Ken Eisold Ph.D.

Hidden Motives

Another "Law" of Economics Bites the Dust

The freedom to trade

Posted Oct 10, 2014

“Since the 1970s, economic orthodoxy has argued for low tariffs, free capital flows, elimination of industrial subsidies, deregulation of labor markets, balanced budgets and low inflation.” That has been the conventional wisdom of mainstream economists, according to Jeff Madrick writing in The New York Times.

The idea is that barriers to trade distort free markets and, in the long run, are counter-productive to economic growth. Not surprisingly, though, as American workers have watched their jobs migrate overseas, they have clamored for protection. Their reaction has been viewed as short sighted by those economists enthralled by free market ideology. Eventually, they have argued, markets will balance out and the “invisible hand” will make sure we all profit.

To be sure, protecting obsolete practices and inefficient industries will slow the “creative destruction” that is the key to a thriving economy under capitalism. It benefits the few at the expense of the many.

But it turns out that, once again, the “laws” of economics don’t always work as expected. Madrick noted: “Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports.”

Worse, the following day in a comprehensive account of what it called the “great wage slowdown of the 21st century,” The Times noted that the “typical American family makes less than the typical family did 15 years ago.” That kind of decline has not “previously been true since the Great Depression

Oh! This has little to do with free trade and globalization. The news about the decline in the official unemployment rate last week was accompanied by a sobering report on stagnant wages. So, yes, there may be more jobs than before but they are paying less. The underlying news is that workers are being squeezed, if not one way, then in another.

Madrick went on to note that free trade “has created tremendous prosperity — but mostly for those at the top . . . . Little wonder, then, that Americans, in another Pew survey, last winter, ranked protecting jobs as the second-most-important goal for foreign policy, barely below protecting us from terrorism.”

So it may well be that, on the whole, free trade is a good thing, just as free markets generally are, but that is not the same thing as a law, an inflexible truth that reality compels us to obey.

Not surprisingly, this issue is tied to our rising income inequality. Those who have money have flexibility. Investors can switch out of one kind of asset into another. Money also allows them to switch out of investments altogether for a time if the economic climate is unfavorable to growth. Those who work for a wage have no such freedom. Economists will argue that then they can switch to other jobs. But even if their skills match the jobs available, recent history brings home the fact that there are fewer and fewer jobs to chose from.

So free markets, like free trade, largely benefit the free, those with sufficient resources to chose how to invest and where to work. This uncomfortable truth is masked by the statistics that smooth over the differences and make it seem that we are all equal participants in the global economy.

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