Kudos! Or half-kudos, to Bernie Sanders, to Donald Trump, and to the disgruntled white working class eager to vote for anybody but whomever's been elected before, for smashing the most sacred kewpie doll of economics (an academic field of pseudoscientists who chant mathematical incantations): Free Trade.
How sacred is the concept of Free Trade?
Paul Krugman, the Nobel Prize-winning economist who is also a columnist for the New York Times, and whose academic specialty was Free Trade, put it this way, "If there were an Economist's Creed, it would surely contain the affirmations 'I understand the principle of Comparative Advantage' and 'I advocate Free Trade.'"
The quote comes from a 1987 article, "Is Free Trade Passé?" It acknowledges that some aspects of Free Trade theory had been challenged, by reputable economists in respectable papers. He concludes that "Free Trade is not passé, but it is an idea that has irretrievably lost its innocence. Its status has shifted from optimum to reasonable rule of thumb."
That sounds like Reason and Reality had walked into the ivied halls of Princeton and the other universities of high repute. But they hadn't. They'd merely strolled across the quad then wandered off again. Even Krugman seemed to forget their brief visits. About a decade later, he wrote an article called "Ricardo's Difficult Idea," which sneered at intellectuals who didn't buy into the principle of Comparative Advantage. He felt there could only be three possible reasons: "(i) a desire to be intellectually fashionable; (ii) a harder concept than it seems; (iii) the aversion of many intellectuals to an essentially mathematical way of understanding the world."
Comparative Advantage is not terribly hard to understand.
Imagine that one country is a woman with children and a degree in accounting and another is a woman who is good at looking after children but has no degrees. Should the female accountant try to do her job and take full care of her children? Should the other woman limit her child care to 20 hours a week and commit the rest of her time to getting her own degree in accounting? The economist says that each should press their comparative advantage. The accountant makes a profit even after child care costs are subtracted from her income. The woman delivering full-time child care doubles her income.
In David Ricardo's original version, the countries were England and Portugal and the products were woolen goods and port. But it worked the same way.
It is so urgent to Krugman to demonstrate that it is wrong to oppose his "mathematical way" that he compares the resistance to Ricardo's idea to opposing Darwin's theory of evolution by natural selection. Because, according to Krugman, both are "grounded, at base, in mathematical models." This is a very peculiar assertion. I've read Darwin's Origin of the Species. There's not a mathematical model in sight. There's not even an equation.
What's going on? Is Krugman just lashing out after some irritating dinner conversations with people who were supposed to be smart but weren't? Actually, it seems that, like the rest of his profession, he has drifted back to the theological view, since the article contains this imaginary dialogue.
An opponent of Free Trade asks what happens if the Vietnamese, "who work for such low wages, manage to achieve Western productivity?"
"The economist's answer," Krugman says, is that "'if they achieve Western productivity, they will be paid Western wages.'"
That's what the theory, the math, and models say must happen. Reality gave a different answer.
Economists, as a group, did not rise up as revolutionary revisionists, crying out—as scientists ought—that Reality has spoken, Theory must change. To be fair, there are some new books and papers by economists that challenge the orthodoxies, and some of their ideas—due to the political fuss—have even made the osmotic journey to the media.
The problems of the American worker and the American economy stem, they mostly say, from globalization and technological change. Or maybe it's the low US savings rate. Then there are the foreigners putting their money in the US making the dollar strong and thus, American goods less competitive. Maybe it's the low interest rates. It could also be bad policy choices in Washington, going with housing and finance instead of industry.
That last begins to point the way. But it misses the real story.
It's about power.
Financial transactions are rarely, if ever, determined solely by some abstract equation of currency for value. There's always an element of power.
Financial interests—except for "please like me" public relations campaigns—don't fight for "truth, justice, and the American way!" They fight for advantages that will give them power against competing industries, their direct competitors, suppliers, employees, and against the communities, nations, and societies in which they operate.
Free Trade is one of the most powerful weapons they have. Nothing puts employees on their knees quicker than the threat, "We're moving the factory overseas." The same threat works equally well against municipalities and states. "If you want us to bring jobs, give us tax breaks, infrastructure, special deals, no liability for what we destroy! If we don't get that, we're outta here!"
Globalization is the next step.
Successful corporations and rich individuals become so because the societies in which they operate provide them with a store of knowledge; educated workforces with all sorts of skills; physical, financial, and legal infrastructures; protection against crime and foreign invaders. Globalization allows them to leave those societies and nation-states behind.
Halliburton was selected to spearhead the privatization of the Armed Forces by Dick Cheney when he was secretary of defense. When Cheney left that job in 1989, they made him CEO. He promptly increased the number of subsidiaries in offshore tax havens from nine to 44. Nonetheless, under his leadership they were headed over the cliff of bankruptcy. Cheney left them to run for vice president in 2000. Once in office, he led the charge to war with Iraq. Which saved Halliburton. Few companies owe more of their success—their very survival—to their country. They have now moved their headquarters to Dubai.
The second most famous financial success story of the Iraq War was Blackwater, also a private contractor. It's founder, Eric Prince, has moved on. He lives in Abu Dhabi. He heads up Frontier Resource Group, based in Hong Kong, using Chinese money to invest in Africa.
It would seem that if a nation makes military contractors rich, the least they would expect in return would be patriotism. Not anymore. They have been saved from that weight by globalization.