Economics and empiricism

An economist friend sent me this article, in which Princeton economist Alan Blinder, one of the brains behind NAFTA and a famous votary of free trade, is cautioning against free trade! Her comment: "it goes to show the 'caste system' that is pervasive in all societies. When NAFTA happened, the very same arguments held, but the number of jobs affected were lower and more importantly blue collar. Now that white collar jobs are being affected, there is a scramble. Should the number of people being affected matter? From a Rawlsian perspective, it shouldn't. The upside maybe that economists are forced to re-think the assumptions of neoclassical theory!"

About the "caste" bias, I have to agree, although I'd call it a class bias. After all, free trade was, from its inception, nothing if not a middle-class ideology. It was a reaction to monopoly trade capitalism (others wanted a piece of the pie that was being hogged by various countries' East and West India companies).

As for Blinder rethinking economics, it's typical that alternatives begin to be considered seriously only when canonical figures of the dominant ideology do the rethinking. Unfortunately, the dialectical process happens within the elite class, not between classes, and elites do not perceive all of reality until someone comes and kicks them between the eyes. Some of us historians have been arguing for a long time that, while free trade is a great theory, it has simply not existed in the age of capitalism.

I've been teaching this theme in my history survey classes. The closest thing to free trade (though not quite) ended in the early 1500s, just before the development of modern capitalism. This was the maritime trade between Europe and coastal northern Africa, the silk route (China through Central Asia), and the Indian Ocean trade. Until the late 1400s, no nation dominated, nor attempted to dominate, trade or trade routes; merchants shipped whatever was in demand (luxury goods, mostly), and pirates sometimes pirated. The big changes came in the second half of the 1400s, with the growing use of sea routes, and the concomitant development of new technology to use guns at sea. This was quickly followed by heavy inflows into Europe of bullion from Latin America (and it reached China pretty quickly). Inflation in Europe made food unaffordable for the poor, but expanded global trade so that plunder from Latin America could buy luxury goods from Asia. However, the word "global" must be used with caution, because economies were less tightly integrated then, and interdependence was not comparable to today.

So that became the end of whatever resembled free trade. THEN came the development of modern capital, i.e. joint stock companies (first mercantile, later industrial/imperial). Capitalism developed perfectly hand-in-hand with large-scale slavery, land-grabbing, and plunder. The trade fueled by modern capital was never free; there was always land-grabbing on a massive scale, exploitative resource extraction from colonies, crop monopolies (e.g. Dutch would not allow anyone else to grow cinnamon in Indonesia), forced labor, illegal ways to force open markets (war, opium trafficking), outright monopolies and cartels... the list is endless. This is why I'm convinced large-scale profit generation is impossible without exploitation.

So I agree with all the economists that free trade is a great idea. But as a historian, I have to emphasize that it's an idea: it never existed in any stage of capitalism so far.

Coming back to classical theory, I wish economists hadn't been so devoted to it for all these years that no other models were developed. As a grad student of International Relations, I used to get frustrated that my economics professors were unable to seriously consider any other possibility than the classical model, even if someone pointed out that it did not apply or work universally. I thought, and still think, they were ideologically attached to the classical model. The irony is that anyone who questions or challenges it is seen as ideological (how the labels fly! Communist, Marxist, Socialist, etc), even though they may be raising perfectly reasonable and empirically based questions.

The Blinder article also dwells on another theme that I often think about, though of course my thoughts are crude and inarticulate: I think the US will be a sort of third world country in a couple of decades -- too many of its young adults (20-30 years old) are inarticulate in any language, their middle and high school education are generally of poor quality, they have no solid vision of their country's future, they earnestly believe their broken systems work -- "managed" healthcare, social security, eroding technological superiority, the electoral college, politically appointed judiciary, academic corruption, debt (or, as one of my venerable economics professors used to say, "borrowing from the future" -- yeah, right!), and they think moving three towns away is a culture shock. This is a newsworthy job after college? They just don't know how the world works.

Unfortunately, I'm not convinced India and China are necessarily going to become quite first world. When Europe and the US got rich, they did it by screwing people in Africa, the Caribbean, South America, China, India, and Southeast Asia. But for India / China to get rich, they have to screw people in their own backyard (any SEZ, for example), and that's always harder to do -- the worst of the violence is geographically too close to both, the conscience and the wealth.