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Free Trade 20th Century Paradigm Breaking Down

April 6, 2011


Just fifty years ago, Keynes, having dissented from the nineteenth-century theory of free markets, began wondering about free trade as well. In a 1933 essay in the Yale Review called “National Self-Sufficiency,” he noted that “most modern processes of mass production can be performed in most countries and climates with almost equal efficiency.” He wondered whether the putative efficiencies of trade necessarily justified the loss of national autonomy. Today nearly half of world trade is conducted between units of multinational corporations. As Keynes predicted, most basic products (such as steel, plastics, microprocessors, textiles, and machine tools) can be manufactured almost anywhere, but by labor forces with vastly differing prevailing wages.

– The Free Trade Fallacy by Robert Kuttner, 1983

Now 26 million unemployed and underemployed, me included, personally know the punitive effects of “putative efficiencies” of free trade and painful “loss of national autonomy.”

Free trade, free markets, deregulation, two-party political system. These are the four major 20th century paradigms that are breaking down, meaning they have outlived their usefulness for the greater benefit of society. And all four are inter-related. As with all socio-economic change, cultural changes – demands meeting needs – often precede paradigm shifts. In between MAJOR shifts we find upheaval, conflict, and uncertainty. This is where we are at today. It is not only one paradigm shift we are experiencing though, but several. And we are seeing in some countries in the Middle East, where demands are not meeting needs, the people are rising up and tearing down the existing system. That’s the stuff of history. That’s the reference in our own Declaration of Independence.

To be sure, a series of events have prodded the process along, but it was well under way prior to those events. Let us understand that none of the four paradigms are part and parcel of our Declaration of Independence, Constitution or Bill of Rights, documents sacred to this nation of ours. Of the three great instruments of our founding though, the Declaration of Independence is the most profound and insightful, for it resonates to every free man or woman into the future and beyond. It is an affirmation of one’s freedom and independence BUT, more importantly, it is a constant reminder and warning that despots of all types, of all stripes, of all persuasion, within and without our country, will try to undermine the free man or free woman by implementation of systems or theories which in of themselves are oppressive. Thus, after the first paragraph of the DOI, we find the most beloved paragraph in American liturgy:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

This sublime paragraph reinforces the Introductory paragraph which states:

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

What many people fail to recall from the DOI is what follows AFTER the famous pursuit of happiness section…..

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

Prudence indeed now dictates our course of action. Everyday Americans have endured political and socio-economic exploitation for far too long in our country. And although no revolution of our system of government is required, a dramatic change is warranted to “abolish the forms” to which we, the people, have become accustomed. Those forms being free trade, unregulated business activities, and the two major political parties operating within our society, all of which no longer serve the best interests of the people of our great nation. For you see, society can change. We can choose the course of our destiny. Economic theories can be tossed out. Artificial political groups dissolved. New checks and balances implemented. But, it will take a re-dedication to our duty as citizens to throw off those who would usurp our well-being and our financial ability to pursuit happiness and stand in opposition to nefarious practices which exists only to serve narrow self-interests and not the greater interest or benefit of this nation and its people.

These four paradigms, through mutual reinforcement of one another, have caused great harm to our nation. Free trade has its roots in an 18th century man named, Adam Smith. He coined the phrase, the invisible hand. The invisible hand is a term used by Smith to describe his theory that natural forces guide free market capitalism through competition for scarce resources.

In a free market each participant will try to maximize self-interest, and the interaction of market participants, leading to exchange of goods and services, enables each participant to be better of than when simply producing for himself/herself. He further said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this “invisible hand” would guide market participants to trade in the most mutually beneficial manner.

Source: Investorwords.com/2633invisible_hand.html#ixzz1IlJoqXv1

Deconstructing Adams theory, we find currently in our modern world, free market adherents want to be free from regulation because they believe (and justify their actions accordingly) there is natural force that safely [implied] guides free market capitalism along. That’s the theory, that’s the ideology that free traders, free market capitalists, and global capitalists embrace. The Kochs, the GEs, the Alcoa’s and Coca-Colas, and all the rest of these like-kind corporations cling to this fabrication. Understand, any theory is a fabrication of ideas — and not proven as facts. There is no inherent underlying truth in economic theories. They are not scientific in nature. That is why they are bandied about so by economists and also why politicians throw them around with casual ease – when one does not work out…. they simply move to another one – one that looks more feasible, like trickle-down economics, another abject failure and worse, a ruse used by politicians to push fiscal policy which has led to dramatic wealth disparity.

I want the reader to read carefully about free trade…. it is a policy of our government embraced and exploited by business. Thus, we see the self-reinforcing circle of participants.

Free Trade, also called laissez-faire, is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports). A free-trade policy does not necessarily imply, however, that a country abandons all control and taxation of imports and exports.

The theoretical case for free trade is based on Adam Smith’s argument
that the division of labour among countries leads to specialization, greater efficiency, and higher aggregate production. From the point of view of a single country there may be practical advantages in trade restriction, particularly if the country is the main buyer or seller of a commodity. In practice, however, the protection of local industries may prove advantageous only to a small minority of the population, and it could be disadvantageous to the rest.

Since the mid-20th century, nations have increasingly reduced tariff barriers and currency restrictions on international trade. Other barriers, however, that may be equally effective in hindering trade include import quotas, taxes, and diverse means of subsidizing domestic industries.

Add this Kuttner comment:

… the trend is toward worldwide excess capacity, shortened useful life of capital equipment, and downward pressure on wages. For in a world where technology is highly mobile and interchangeable, there is a real risk that comparative advantage comes to be defined as whose work force will work for the lowest wage. In such a world, it is possible for industries to grow nominally more productive while the national economy grows poorer. How can that be? Source: The Free Trade Fallacy by Robert Kuttner, 1983

Thus, we see the impetus for U.S. businesses rooted in free trade/freemarket ideology to export American jobs to other countries.
They pay less wages, have no EPA to keep them from polluting, and pay less, if not any taxes. This leads to greater profit margins and increased wealth. The down side of free trade is less jobs and less well-paying jobs for citizens in their home country. And as we have seen, there is a gradual depletion of wealth for the masses and redistribution of wealth from profits by companies to those companies owners, stockholders, and investors who make their money oversees and do not reinvest nor pay taxes in their home country. There is no trickle down. Free trade and free market economics has created vast disparity of wealth and a new class system. This has been called “the great divergence of wealth“.

Global Capitalists – the New Aristocracy
It has taken a couple hundred years to displace long entrenched aristocracies. In between then and now, we have seen revolutions, the rise and fall of despots, fascists, communists, and various totalitarian regimes. Our own form of government – a democratic republic – is now under siege as global capitalism has ravaged our middle class, both blue collar and white collar. Global Capitalists are the new aristocracy. They hold the majority of wealth. They work with global central banks to move money within the financial markets – their playground. The trend started with the export of jobs in once key industries. In the 70s we saw the beginnings with the decline of the steel industry and textile manufacturing. We saw deregulation get a foothold in the 80s. The trend continued in the 90s with the passage of NAFTA. In the late 90s, we saw an influx into the U.S. of techno-workers from India and other countries. The cycle was then complete and has become even more entrenched and very difficult to break without introducing an alternative.

Ian Fletcher yesterday wrote in his piece, Why Public Support for Free Trade Will Collapse Soon: “A specific crisis has not happened to force the system out of its old way of doing things as the debacle in subprime mortgages upended our financial system in 2008 and made continuation of prior policy impossible whether anyone wanted it or not.”

I disagree. The sub-prime debacle — and this may be hard to grasp — was not the cause of the 2008 global financial crisis — it was the unregulated trading of credit default swaps which undermined the financial system and exposed the $62 trillion artificial paradigm. The subprime loans were mere widgets. Understand, the widgets can be anything of value: stocks, bonds, commodities, derivatives, carbon-credits, mortgage backed securities, etc. It is the faulty and risky process that facilitated the whole thing. The free trade, free market, unregulated activity AND lack of effective government oversight and intervention, led to gross unethical and illegal activities that spawned the great global financial collapse.

General Electric, which has reportedly collected about $200 million worth of tax credits, also increased its lobbying spending to almost $40 million in 2010.

These same participants now are trying to revive the game, to extend the paradigm. They are using millions to lobby our elected representatives – public servants – to weaken regulation, to lessen their tax obligation, to forestall any interuption or intervention of their activities. Our whole political process which is highly vested in political parties, is ineffective against these forces. From where I stand, the two-party system is inadequate and not up to the task of regulating and taxing corporations who are perpetuating an era of corporatism and oligarchy.

The introduction of multiple parties — Progressive, New Republican, Independent, Green party, or what have you, is required. I strongly believe we need at least five parties so as to not have the divisiveness in our politics AND to adequately represent the interests of human rights, labor, states rights, clean energy, environmental issues, and health care. I believe it should be a law.

Even Lincoln’s friends believed the speech was too radical for the occasion. His law partner, William H. Herndon, believed Lincoln was morally courageous but politically incorrect. Lincoln read the speech to him before delivering it, referring to the “house divided” language this way: “The proposition is indisputably true … and I will deliver it as written. I want to use some universally known figure, expressed in simple language as universally known, that it may strike home to the minds of men in order to rouse them to the peril of the times.”

I would hope Americans are roused these days to the perils of our time, and not by speeches or even the written word, but by the deeds of those who believe exploitation is acceptable. And more than that, that feelings of narcissistic entitlement emboldened by the false ideology of free trade, is unacceptable and must be rooted out of our American system of government and business conduct.

New Leadership in Business and Politics is the answer. Robert Kuttner suggested in 1983…

What, then, is to be done? First, we should acknowledge the realities of international trade. Our competitors, increasingly, are not free marketeers in our own mold. It is absurd to let foreign mercantilist enterprise overrun U.S. industry in the name of free trade. The alternative is not jingoist protectionism. It is managed trade, on the model of the Multi-Fiber Arrangement. If domestic industries are assured some limits to import growth, then it becomes rational for them to keep retooling and modernizing.

It is not necessary to protect every industry, nor do we want an American MITT. But surely it is reasonable to fashion plans for particular key sectors like steel, autos, machine tools, and semiconductors. The idea is not to close U.S. markets, but to limit the rate of import growth in key industries. In exchange, the domestic industry must invest heavily in modernization. And as part of the bargain, workers deserve a degree of job security and job retraining opportunities.


The Free Trade Fallacy by Robert Kuttner, 1983

Why Public Support for Free Trade Will Collapse Soon by Ian Fletcher

Lobbying for Tax Loopholes by Citizens for Ethics

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