Déjà Vu Again

Book Reviews

Against the Tide:  An Intellectual History of Free Trade
by Douglas A. Irwin
Princeton University Press, 1996, US$16.95

When I first read Hancock's Australia, it seemed that Australia had not so much had eight full decades of federal public policy as reiterations of the same two or three decades -- particularly when one compared "Black Jack" McEwan's "protection all around" of the 1960s with Earle Page's "New Protection" of the 1920s.  The policies even had similar denouements, with Australia doing worse than comparable countries when the world economy ran into problems:  whether in the Depression of the 1930s or in the 1974 and 1982 recessions.

More recently, the car and textile tariff decisions of the Howard Government's first term seemed to take place in a backdrop where the arguments which had been fought, and apparently won, over protection and free trade in the 1980s eerily might never have happened.

Actually, the latter feeling was a little too pessimistic -- the decisions only slowed down the rate of tariff cuts, they did not reverse or stop them.  And even "Black Jack's" policies were more sophisticated and forward-looking than those of the 1920s.  While the Depression was made far worse by the international adoption of "protection all round" which devastated international trade and thus global economic activity, the GATT was something of a saviour in more recent global recessions, acting to prevent another Depression in precisely the way it was intended to.  So, one can see some progress.

But, it is still progress of a very slow, two-steps-forward-one-step-back kind.  Which is precisely the long-term history of free trade, as Douglas Irwin's splendid volume shows.

Irwin does not attempt to write a history of public policy on trade, or the consequences of such policies.  Instead, he confines himself to the intellectual debate over free trade.  This he expounds brilliantly and clearly, displaying a deep grasp of the trade theory and a wish to inform which translates into a remarkably clear presentation of the ideas and arguments.

Reading Against the Tide, one quickly finds confirmation that the ideas served up as so "obvious" in the Op. Ed. pages of The Age or on the ABC are old ideas recycled:  ideas considerably more antiquarian than the free trade ideas they attack.

Irwin surveys the relatively meagre offerings of classical, early Christian, scholastic and natural law writings on international trade -- writings which, apart from the natural law theorists, often reeked of the standard intellectual (whether aristocratic or priestly) sneerings at merchants as vulgar and sinful (some things really do not change much) with strong doses of xenophobia and fear of foreign contamination (such as are frequently expressed about foreign ownership of Australian media, for example).  He then moves on to the mercantilists, who were much more favour able to merchants and much more impressed by the importance of international trade -- often to the extent of disparaging domestic production since it did not (in their zero-sum view of the world) add net value to the "commonwealth", such as occurred through profit-taking from foreigners.  Contemporary commentary which sees exports as "gains" and imports as "losses" recycle these same views:  all sellers are winners and all buyers are losers.  Which, of course, poses the question:  why is anyone silly enough ever to buy?

The mercantilists saw things resolutely in terms of a trumping national interest, which required that merchants be regulated so that they conformed with this national interest rather than following potentially wayward private interests.  A national interest that mercantilist writers were sure they completely understood.  Again, a familiar attitude from contemporary commentary:  "economic nationalism" being alive and well and advocated by the Democrats, Greens, One Nation, large sections of the ALP and many commentators favoured by The Age and the ABC.

Irwin identifies the original pioneer of serious analytical thought about trade as being Henry Martyn in his Considerations upon the East India Trade published in 1701 and reprinted in 1720, a work of which he writes "it would not be unreasonable to suggest that he surpasses even Adam Smith in his analytical contribution to the case for free trade" (page 57).  In this work, Martyn uses concepts of opportunity cost, efficiency and productivity.  He was conscious of going against received wisdom in arguing that the public benefit came from improving the volume of trade -- not the profits of particular manufacturers -- from allowing competition to drive innovation and from taking maximum benefit from the international division of labour.  In Martyn's eyes, to force more expensive domestic production in place of cheaper foreign production was simply to waste labour which could be far better employed in producing other goods so as to purchase such production.  Martyn understood the difference between the level of wages and unit costs of labour -- something that still eludes many commentators -- arguing that greater productivity is what secured prosperity.

Irwin goes on to cover the physiocrats and moral philosophy (Chapter Four), Adam Smith's pathbreaking synthesis creating a "systematic, coherent framework for thinking about the economics of trade policy" (Chapter Five), the outpouring of free trade classical economics, including the concept of comparative advantage:  that immensely powerful, and counterintuitive idea which shows how A and B can trade to mutual advantage, even when A is better at making everything than B (Chapter Six).  In Part Two, Irwin deals with controversies about free trade doctrine, tracing each back to its historical roots.

These controversies generally operated around exceptions to the general case for free trade.  The first, and most important, of these being Robert Torrens' terms of trade argument.  In work published between 1830 and 1844, Torrens -- who, along with David Ricardo, developed the concept of comparative advantage -- argued that the use of tariffs could change the terms of trade (the price of imports in terms of the price of exports) to a country's advantage, though global welfare was best served by unrestricted free trade -- since the benefits to the particular country were less than the losses imposed on others.  Torrens was subject to a torrent of abuse for his "heresy" before being rescued by John Stuart Mill's more rigorous restatement of his argument in 1844, with the final confirmation of basic elements of the theory coming from F.Y. Edgeworth in 1894.

But it was one thing to establish the theoretical basis for an optimal tariff, it is quite another for that to be translated into practical policies -- not least because of the effects of foreign retaliation.  As Irwin says, the most that can be shown is that, under certain circumstances, unilateral free trade can be undesirable.  A problem for which mutual agreement mechanisms for free trade (such as GATT) provide an answer.

The "infant industry" argument, scorned by Smith, endorsed in a brief passage by Mill and expounded forcefully by Friedrich List (though only for manufacturing:  List supported free trade for agricultural goods and raw materials and eventual attainment, under the right political conditions, of global free trade), has never attained the level of intellectual coherence to be more than a vague possibility.  Its defenders have never provided a case why any temporal problem would not be dealt with by capital markets or why any (unspecified) market failure should not be dealt with directly.

The "increasing returns to scale" argument advanced in the 1920s by Francis Graham, the "wage differential" argument advanced by Mihail Manoilescu in 1929, the "Australian case" for protection based on income distribution effects, Keynes's "macroeconomic" argument for protection and strategic trade policy have all been, in the end, shown to be very limited in their scope, serving mainly to better define and delineate the case for free trade.

Irwin concludes with an insightful chapter on the (very limited) role of empirical analysis in these debates and the difficulties economists have regularly pointed to in actually implementing interventions to genuinely beneficial effect.  Irwin's own final comment sums things up:  "if the historical experiences described here continue, free trade will remain one of the most durable and robust propositions that economic analysis has to offer for the conduct of economic policy" (page 230).

The trouble with a book like this is that none of the people who should read it will bother to.  They will, however, continue to advance arguments by-and-large refuted before the European colonisation of Australia.  Intellectual progress is a limited commodity.