.’

France and Britain traded with each other – and could have traded more, except for the mercantile political economy practised by All European governments, which Smith criticised in Book IV of Wealth Of Nations – and were at war several times in the 18th century and in the early 19th century when Bastiat wrote his article.

The problem is one of what David Hume called ‘jealousy of trade’ – the proclivity to treat neighbouring trading partners as deadly rivals, which festers into hostile actions and eventually into wars. Tariff protection often is a prelude to war. Armies cross borders in pursuit of commercial advantage, apart from wars of dynastic succession, of which there were many in Europe.

Trade is a civilising influence, but it is subject to ideology, religious extremism, passionate causes, economic illiteracy, politics and emotional ignorance. Add in mercantile fallacies, protectionism, discrimination, short-term advantage, and the cussedness of people, and Bastiat’s optimism is soon compromised.

All the more reason to make the case for free trade on sound grounds (and often!).