Saturday, April 08, 2006

Free Trade: A Socialist Analysis

Free trade makes as much sense as a three dollar bill, and in fact, that is just about the extent of what it delivers to the working people and poor (e.g. the proletariat) of the world.

Martin Hart-Landsberg delivers a comprehensive dismissal of the free trade myth in the current issue of the Monthly Review (Vol. 57 No. 11). The most surprising part of his article, from my perspective, is that the WTO and other proponents of free trade actually 1) base their arguments in favor of free trade on the antique and simplistic concept of comparative advantage and 2) care about trying to fool us all into believing that free trade is good for the poor.

The 15 year experiment in neoliberalism is finally coming to an end. It is clear to the global proletariat that the lies of globalization lead to nothing but a race to the bottom for everyone other than the super rich. Peru is on the very of electing the latest in a series of socialist presidents in Latin America, perhaps the worst hit victim of neoliberalism (and its predecessors).

Nevertheless we have technocrats in Geneva, London and New York continuing to blindly tow the line of their capitalist masters, dazzling us with complex computer simulations of a bright future all the while ignoring the statistical reality of suffering evident the world over.

Fortunately there are a growing number of socialist economists who stand up to the pollyanna utopian visions of the neoliberal propaganda machine. One such, Hart-Landsberg delivers the death blow to Ricardo's comparative advantage in the following excerpts:
Arguments promoting free trade generally rest on the theory of comparative advantage. David Ricardo introduced this theory in 1821 in his Principles of Political Economy and Taxation. It is commonly misunderstood to assert the obvious, that countries have or can create different comparative advantages or that trade can be helpful. In fact, it supports a very specific policy conclusion: a country’s best economic policy is to allow unregulated international market activity to determine its comparative advantage and national patterns of production.


Mainstream economists, while continuing to accept the basic outlines of Ricardo’s theory, have developed refinements to it.


Like all theories, the theory of comparative advantage (and its conclusion) is based on a number of assumptions. Among the most important are:
  • There is perfect competition between firms.
  • There is full employment of all factors of production.
  • Labor and capital are perfectly mobile within a country and do not move across national borders.
  • A country’s gains from trade are captured by those living in the country and spent locally.
  • A country’s external trade is always in balance.
  • Market prices accurately reflect the real (or social) costs of the products produced.
Even a quick consideration of these assumptions reveals that they are extensive and unrealistic. Moreover, if they are not satisfied, there is no basis for accepting the theory’s conclusion that free-market policies will promote international well being. For example, the assumption of full employment of all factors of production, including labor, is obviously false. Equally problematic is the theory’s implied restructuring process, which assumes that (but never explains how) workers who lose their jobs as a result of free-trade generated imports will quickly find new employment in the expanding export sector of the economy. In reality, workers (and other factors of production) may not be equally productive in alternative uses. Even if we ignore this problem, if their reallocation is not sufficiently fast, the newly liberalized economy will likely suffer an increase in unemployment, leading to a reduction in aggregate demand and perhaps recession. Thus, even if all factors of production eventually become fully employed, it is quite possible that the cost of adjustment would outweigh the alleged efficiency gains from the trade induced restructuring.
It should be noted that despite the smokescreen of academic economic analysis it is quite clear that the capitalist class (if not the technocrats themselves) is fully aware of these false assumptions and does not at all expect free trade to operate in a way that is beneficial to trading partners nor the world poor. Indeed, the capitalists specifically do not want the system to work in a fair way because their prime motivation is the retention and consolidation of their own power, a project at which they excel.

Hart-Landsberg goes on to explain:
Although this bias is sufficient to dismiss the study’s usefulness as a guide to policy, its results are still worth examining for two reasons: First, the projected benefits are smaller than one might imagine given the World Bank’s unqualified support for liberalization.


If we were to take these numbers seriously, they certainly suggest that the third world has little to gain from an actual WTO agreement. As Mark Weisbrot and Dean Baker note in their critique of this study, “the removal of all of the rich countries’ barriers to the merchandise exports of developing countries—including agriculture, textiles, and other manufactured goods—would...when such changes were fully implemented by 2015...add 0.6 percent to the GDP of low and middle-income countries. This means that a country in Sub-Saharan Africa that would, under present trade arrangements have a per capita income of $500 per year in 2015, would instead have a per capita income of $503.”12 Moreover, as they also point out, these meager gains would be far outweighed by losses incurred from compliance with other associated WTO agreements.
Read the full Monthly Review article...

I'm no economist but $3.00 more a year per capita! I can guarantee you that won't pay the bill for the newly privatized water system, one of the strings the IMF invariably attaches to WTO compliance! Needless to say, this is leaving our friends at the WTO scratching their heads, while the pirates of capital laugh all the way to the bank (which of course, they own too).

Free trade is nothing but. The alternative to free trade is simple: give the people the ability to self determine their economic relations by allowing local, state and national governments to regulate trade and capital. These decisions must be based on the democratic will of the people, not closed door deals between the unelected bagmen on capital. Another world is possible, and socialism gives us the tools to put the necessary constraints of capital, freeing the wealth of the world to benefit all people instead of only the few.

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