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How to Enrich a Country: Free Trade or Protectionism? - YouTube
Channel: The School of Life
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One of the most pressing choices facing
modern economies
[3]
is whether to adopt
[4]
a policy of free trade
[6]
or of protectionism,
[8]
that is, whether to encourage
[10]
foreign goods into the country with
[12]
minimum tariffs
[13]
and allow industries to relocate abroad;
[15]
or whether to make it hard for foreign firms
[18]
to sell their goods internally
[20]
and discourage domestic producers
[22]
tempted by cheaper wages in other lands.
[25]
It feels like a very modern dilemma,
[28]
but the debates between proponents of
free trade
[31]
and protectionism
[32]
go back a very long way.
[34]
The argument began in earnest
in Europe in the 15th century
[38]
with the formulation of a theory
[40]
known as mercantilism
[42]
the forerunner of what we today
[44]
refer to as protectionism.
[47]
Mercantilism was, like nearly
every economic theory
[51]
interested in increasing a nation’s wealth.
[54]
But, Mercantilists argued
[56]
that in order to grow richer,
[57]
a country had to try
[58]
to make as many things as possible
[60]
within its own borders
[62]
Nd reduce to an absolute minimum
[64]
any reliance on foreign imports.
[67]
The role of government
[68]
was to help local industries
[70]
by applying huge tariffs on imported goods
[73]
and discouraging foreign manufacturers
[75]
from competing with local players.
[78]
A strong country was one that knew how to
[80]
provide for itself
[82]
and could achieve almost total independence
in trade
[85]
a goal known as
[86]
economic
[86]
economic autarky.
[88]
The philosophy of mercantilism
reigned supreme
[90]
as the most persuasive theory of economics
[93]
until the 9th of March 1776
[96]
the publication date of possibly
[98]
the most important book
[100]
in the history of the modern world.
[102]
In 'An Inquiry into the Nature and
Causes of the Wealth of Nations'
[107]
the Scottish philosopher and
economist Adam Smith
[110]
attempted to dynamite
[111]
the intellectual underpinnings
of mercantilism.
[114]
Smith argued that the best way for
[116]
any country to grow wealthy
[118]
was not to try to make everything by itself,
[121]
for no country could ever hope
[122]
to do well in every sector of an economy.
[125]
Smith observed,
[126]
that countries naturally had
[128]
different strengths in particular areas
[130]
Some were great at making wine,
[132]
others had talent in pottery,
[134]
others still might be experts at making lace
[136]
and it was on such strengths
[138]
that every country should focus.
[140]
This was an application
[142]
at the level of nations
[143]
of a theory we can understand well enough
[145]
at the level of individual life.
[148]
If someone has a natural aptitude
[150]
for accountancy,
[151]
it makes no sense for them to spend
[153]
a considerable part of each day
[154]
trying also to make cheese,
[156]
to sew their own trousers
[158]
or to learn to play violin sonatas.
[160]
Far better for the accountant,
[161]
cheese-maker,
[162]
tailor and violinist
[163]
to specialize in
the areas in which
[165]
they each have the
greatest advantage
[168]
and then trade with others to
[169]
satisfy their remaining needs.
[172]
As Smith noted:
[173]
“It is the maxim of every
[174]
prudent master of a family,
[176]
never to attempt to make at home
[179]
what it will cost him more
[180]
to make than to buy.”
[183]
Smith emphasized that
if Britain could
[185]
produce woolen
goods more cheaply
[187]
than Portugal
[188]
and if Portugal could produce
[189]
wine more cheaply than Britain,
[191]
then it would be beneficial to both parties
[193]
to exchange the product they
[195]
could make at a lower cost
[196]
for the one they could only make
[198]
at a higher cost.
[200]
The overall wealth of both countries
[202]
would rise as labor and capital
[204]
would always be optimally employed,
[206]
directed to those sectors
[208]
where native skill and opportunity
[210]
was at its greatest.
[212]
The job of the government
[213]
was to recognise sectors where
[214]
there was a national advantage,
[216]
assist in the education of the workforce,
[219]
but otherwise, reduce tariffs
[220]
as much as possible,
[221]
and step out of the way.
[223]
With astonishing speed,
[224]
Smith’s theory convinced
most of the economic
[227]
and political classes of
[228]
north Western Europe.
[229]
In Britain, his ideas were
[231]
first put to a practical test
[233]
in relation to the primary foodstuff
[235]
of the nation:
[236]
corn.
[237]
Grain prices had, for many years,
[239]
been protected by government decrees.
[241]
Cheaper foreign grain had been kept out,
[244]
apparently in order to
[246]
protect jobs and national wealth.
[248]
But Smith’s ideas,
[250]
now driven forward
by his foremost
[251]
disciple David Ricardo,
[253]
proposed that all tariffs on imported grain
[256]
protectionist measures known as
[258]
The Corn Laws
[259]
were in fact obstacles to economic growth.
[262]
After bitter debates in Parliament,
[264]
the laws were repealed in 1846.
[267]
The result demonstrated both
[269]
the advantages and incidental
[271]
costs of Smith’s ideas:
[273]
the price of corn dropped sharply,
[275]
food became cheaper
[276]
and everyone, especially
[277]
the working classes,
[279]
had a lot more spare money
[280]
to spend on other goods,
[282]
This, in turn
[283]
grew the overall size of the
[284]
British economy,
[285]
so that it significantly outperformed
[287]
all of its European counterparts.
[289]
But – and it was a very big but
[292]
large swathes of British agriculture
[294]
went to the wall.
[296]
Cheap imported corn, from
[297]
Canada and the United States,
[299]
destroyed farms
[300]
and ways of life that had persisted
for centuries.
[303]
Smith’s theories were both correct
[305]
and, depending on where one was standing,
[307]
plainly agonizing.
[310]
An enduring problem for
the undoubtedly very
[312]
sound arguments in
favour of free trade
[315]
is that its human costs
[317]
have seldom been addressed
[318]
with sufficient passion
[319]
and ingenuity.
[320]
The cries of the dispossessed
[322]
have not been recognised for what they are:
[325]
threats to the entire stability
[327]
and moral dignity of a nation.
[329]
As has only gradually been realised,
[331]
the benefits of an open economy
[333]
can only properly bear fruit
[335]
if a series of steps are taken to mitigate
[338]
the attendant downsides.
[341]
Any nation committed to free trade
[343]
must tax the sectors of the economy
[345]
which have an advantage
[346]
and then use the money
[348]
to retrain those in the
[350]
sectors of the economy
[351]
with the gravest disadvantages
[353]
in relation to foreign competition.
[355]
Without such redirection of money and labor
[358]
a nation will become highly
[360]
unstable politically
[361]
thereby endangering
[362]
any progress that free trade has made.
[365]
Secondly, governments must enable
[367]
everyone in the economy
[368]
to find their own natural
areas of strength;
[371]
which means high levels of
investment in education
[374]
and a raft of measures to
maximize social mobility.
[377]
Monopolistic behaviour by the rich
[380]
endangers the integrity of a
free trade system
[383]
just as much as punitive import tariffs.
[386]
Intellectually, free trade has
[388]
undoubtedly won the argument.
[391]
When a Mexican worker can make a car
[392]
for eight dollars an hour,
[394]
whereas an American one
[395]
costs 58 dollars an hour,
[397]
it is clearly wise to allow Mexico
[399]
to do what it can do best,
[402]
whatever the effect on
American car workers.
[405]
However, defenders of free trade
[407]
have been grossly negligent
[408]
when it comes to instituting
[410]
the political programs necessary
[412]
to support the efficient
[413]
operations of the system.
[415]
It has forgotten the pain
[417]
of the car workers,
[418]
the coal miners and the steel makers.
[420]
And, in democracies,
[422]
there has been a heavy price
[423]
to pay for this neglect,
[425]
in the form of the rise of a new
[426]
class of mercantilists,
[428]
who have successfully argued that
[429]
barriers must again increase,
[432]
that a country should try to make
[433]
everything within
its own borders
[435]
to regain its greatness
[436]
and that cheap importers
[438]
are invariably the
[439]
destroyers of domestic jobs.
[442]
These arguments make no sense,
[444]
but so long as the proponents of free trade
[447]
fail properly to articulate a program
[449]
to remedy free trade’s operations,
[452]
whole nations will be seduced by the
[454]
easy promises of the mercantilists
[456]
and will suffer accordingly
[458]
until the distinctive wisdom
[460]
of Adam Smith can once more
[462]
reassert itself.
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