In a way it’s not surprising that protesters involved in Occupy Wall Street have been, as far as I can tell, silent about Steve Jobs because his death was so recent.  At the same time, it’s a little surprising to me that Occupiers haven’t used the opportunity to condemn someone who has been one of the leading members of the “1 percent” – corporate billionaires – against whom they have expressed such disgust.  From the perspective of most (though not all) of them, Jobs should have been Exhibit A in the case against capitalist exploitation.  Even though his personal wealth is said to have exceeded $8 billion, I haven’t been able to find very much in the way of outrage against him or his company.

Instead, young and old around the world have mourned his passing and displayed heart-felt gratitude, even reverence, for a man who in one generation changed for the better the lives of nearly everyone on the planet.  California Governor Jerry Brown declared October 16 Steve Jobs Day.  Far from being vilified, his life has been celebrated internationally almost like that of a secular saint.

Is it because, like Bill Gates and Warren Buffet, Jobs has given billions away through a well-endowed charitable foundation?  Turns out there isn’t anything like a “Steve Jobs Foundation,” nor does Apple today even have a philanthropic arm, at least not since Jobs dismantled it in 1997.

No, I believe it’s because in Jobs’s case it’s so painfully obvious, especially to the generational and cultural demographic to which most of the Occupiers appear to belong, that his business acumen and the massive profits it has earned him and his company have improved the quality of life for a large chunk of humanity to a level few could have imagined in 1976 when he and Steve Wozniak founded Apple.  The convenience, profitability, and sheer coolness that Apple and its host of competitors and providers in the high-tech industry have made possible is simply undeniable.  Where would we be without the iPhone, iPad, iPod, or the Mac – and their imitators at Google, Amazon, and elsewhere?

What Has Steven Jobs Given Back to Society?

But no large-scale philanthropy?  Where’s the outrage?  Or as some might put it, “What has Steve Jobs given back to society?”  Most of us, though I suppose not everyone, recognize at a gut level the sheer absurdity of such a question.

The charities of Gates, Buffett, Soros, Bloomberg, and Turner are certainly praiseworthy.  At the same time they really didn’t have to do this to elevate our material standard of living; their businesses did it just by buying and selling stuff. But what about Jobs?  Didn’t he get rich off our backs?

Well, could it be that when I paid $140 for my iPod that in fact I valued it more than the $140?  Could it be that Apple valued my $140 more than the iPod?  And could it be that people who work for and supply Apple value the incomes and payments more than the services and goods they sell to Apple; and that Apple values what they offer more than what it pays them?  Could it be, in short, that these voluntary exchanges take place because the parties expect to gain more than they give up?

If so, would it make much sense for me to ask Apple to “give back” to me the profits it earned from my $140?  Well, that would make about as much sense as it would for Apple to demand that I “give back” whatever value I get from my iPod over and above the $140 I paid for it.

What about Sam?

And how is Steve Jobs different from the late Sam Walton, whose Walmart discount stores have made life more comfortable, convenient, and less costly for the demographic they serve – lower- and middle-income working families in the suburbs?  Perhaps Walmart’s products don’t appeal to the tastes of those occupying Wall Street, either in Zuccotti Park or in the office buildings that tower over them.  But, like Jobs, the competition he brought to the retail business has benefited them all.

Jobs is just an extreme example of business men and women and entrepreneurs who make their living, not by government intervention, but mostly by voluntary exchange.  From the pushcart vendor to the trucking company to the mall developers to the big Wall Street financial concern, insofar as they make their profits without resorting to political power, all do their part, though in a smaller way, to benefit those with whom they buy and sell.

Did Walton and Jobs ever take a government handout or gain from government regulation? I’m told that Walmart benefited from eminent domain and Apple from patent enforcement. So while they were probably not “pure” in that sense, they were more so than the car manufacturers, financial companies, labor unions, and others that would have disappeared long ago without government privileges and bailouts.  From my perspective, of course, those are the crony capitalists the Occupiers should mainly be targeting and to some extent have been.

An Aha! Moment?

It’s hard to live pure in a mixed economy.  So I’m not criticizing the Occupiers for using iPhones or Twitter or the cheap bottled water produced by the capitalism most of them hate.  I work for the State University of New York and my salary comes from taxpayers even though I’m committed to the principle of voluntary exchange.  I might well lose in a contest of libertarian lifestyle purity (as would U.S. Rep. Ron Paul).  What I’m after isn’t purity of ideological lifestyle but simply intellectual consistency . . . and honesty.

Either Steve Jobs is among the worst of profit-seeking capitalists (even if he got rich largely without government privileges) – the worst 1 percent of the repugnant 1 percent — or he’s not.  And if Steve Jobs is honored for the way his corporate juggernaut made life better for most of us, then so should Sam Walton be and for the same reason.  Some might respond to this by saying, “Right, we should despise Steve Jobs!” but I’m pretty sure few would.  Maybe I have too much faith in common sense.

Let’s honor the Steve Jobses (and Sam Waltons) of the world; but let’s also recognize that it’s the market (however hampered today) that makes them and their contributions to humanity possible.

But is the sector too small? In an article titled “Yes, American Manufacturing Really Is in Trouble” (Huffington Post, February 11), free-trade critic Ian Fletcher says it is.

To judge whether a sector of the economy is too small, we need criteria. Fletcher writes: “Unfortunately, the only rational standard for how much America should produce is how much Americans wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it” (italics in original).

But if that were the only way, Fletcher should be content—yet he’s not. Why not? Because, as he well recognizes, it’s not the only way, and that’s why he wrote his article. He notes two ways that we consume what we get from foreigners besides selling them goods and services: 1) by selling them assets (these assets are produced, but that’s not what he means) or 2) by borrowing. He objects to both.

He writes: “And this is where American manufacturing is clearly falling short, because America is running a huge trade deficit in manufactured goods, and we don’t produce enough of anything else (raw materials, services) to cover the gap. So instead we borrow and sell off existing assets to pay for imports.”

Fletcher’s ideal is becoming clear: The “right” amount of manufacturing is achieved when the amount the United States spends on other countries’ manufactured goods (and I think he means to include raw materials and services) just equals the amount foreigners spend on our manufactured goods, services, and raw materials. In short, Fletcher’s ideal is a zero trade balance.

He’s almost right that if we have a trade deficit, which we do, we will have to borrow from foreigners or sell assets. Why almost? Because Fletcher leaves out two other possibilities. First is that foreigners will want to invest directly in the United States. Second is that they will want to hang on to some dollars: The U.S. dollar is still the closest thing there is to a world currency.

It’s true that the increases in foreign direct investment in the United States and in dollars held are substantially smaller now than the sale of assets and the increase in borrowing. So let’s grant that most of the trade deficit will be paid for with borrowing and asset sales. What’s wrong with that? In a later article, “The Biggest Bubble of All Has Yet to Pop” (Huffington Post, February 17), Fletcher explains: Americans will own fewer assets. That does seem like a problem, doesn’t it? Let’s dig further.

If the capital stock is growing quickly enough, even if foreigners own more of it, Americans might own more too. It’s true that private investment has declined, something likely due to President Obama and Congress making investors unsure about health care and other regulations in the future. Between 2008 and 2009 the value of the U.S. capital stock fell by about 2 percent. By the end of 2009 foreigners owned about $21.1 trillion of the $48.5 trillion U.S. capital stock–over 40 percent. Sounds scary, right? But it overlooks that Americans own $18.4 trillion of the rest of the world’s capital stock. So the U.S. “net international investment position” was negative $2.7 trillion, or less than 6 percent of the U.S. capital stock. Interestingly, even though “our” ownership of “their” capital is less than theirs of ours, in 2009 “we” made $121 billion more on them than they made on us. That suggests the U.S. government’s data underestimate the value of U.S. investments abroad or overestimate the value of foreign investments here, or both.

Bonds and the Trade Deficit

One of the main U.S. assets that foreigners invest in is Treasury bonds. If the federal government reduced its budget deficit, now running at more than $1 trillion annually, there would be fewer bonds for foreigners to buy. That wouldn’t necessarily cause our trade deficit to fall because if foreigners see private U.S. assets—corporate bonds, for example—as good substitutes for U.S. government bonds, they might simply shift to buying more. Still, private assets are unlikely to be a perfect substitute for government debt, and so reducing the budget deficit would probably reduce the trade deficit somewhat.

It’s also true that if we Americans increased the percentage of our income that we save, we would buy some of those bonds and buy fewer foreign goods and services, again reducing the trade deficit.

Fletcher recognizes these facts. In his February 17 article he writes: “It is indeed true that if we take our low savings rate as a given and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better.”

But Fletcher doesn’t want to take this low rate of saving as given. He wants a higher rate. Fine. There are two ways to accomplish this. The first is to reduce the budget deficits of the U.S. federal, state, and local governments. In 2009 they totaled a whopping $1.272 trillion, which exceeded net private saving (personal and corporate) of $945 billion. The result: a negative saving rate for the economy as a whole. Have the government spend less, and the net saving rate would probably increase. It’s still not clear, though, that we would manufacture more.

The second way to increase saving and thus reduce the role of foreign investment is for us individually to spend less and save more. Fletcher seems to like this idea, asserting that “domestically-financed investment is obviously better because then Americans, rather than foreigners, will own the investments and receive the returns they generate.” But how can he know whether it’s better for you to buy an iPhone or to put more money in your IRA? He doesn’t. Neither do I. I’m more humble than Fletcher: I want you to be able to choose. Do I trust your choice? Not necessarily. But I think you have the right to make even bad choices.

So what is my criterion for the “right” size of the manufacturing sector? Simple. The right amount of manufacturing is the amount that would be achieved if the government did nothing to distort people’s choices. Let’s focus on getting rid of government distortions and not attack the symptoms, if they are indeed symptoms, of those distortions.

How an Economy Grows and Why It Crashes is Peter Schiff’s most recent effort in that regard. Bypassing the academic crowd and avoiding an eye-glazing academic approach, Schiff and his brother Andrew have tried to grab readers’ attention with an amalgam of allegorical storytelling and current events. They aim to promote real economic comprehension.

The book’s introduction starts with a lucid explication of the key elements of Keynesian economics—showing how John Maynard Keynes, by making “something simple seem hopelessly complex,” paved the way for acceptance of “some very stupid ideas about what makes economies grow.” In chapter 1 the authors shift into allegorical mode, weaving a tale about a Crusoe-type economy based on fishing. Here they introduce the reader to the rudiments of capital theory. The story progresses logically from there. The use of capital leads to both greater wealth and income inequality. Then comes a cogent discussion of the counterproductive effects of forced income redistribution.

Next they turn to the role of saving—how it serves as the source of credit and a cushion permitting people to get through emergencies and how, contra Keynes, it is the true key to economic growth. In addition the authors correct the common misinterpretation of deflation—not as the disaster depicted by Ben Bernanke and his ilk, but as a key channel through which prosperity spreads. They proceed to describe the benefits of free trade, dissecting the canard that it is a job-killer and pointing out that “it is not the aim of an economy to simply provide jobs, but to create jobs that maximize labor productivity.”

Notable in their discussion of government is an endorsement of restricting voting to those who pay taxes, an idea going back at least to John Stuart Mill. They argue that retreat from this stipulation accelerates a nation’s downward trajectory into an inflationary welfare state. The Schiffs elucidate the unaccounted-for implications of the many popular policies dragging economies down this path. Included among those are the replacement of a commodity standard with fiat money, subsidization of loans to politically favored sectors of the economy, and so-called “stimulus” spending—all central elements of Keynesian monetary and fiscal policy.

They finish their allegory with the inevitable upshot of those policies (given the lack of political will to incur the short-term pain that would stave it off): the decision of our international creditors to cease enabling our profligate ways by redeeming our dollars, unleashing massive price increases, and pushing our standard of living off a cliff.

It’s well argued, but I wonder if the book is written at the right level for its intended audience. It is clearly not aimed at academics, which is too bad because many of them could use it the most. Rather it is aimed at noneconomists. Yet for the totally uninitiated I fear that it may throw too much at them too fast, without sufficient explanation. One can only hope they will be interested enough to seek the requisite explanations from other sources rather than throwing up their hands in frustration.

Also, I found the pervasive fish metaphor tiresome—not to mention that fish are too perishable to ever be used as a monetary commodity. (On p. 159 the Schiff brothers do mention the advantages of precious metals as money.) While I realize this is an allegory in which some literary license is permitted, the cost of this aspect of the story in reader confusion and lack of credibility may be high.

On the other hand I do like the way each allegorical chapter is followed by a takeaway that uses the principles presented to shed light on real-world events. Knowing that the authors of this book wrote it to share the economic insights that enabled them to predict the onset of our current recession, I hope my misgivings are unfounded because the lessons are ones all of us need to master.

Bastiat loved the market economy, and badly wanted it to blossom in full—in France and everywhere else. When he described the blessings of freedom, his benevolence shined forth. Free markets can raise living standards and enable everyone to have better lives; therefore stifling freedom is unjust and tragic. The reverse of Bastiat’s benevolence is his indignation at the deprivation that results from interference with the market process.

He begins his book Economic Harmonies by pointing out the economic benefits of living in society:

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions [a] man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries.

What makes the phenomenon stranger still is that the same thing holds true for all other men. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else.

Bastiat was not naive. He knew he was not in a fully free market. He was well aware of the existence of privilege: “Privilege implies someone to profit from it and someone to pay for it,” he wrote. Those who pay are worse off than they would be in the free market. “I trust that the reader will not conclude from the preceding remarks that we are insensible to the social suffering of our fellow men. Although the suffering is less in the present imperfect state of our society than in the state of isolation, it does not follow that we do not seek wholeheartedly for further progress to make it less and less.”

He wished to emphasize the importance of free exchange for human flourishing. In chapter four he wrote:

Exchange is political economy. It is society itself, for it is impossible to conceive of society without exchange, or exchange without society. . . . For man, isolation means death. . . .

By means of exchange, men attain the same satisfaction with less effort, because the mutual services they render one another yield them a larger proportion of gratuitous utility.

Therefore, the fewer obstacles an exchange encounters, the less effort it requires, the more readily men exchange.

How does trade deliver its benefits?

Exchange produces two phenomena: the joining of men’s forces and the diversification of their occupations, or the division of labor.

It is very clear that in many cases the combined force of several men is superior to the sum of their individual separate forces. . . .

Now, the joining of men’s forces implies exchange. To gain their co-operation, they must have good reason to anticipate sharing in the satisfaction to be obtained. Each one by his efforts benefits the others and in turn benefits by their efforts according to the terms of the bargain, which is exchange.

But isn’t something missing from this account?

Indeed, there is: the subjectivist Austrian insight that individuals gain from trade per se. For an exchange to take place, the two parties must assess the items traded differently, with each party valuing what he is to receive more than what he is to give up. If that condition did not hold, no exchange would occur. There must be what Murray Rothbard called a double inequality of value. It’s in the logic of human action—the discipline Ludwig von Mises christened praxeology. Bastiat, like his classical forebears Smith and Ricardo, erroneously believed (at least explicitly) that people trade equal values and that something is wrong when unequal values are exchanged.

Perhaps I am too hard on Bastiat. After all, he was writing before 1850. Carl Menger did not publish Principles of Economics until 1871. Yet the Austrians were not the first to look at exchange strictly through subjectivist spectacles—that is, from the economic actors’ points of view. The French philosopher Étienne Bonnot de Condillac (1715–1780) did so a hundred years before Bastiat wrote: “The very fact that an exchange takes place is proof that there must necessarily be profit in it for both the contracting parties; otherwise it would not be made. Hence, every exchange represents two gains for humanity.”

Well, perhaps Bastiat was unaware of Condillac’s argument. That is not the case. He reprints the quote above in his book and responds:

The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. . . .

The exchange represents two gains, you say. The question is: Why and how? It results from the very fact that it takes place. But why does it take place? What motives have induced the two men to make it take place? Does the exchange have in it a mysterious virtue, inherently beneficial and incapable of explanation?

We see how exchange . . . adds to our satisfactions. . . . [T]here is no trace of . . . the double and empirical profit alleged by Condillac.

This is perplexing. Clearly, the necessary double inequality of value is not empirical or contingent. Contra Bastiat, the double inequality explains quite a lot, and his questions all have easy answers.

Yet more perplexing still is Bastiat’s statement in the same chapter: “The profit of the one is the profit of the other.” This seems to imply what he just denied.

Bastiat’s failure to grasp this point had consequences for his debates with other economists. For example, he and his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate over whether interest on loans would exist in the free market or whether it was a privilege bestowed when government suppresses competition. Unfortunately, the debate suffers because neither Bastiat nor Proudhon fully and explicitly grasped the Condillac/Austrian point about the double inequality of value. As Roderick Long explains in his priceless commentary on the exchange:

[E]ach one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it. . . .

Proudhon’s case against interest seems to depend crucially on his claim that all exchange must be of equivalent values; so pointing out the incoherence of this notion would be a telling reply. But Bastiat cannot officially give this reply (though he comes tantalisingly close over and over throughout the debate) because elsewhere—in his Economic Harmonies—Bastiat explicitly rejects the doctrine of double inequality of value.

How frustrating! Bastiat has so much to teach. But here is one blind spot that kept him from being even better.

For the first time in 16 years the U.S. economy was reclassified from “totally free” to “mostly free.” But wait: The United States was totally free economically until 2010? That’s enough to suggest that the Index focuses on quite a narrow range of “economic freedom” criteria, rather than looking critically at the forms of State intervention most structurally important to the survival of big business and corporate power.

For example, by any valid measure of economic freedom, the passage of the WIPO Copyright Treaty, the Uruguay Round TRIPS (Trade-Related Aspects of Intellectual Property Rights) Accord, and the Digital Millennium Copyright Act would have been considered an upward surge in statism and protectionism unequaled since (at least) the Smoot-Hawley Tariff. “Intellectual property” is every bit as much a form of protectionism as are tariffs. Patents and copyrights serve exactly the same protectionist function for transnational corporations that tariffs did for the old national industrial corporations; in both cases they restrict who is permitted to compete in offering a given good to a given population.

But among the inside-the-Beltway “free market community,” Heritage is one of the staunchest advocates of global “intellectual property” enforcement expansion. Indeed, two lines out of six in its summary concerning its metric for “Property Rights” in the United States are taken up by this: “A well-developed licensing system protects patents, trademarks, and copyrights, and laws protecting intellectual property rights are strictly enforced.”

One-Sided Index

There are other suggestions of the one-sided nature of the Index, as well. For example, under “Labor Freedom” it simply states that “dismissing an employee is not burdensome.” Never mind for the moment that, from the standpoint of an employee, a bit of contractual security might be a good thing. (I doubt if the people at Heritage would generalize this disdain for contracts to all their other commercial dealings.) What’s important is what the article doesn’t say: “Quitting without notice is not burdensome.” In fact it is not burdensome; workers in most states are at-will employees unless a union contract specifies otherwise. But Heritage doesn’t consider the contractual burden on the worker or lack thereof a sufficiently important issue even to bear commenting on—and this in a section titled, mind you, Labor Freedom, not Employer Freedom.

The problem is that an index, ostensibly put forward as a general survey of economic freedom as such, is really a survey of economic freedom primarily as it affects the minority of the population that owns considerable amounts of capital and employs others. The idea that being employed is an economic activity, and that those who are employed have economic interests as much as those who do the employing, doesn’t even appear on the radar.

Yet another example of the Index’s bias is its “concerns” regarding bailouts of automakers over “expropriation and violation of the contractual rights of shareholders and bondholders.” Bill Beach, director of the Heritage Foundation’s Center for Data Analysis, laments that “the rule of law declined when the Obama administration declared some contracts to be null and void. For example, bondholders in the auto industry were forced to the back of the creditor line during bankruptcy.”

But note the glaring lack of concern for contractual rights guaranteed under GM’s contracts with the UAW. This one-sided concern with impairment of the obligation of contracts is fairly widespread on the “free market” right. The same people who protested the loudest about bailout “blackmail” in interfering with CEO salaries and benefits, oddly enough, were by and large also the source of the most strenuous calls for using Washington bailout money as a hammer to “impose discipline” on auto workers. So apparently, for a certain breed of “free market” advocate, the differential between a GM and Toyota assembly line worker is problematic—but the differential between a GM and Toyota CEO isn’t. What’s that thing I was saying before? Contractual security is a good thing—for everybody but workers.

This shortcoming is compounded by Heritage’s endorsement of Bush Treasury Secretary Henry Paulson’s original TARP program. Stuart Butler and Edwin Meese, in a 2008 article titled “The Bailout Package: Vital and Acceptable,” did express concerns lest the bailout take the form of a blank check—to the government, that is.

So they favored TARP, as such—a Hamiltonian program of using taxpayer money to prop up the bubble-inflated value of financial assets and preventing them from being marked down to market value. They just objected to any conditions on how the free money could be spent once the banksters got hold of it. I wonder how they feel about workfare. I understand that it was probably different people composing the different passages in question, but still it would be nice if the right hand knew what the further-right hand was doing.

Ignoring Primary Interventions

The Index fails to distinguish between the primary, structural forms of government intervention that prop up corporate power and the secondary, ameliorative forms of intervention that attempt to moderate its side effects. The State enforces a whole host of artificial property rights and artificial scarcities that serve as sources of economic rent to privileged firms, and maintains all sorts of regulatory cartels. The cumulative effect of these privileges, artificial scarcities, and cartels is to sustain corporate power on a global scale and create vast disparities in wealth.

These forms of intervention, these primary grants of privilege, don’t show up very prominently on the Index of Economic Freedom. What does show up is mainly the kinds of fiscal and welfare-state interventions that serve to limit the exercise of State-granted privileges and make corporate power less galling to average people. Is it only “statism” when it benefits someone besides the rich?

In fairness, while Heritage supports many of the legal privileges that serve as entry barriers at the national level, the Index does at least acknowledge barriers to small business formation at the state and local levels, comparing them favorably to other places: “The overall freedom to start, operate, and close a business, regulated primarily at the state level, is still strongly protected [in the United States]. Starting a business takes six days, compared to the world average of 35 days. Obtaining a business license takes less than the world average of 218 days. . . .”

The same critique applies to other indices of “economic freedom,” as well. For example, like Heritage, the Economic Freedom of the World Index (Fraser and Cato institutes) treats voting for anything called a “free trade agreement” as a proxy for supporting free trade. [Editor's note: See comments for correction.] Economist Dean Baker ridicules mainstream journalists for taking the “free trade” label at face value when the primary purpose of such agreements is to boost “intellectual property” protectionism rather than to reduce tariff protectionism. In the introduction to The Conservative Nanny State, Baker writes:

[N]ews reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”

It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition.

Nicholas Hildyard had a pretty good handle on what’s actually entailed in the neoliberal “free market” agenda promoted by these indices. The effect of the agenda “has not, in most cases, been to diminish either the state’s institutional power or its spending. Instead, it has redirected them elsewhere. It has also strengthened the power of many Northern nations to intervene in the economic affairs of other countries. . . .”

Of the kind of “privatization” that prevailed, for example, under Chile’s Pinochet and has since been promoted by assorted “structural adjustment” programs, Hildyard wrote:

While the privatisation of state industries and assets has certainly cut down the direct involvement of the state in the production and distribution of many goods and services, the process has been accompanied by new state regulations, subsidies and institutions aimed at introducing and entrenching a “favourable environment” for the newly-privatised industries. [“The Myth of the Minimalist State,” The Corner House, March 1998]

In practice, such “privatization” involves, first of all, spending taxpayer money on upgrades of State property to entice corporate buyers to take it off their hands—with the new outlays to make the property salable frequently exceeding the purchase price. The bidding process itself for State-owned industries and utilities has usually been governed by what Joseph Stromberg calls “funny auctions, that amounted to new expropriations by domestic and foreign investors” (“Experimental Economics, Indeed,” Mises.org, Jan. 7, 2004). The first order of business, subsequently, is massive asset stripping by the new corporate owners. And as Hildyard suggested, the newly “privatized” functions are carried out within a web of special regulations and protections to make sure the “private” firms are insulated from anything resembling genuine market competition.

A genuinely libertarian privatization policy, as recommended by Murray Rothbard in “Confiscation and the Homestead Principle” (Libertarian Forum, June 15, 1969), would treat State-owned utilities as the homesteads of those working them.

The same is true of so-called “deregulation,” which (as Hildyard pointed out) can more accurately be called reregulation. The nature of most so-called utility deregulation can be illustrated by the mid-1990s electrical “deregulation” in Texas, home of “free market” champions like Dick Armey and Tom DeLay. Writing at Mises.org, Tim Swanson stated:

[I]n the mid-90s, regulators, consumers and energy producers began to rearrange the market for “deregulation” in Texas. Incumbent providers such as TXU and Reliant were restructured in the name of free markets, but when the dust cleared, the only winners were members of the political class and corporations that had been State-sanctioned monopolies prior to the “deregulation.”

TXU was separated into two companies, Oncor and TXU Energy. Oncor was given the monopoly on all services including meter reading, energy delivery, etc. Additionally they own all of the poles and wires and are protected by law from competition. TXU Energy became a billing company (and owner of power plants), merely forwarding all of the customer service questions and problems to Oncor, and therefore providing no services themselves.

This is akin to the following: splitting AT&T into two separate companies, one (Nexis) that owns all of the cables, wires, PBXs, switching stations, call centers, etc. and provides all of the services, repairs, installations, etc., and the other company (Willy) whom [sic] simply sends you a bill at the end of the month, providing no value-added service.

Not only is it not deregulation (the same players exist with State protection) but more overhead is created through the creation of another billing company. [“Texas Sized Tomfoolery,” Sept. 9, 2003]

When the mainstream press and mainstream politics identify the narrow analysis associated with the indices as “economic freedom,” it’s no wonder that most people are wary of “free markets.” If I didn’t know better—if I didn’t know that real free markets were like kryptonite to corporate power—I’d hate them myself.

Anyone expressing skepticism about this is sure to be confronted with the oil embargoes of the 1970s. According to popular belief, Americans suffered in that decade because the OPEC nations stopped oil shipments in retaliation against the U.S. government’s Middle East policy. The nation was at the mercy of malefactors who held its lifeblood in their hands. That crisis had American officials talking about war (the “low-cost option,” one high-ranking bureaucrat called it), and the military was restructured accordingly.

The lesson? America must not let foreigners control its economy through access to needed resources.

Except that’s not what happened.

As Donald Losmam wrote in a 2001 Cato Institute paper, “Far too much of the economic debacle of the 1970s has been attributed to OPEC and the price hikes and far too little to U.S. government policies — both pre- and postembargo.”

People forget that in 1971, two years before the first embargo, President Richard Nixon imposed price controls on the U.S. economy in an ill-conceived attempt to curtail inflation. For Americans, oil and gas were kept artificially cheap, pumping up demand – and creating shortages and long gas-station lines — when world demand and prices were already rising. “[D]omestic price signals were misleading and promoted vulnerability to price and supply disruptions,” Losman wrote. The government tampered with the price system, and an economic debacle resulted. Where have we heard that before?

What effect did the 1973 Middle East war have on things? “When war broke out in the Middle East October 1973, an OPEC delegation had been in Vienna negotiating with the big oil companies for yet another round of price increases,” Losman wrote. “The timing was fortuitous for Arab suppliers, who would drape their price-raising production cutbacks in the flag of Pan-Arab rhetoric. Acting opportunistically, non-Arab cartel members went along for the ride.”

Note this well: “Despite the embargo, U.S. oil stockpiles fell only slightly, and, by March 1974, they were growing again” (emphasis added).

Symbolic Embargo

The embargo was a flop. As the Saudi oil minister put it, “[T]he embargo was more symbolic than anything else.” How can that be? The minister had the answer: “[T]he world is really just one market.”

Losman explained: “[S]upplies meant for other consuming countries were diverted to the United States.” But that did not ease things for American consumers because the U.S. government still controlled domestic prices. The regulators raised them, but not nearly as much as the world price had risen. As economist Paul MacAvoy summed up: “[R]egulation created the effects of the embargo … and the FEO [Federal Energy Office] gets the credit for the energy crisis perceived by consumers in 1974.”

The terrible seventies, then, were not the result of anti-American oil sheiks shrewdly manipulating the U.S. economy for political or religious purposes. The injuries were self-inflicted – or U.S. government-inflicted, to be precise.

The lessons from that decade, then, are these:

1. Don’t interfere with the price system, and
2. Don’t worry about embargoes.

The second may seem more controversial, but think about it: Oil producers need to sell their oil. They have nothing else to do with it. If they won’t sell it to Americans, they will sell it to someone who will sell it to Americans. That’s true for other commodities as well. Keep the trade channels open, and we have little to fear. We don’t need to be perpetually prepared for war to save the economy. What believer in the efficacy of markets could disagree?

The Great Myth

This point was made recently by Bruce Fein, a conservative lawyer who worked in the Reagan administration and at the Heritage Foundation. Writing in The American Conservative magazine, Fein quotes President Dwight Eisenhower as an exemplar of the view he plans to demolish. Eisenhower said,

From my viewpoint, foreign policy is, or should be, based primarily upon one consideration. That consideration is the need for the U.S. to obtain certain raw materials to sustain its economy and, when possible, to preserve profitable foreign markets for our surpluses. Out of this need grows the necessity for making certain that those areas of the world in which essential raw materials are produced are not only accessible to us, but their populations and governments are willing to trade with us on a friendly basis.

Before getting to Fein’s response, I note that Eisenhower’s position, which faithfully captures the ruling elite’s historic approach to foreign policy, violates the classical-liberal spirit as well as free-market principles, since it inevitably assigns a major economic role to politicians, bureaucrats, and generals in the service of special economic interests. Furthermore, it sullies the freedom philosophy by associating it with a picture of the less-developed world as a mere convenience for the United States, both as supplier of raw materials and as consumer of what American manufacturers can’t sell domestically at desirable prices. In other words, it rhetorically links the free market with empire, although these things have no true relationship whatever. Unsurprisingly the U.S. record on the ground is less free market and more imperialist. This criticism did not originate with Marxist-Leninists but with free-market advocates like Richard Cobden and John Bright. Joseph Schumpeter later elaborated the point.

Fein, author of the newly published American Empire Before the Fall, rejects Eisenhower’s statement completely: “[I]t is founded on a myth. Neither the United States nor any other nation has ever been deprived of essential goods and brought down by economic warfare. Smuggling, bribery, and middlemen eager to make money invariably evade the tightest embargoes.”

The economic-security argument for a war-ready global military presence is worse than wrong. It’s dangerous since it is sure to create peril instead of averting it.

As an example of the latter, consider radio host and writer Lou Dobbs, who dismissed concern for consumers in his book Exporting America, where he wrote, “I don’t think helping consumers save a few cents on trinkets and T-shirts is worth the loss of American jobs.” Similarly, then-Senator Barack Obama told a stadium filled with cheering union members in 2007 that “people don’t want a cheaper T-shirt if they’re losing a job in the process.” The idea here is that desire of consumers to save money should be trumped by the supposed need to “save jobs.”

Griswold points out that politicians generally favor “the noisy producer interests over the silent, suffering consumer” and reminds the reader that life itself depends on consumption. To that end, he quotes Adam Smith in The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promotion of the consumer. The maxim is so perfectly self-evident that it would be absurd to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end and object of all industry and commerce.

The problem, of course, is that there is usually political advantage in running a “mercantile system” that benefits some domestic producers at the expense of consumers—and other producers who need the “protected” goods to make their own products.

Griswold’s tour de force explores and documents the many ways in which import competition benefits American consumers, enabling them to improve their standard of living with a greater range of choice, lower real prices, and better quality. Those are not insignificant benefits. When the likes of Dobbs and Obama ridicule free trade as merely a matter of saving a small amount on T-shirts and trinkets, they’re giving a deliberately distorted picture of reality.

Big-box retailers, such as Walmart, Home Depot, and Best Buy, that purchase much of their inventory from overseas producers and ship it to stores in the United States, managed to hold their sales fairly steady or even increase them during the current recession. But what was good for those chains and their customers was sour news for organized labor. Unions often demand a “level playing field” and claim that foreign producers enjoy various “unfair advantages” such as a lower wage scale and export subsidies. When they call for tariffs, they say they don’t want special favors but only “fairness.”

Our author begs to differ. He explains to readers David Ricardo’s 1817 insight about comparative advantage—that each nation (or better still, each person or firm) will tend to discover where it has comparatively lower costs and then concentrate on producing those goods. Whether a producer’s cost advantage is “fair” or “unfair,” the best policy, Griswold argues, is for the government not to interfere with trade. Instead of further building up trade barriers, as various special interests advocate, he urges that we drop the barriers that separate us from the peaceful global marketplace.

But what about American manufacturing? Won’t free trade reduce us to a “service economy” consisting of mostly low-paying jobs? Politicians and pundits have been saying that for years, but Griswold replies that it isn’t true. The number of Americans working in manufacturing has indeed fallen, but that is due more to increases in productive efficiency than to “unfair competition.” While protectionists like North Dakota Senator Byron Dorgan wring their hands over the demise of some household name products like Huffy bicycles and Swingline staplers, they neglect to mention that American manufacturing has significantly increased in real terms since 1970.

Furthermore, Griswold explains that the U.S. government is responsible for a huge “swindle” of consumers—our Harmonized Tariff Schedule, filling nearly 3,000 pages. Our sugar tariff, for example, compels Americans to pay two to three times the world price for sugar. In turn, that has caused American food producers to shift production to Mexico or Canada to escape the cost. Protectionist politicians never mention the flip side of their “save jobs!” coin.

The book’s closing paragraph states: “Free trade unites us with other people in an ever-widening ‘community of work’ that provides a powerful alternative to conflict and war.” I strongly recommend Mad About Trade.

The strength of the anti-globalist coalition has waxed and waned over time, but there is still a large number of people who believe that globalization is a sinister force that must be stopped at any cost. In Why Globalization Works, Martin Wolf does a fine job in showing why free trade ensures that the world’s economies continue to grow.

Wolf is the economics columnist for the Financial Times; he is the most libertarian voice in a newspaper well known for its stubborn hostility to classical liberalism. But in the 1970s, before he became a journalist, Wolf was an economist for the World Bank, where he saw firsthand how the bank’s lending for failed Third World planning schemes left some of the world’s poorest nations more destitute and debt-ridden then they were before the bank began to “help” them. This led Wolf to see that free trade is the best way to make sure that Third World countries are transformed from passive recipients of international aid to productive participants in the global economy.

Wolf is at his best when he refutes the facile claims of the foes of globalization. Among the charges he addresses:

• Corporations rule the world and force us to buy things we don’t want. In her 2001 book, No Logo, Canadian anti-globalist Naomi Klein explains that her hostility towards capitalism began in fourth grade, where “my friends and I spent a lot of time checking each other’s butts for logos. . . . [W]e were only eight years old but the reign of logo terror had begun.”

“In the last century,” Wolf notes, “millions of human beings knew the terror of police states, genocide, and government-engineered famines. But insists Klein, I and people like me have experienced terror too. We are not just the world’s most pampered brats. We know terror too: ‘logo terror.’ ” Wolf then shows that all the evidence suggests that consumers are less and less likely to buy products solely based on a brand name. And corporations, unlike governments, have no police or tax-collection agencies to confiscate people’s incomes.

• Under globalization, the Third World gets all the manufacturing jobs. An average Chinese worker may earn $750 a year while a German earns $35,000 and an American $29,000. But Americans and Germans are far more productive than Chinese workers are. This productivity advantage ensures that skilled workers in American factories earn their high salaries—and explains why makers of complex products such as airplanes or drugs are unlikely to move production overseas.

• Globalization has increased inequality among nations. In fact, Wolf argues, the reverse is true. Freer markets in China and India have resulted in dramatic increases in income levels in those two nations in the past decade, ensuring that hundreds of millions of Chinese and Indians are leading better lives. Incomes in these two countries are nowhere near Western levels, but what matters more is that capitalism has made sure that the average worker is doing far better than he did under the draconian governments of Mao Zedong or Indira Gandhi.

Moreover, international companies do not make investments in the Third World randomly. They invest in countries that believe in the rule of law—where private property is supported, contracts can be enforced by an independent judiciary, and an educated labor force is available. If far too many African nations are stagnating, it’s not because of stinginess by multinational corporations, but because these countries are ruled by strongmen who plunder their countries and leave them as economic basket cases.

Wolf does not reflexively condemn all the anti-globalizers’ arguments. In particular, he says that the charge that rich countries are hypocrites for asking poor countries to open their markets while preserving trade barriers is “more than justified.” He notes that while global tariffs currently average 3 percent, agricultural tariffs are a more-punitive 13 percent—and most of these tariffs hurt the Third World. A Progressive Policy Institute study, for example, showed that in 2001 the United States charged Bangladesh $331 million in tariffs—about the same as France. The result: the tariffs punished Bangladeshi farmers trying to better their lives. Farm subsidies, antidumping measures, and environmental regulations are also frequently used by Americans, Europeans, and Japanese to keep foreign goods out. Those barriers, Wolf believes, should be greatly reduced or eliminated.

Martin Wolf is a sharp and lucid writer. Those interested in deepening their knowledge of the world’s economy will find that Why Globalization Works is well worth the time and money.

Dobbs spits his vituperation at two groups. The first is “Corporate America” (the capitalization is his): rich, greedy, heartless bigwigs who fire workers in America and replace them with low-paid workers in the Third World. This strategy is driven by the bigwigs’ need to maximize short-run profits. The second group is free-trade advocates: ideological, heartless eggheads and politicians whose “blind faith” in free trade and the market provides intellectual cover for the greedy bigwigs to continue to “export jobs.”

Dobbs loathes this alliance, for it means that our “blind” adherence to free trade might go on long enough to rid America of her middle class. Sounding very much like the leftist Thomas Frank, who argues that the many middle-class Americans who vote for cutting taxes, reducing regulation, and increasing their freedom to trade have been duped, Dobbs just knows that “outsourcing” of American jobs is destructive and wicked. He is outraged at outsourcing and astonished that more Americans don’t share his rage.

He cries: “We should be worrying about the prospect of more jobs and more businesses being wiped out by cheap foreign labor, and even more worried about those who blindly advocate free trade for its own sake—well, actually for the sake of powerful U.S. multinational corporations.”

He uncovers ominous developments: “And corporate logos in many cases have more powerful symbolic importance than national flags.”

He puts matters in perspective: “I don’t think helping consumers save a few cents on trinkets and T-shirts is worth the loss of American jobs.”

Mostly he fulminates: “But the simple truth is that our multinationals and our elected officials who support them without reservation are callously and shamelessly selling out the American worker.”

No coherent theory underlies Dobbs’s concerns and accusations. He’s as naive on matters of trade as one can possibly be. In Dobbs’s view, when Americans buy foreign product or services, other Americans are harmed because expenditures abroad mean less demand for American output and, hence, less demand for American workers. The result is unemployment and lower wages. This downward spiral in American prosperity won’t stop until most American workers are paid wages equal to the paltry wages paid in Third World countries—unless, of course, Congress steps in.

Dobbs never stops to ask, “Why are foreigners so eager to earn U.S. dollars by exporting goods and services to Americans?” Nor does he ask why private investment in the United States has been so much higher over the past few centuries—continuing to this very day—than it is in Third World countries.

In a marvelous, if unintended, testament to the success of free-trade ideas, Dobbs nevertheless rejects the label “protectionist.” (This rejection is dishonest, for a protectionist is exactly what he is.) He describes himself as a “balanced trader.”

By “balanced trade,” Dobbs means trading relationships in which the United States runs neither a trade surplus nor a trade deficit with the rest of the world or even with any individual country. Even I, who wasn’t expecting much real analysis from Dobbs, was surprised that he is completely unaware of what “trade deficit” means and that there’s an inherent balance in trade accounts. Any trade deficit (more precisely, any current-account deficit) is exactly balanced by a capital-account surplus. That is, if the United States runs a $500 billion current-account deficit this year, it runs a $500 billion capital-account surplus—which means that foreigners are investing at least this amount in American assets.

Dobbs’s obsession with what he mistakenly identifies as “balanced trade” is especially annoying because he declares that Adam Smith would agree with him. That is unlikely, given that Smith declared in The Wealth of Nations: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade . . . ”

Friends of free trade will find no arguments or data in this book to challenge their presumptions or theories. Opponents of free trade will find no arguments or data to support their presumptions or theories. All that anyone will find is ranting and raving, as uninformed as it is self-righteous and as hysterical as it is mistaken.

Bastiat’s definition of socialism, i.e., using the law to take money from some people and give it to other people, could more accurately be translated today as “the welfare state.” Even so, I’ll stick with his term— socialism. And he believed that the idea behind tariffs and other restrictions against free trade was the keystone that supported the legal plunder he saw all about him. He was convinced that if tariffs were abolished, the other elements of socialism would begin to collapse.

He was probably right. For if there were no restrictions against foreign competition— i.e., if foreign goods and capital were treated exactly like domestic goods and capital—the fearful cost we are paying for the other economic compulsions and prohibitions by government would be easily observed by everyone, and would thus soon fall.

Among the several “story examples” offered by Bastiat to expose the fallacy of improving the domestic economy by restricting foreign imports, his allegory on prohibiting Belgian iron from entering France is a classic. He begins by following the thoughts and actions of just one French producer of iron. A century and a third after he wrote it, his story reads as though the essence of it were adopted from today’s Congressional Record or from the editorial pages of any one of hundreds of our daily newspapers.

Our French protectionist was well aware that Belgian mine owners were able to produce and ship iron into France at less cost than he and other French mine owners could produce it and sell it at home. That fact was naturally reflected in the comparatively low price of Belgian iron in French markets. And just as naturally, the French people bought most of their iron from Belgian producers instead of from their own domestic producers. That fact displeased the French mine owners exceedingly, and the one we are here discussing decided to do something about it.

At first, he considered the possibility of personally stopping that undesirable trade. He thought that he might take his gun, sally forth to the frontier, and kill the nailmakers, locksmiths, and other users of iron who crossed the border into Belgium to patronize his competitors. That would teach them a lesson!

But, unfortunately, there was the possibility that those buyers of Belgian iron might object to being killed, and kill him instead. Moreover, he knew that he would have to hire men to guard the entire frontier to make his plan effective. That would cost more money than he had. So our hero was about to resign himself to freedom, when suddenly he had a brilliant idea.

He remembered that at Paris there is a large factory engaged in producing laws. He knew that everyone in France is forced to obey the laws, even the bad ones. So all he needed from the Parisian law-factory was just one small law: Belgian iron is prohibited.

Then, instead of having to guard the frontier with his own few employees, the government would send 20,000 guards — chosen from the sons of the very locksmiths and enginemakers who were carrying on this undesirable trade with the Belgians. Better still, the domestic mine owner himself wouldn’t even have to pay the wages of those guards. That money would be taken from the French people in general, much of it from the self-same buyers of Belgian iron. Our hero could then sell his iron at his own price.

With this ingenious plan, our French mine owner proceeded to the law-factory in Paris. (“At some other time,” interjected Bastiat, who was himself a deputy, “I may tell you of his underhand methods, but here I wish to speak only of what was divulged to the public”)

The protectionist ironmaker urged the authorities of the law-factory to consider the following argument: “Belgian iron sells in France for 10 francs per hundred pounds. But I would prefer to sell it for 15 francs. Now if you will only produce a law that says, Belgian iron shall no longer enter France, the following wonderful results will occur. For each hundred pounds of iron that I sell to the public, I shall receive 15 francs instead of 10 francs. As a result, I can expand my business and employ more workers. My workers and I will have more money to spend. This will help the tradesmen in our community. The tradesmen will, in turn, then also buy more goods. That will mean larger orders to their suppliers all over France. Those suppliers, in turn, will also expand their businesses and hire more workers. Thus employment and prosperity will increase throughout France. All this will result from that extra five francs that your law will permit me to charge.”

The producers of the laws in the law-factory were charmed indeed by the logic of our hero. They rushed to produce the requested law. “Why talk of hard work and economy,” they said, “and why use an unpleasant way to increase the wealth of our nation when a single law can do the same thing.”

Familiar Argument

That argument for protection from foreign competition is precisely (word for word) the argument advanced today in Congress and the media in general to support restrictions against Japanese automobiles, Brazilian shoes, Swedish steel, Argentine beef, and Chinese textiles. And, again, that’s the reason Bastiat’s works are as readable today as they were in 1850; he was dealing with ever-present and universal problems.

“OK,” you may observe, “but you’ve got to admit that protectionism works, just as Bastiat’s fictional mine owner claimed. When the owners of the protected industries spend their profits, it does indeed create more jobs. Unrestricted foreign competition would simply wipe out all those jobs and profits. So what’s wrong with the French mine owner’s argument, if anything?”

Bastiat offered an answer to that question when his fellow-legislators advanced it in the 1800s.

Now in all fairness, we must do justice to the arguments of this mine owner who wanted a tariff to increase domestic employment. His reasoning was not entirely false, but rather incomplete. In securing from the government a special privilege, he had correctly pointed out certain results that can be seen. But he completely ignored certain other effects that cannot be seen.

True enough, the five-franc piece thus directed by law into the cash-box of the domestic producer does serve to stimulate the economy along the lines he predicted. That can easily be seen. But what is not seen is this: That five-franc piece comes, not from the moon, but from the pocket of some French citizen who must now pay 15 francs for the thing that cost him only 10 francs in a free market. And while the protected industrialist may well use the five francs to encourage national industry, the French citizen himself would also have used it for the same purpose, if he had been left free to do so. He would have used his five francs to buy a book, or shoes, or some other article or service he wanted. In either case, national industry as a whole would be stimulated by the same amount.

Thus the new tariff law has resulted in this: The protected industry now makes a high profit to which it is not justly entitled. The average French citizen has been duped out of five francs by his government, and must therefore do without the article or service he would have bought with it. One segment of the economy has profited at the expense of many others. True enough, because of the artificial price increases, new jobs have been created in the protected industry. But what is not seen is the fact that the extra money now spent for iron must necessarily result in reduced spending for other products and services, and thus fewer jobs in those industries. And worst of all, the people have been encouraged to think that robbery is moral if it is legal.

A popular argument today (one that Bastiat never heard) is that those five francs spent by the owners would actually be more productive than the same amount spent by U.S. consumers. The economists who support that argument assume that efficiency under “protected prices” will remain the same as under competition, and that the promised profits will be there as specified, and that those profits will be spent on new equipment, e.g., the United States Steel Corporation will actually use its government-created profits to modernize its facilities and not use them to buy an existing oil company. For the most part, however, reality simply doesn’t work out in harmony with that theory that’s still supported by so many of our leading economists.

As Bastiat said, all tariffs result in a net loss to the national economy and to the people in general. He demonstrates this net loss (both in products and satisfaction) in one of his stories on “compensatory tariffs,” i.e., retaliation against foreigners when they have an advantage (natural or artificial) that’s not possessed by our own producers. He was referring to cheaper labor costs abroad, subsidies and tax concessions given to native producers by their governments, and other advantages that foreign producers are said to have over domestic producers.

A poor peasant in France had planted a few grape vines of his own. After much sweat and time, he harvested enough grapes to make a cask of wine. “I shall sell this wine,” he said to his wife, “and buy enough material to enable you to make a trousseau for our daughter.”

Our honest peasant took his cask of wine to the nearest town. There he met an Englishman and a Belgian, and began to bargain with them about exchanging his wine for cloth.

The Belgian said, “Give me your wine, and I will supply you with 15 parcels of the material you want.”

Then the Englishman entered the bargaining with this offer, “Since we English can manufacture cloth at less cost than the Belgians, I will give you 20 parcels for your cask of wine.”

The peasant was about to sell to the Englishman when a customhouse official, who had heard the conversation, spoke to the wine owner, “My friend,” he said, “trade with the Belgian if you wish, but I have orders to stop you from trading with the Englishman.”

The astounded countryman exclaimed, “What! You wish me to be content with 15 parcels of material that come from Brussels when I can get 20 parcels that come from Manchester?”

The customhouse official answered, “Certainly, don’t you understand that France would suffer if you receive 20 parcels instead of 15?”

The peasant didn’t understand it at all, and said so in no uncertain terms.

Replied the customhouse official, “Well, I’m sorry I can’t explain it, but there is no doubt that it’s true. You see, all our government officials and journalists have agreed that the more a nation receives in exchange for its products, the more it is impoverished.”

Thus because of the protective French tariff against low-cost English textiles, the peasant got just as good a bargain by exchanging his wine for high-cost Belgian textiles. As a result, his daughter got only three-fourths of her trousseau. And those unsophisticated countrymen are still wondering to this day how it happens that a person is ruined by receiving four yards of cloth instead of three. They still don’t understand why a person with nine towels is richer than a person with 12.

A Modern Application

I sometimes suggest to my students in international marketing that the use of compensatory tariffs by the European Common Market today gives precisely the same result that Bastiat pointed out in his story, i.e., tariffs cause higher prices and a decrease in products and services always. The students seem to understand the idea better when I put the transaction in story form, a la Bastiat.

“Take wheat, for example,” I begin. “And let’s follow the American owner as he enters a European port with a shipload of wheat grown in Kansas. The American owner wants to sell his wheat for, say, $3 a bushel. But the officials in the European Economic Community refuse to accept that low price and insist that the European purchasers must pay a much higher price.”

At that, my students begin to look at me strangely. “You mean the European people insist on paying more for the wheat to bake their daily bread than they need to?”

“That’s right,” I answer. And in spite of their doubting expressions, I continue with my story.

“You see, while the Europeans believe in competition, it must be fair competition. And those vast wheat lands in Kansas are just better suited to grow wheat than are the small European farms. So it’s not fair competition—obviously. Further, those Kansas farmers have another big advantage, i.e., vast amounts of capital (farm machinery) that’s just not available to European farmers. The result is unfair competition, i.e., the costs of production for many wheat farmers in Europe are perhaps twice as high as in Kansas. And while most Europeans claim to favor the free market economy and open competition, naturally it must be fair competition. Everybody is in favor of competition, as long as it’s fair. And since fair competition is obviously impossible when the Americans enjoy those two big advantages, tariffs must be used to equalize the situation. Fair’s fair, you know.

“First, the EEC officials check around Europe to find the cost of producing a bushel of wheat by the most inefficient wheat producer in all of Europe. The chances are that’ll be a French farmer who insists on growing grain on his land when the market says grapes or vegetables.

“Once the costs of this most inefficient wheat farmer in all of Europe are determined, then the compensatory tariff to wipe out the American production-advantage is set so that European consumers will find little or no advantage in buying American wheat over French wheat. The price to them will be about the same.

“That’s what most people seem to mean by ‘equal competition,’ i.e., tariffs to wipe out any advantage (natural or man-made) enjoyed by the foreign producer over the domestic producer. The result is that the Europeans must pay perhaps 100 percent more for their daily bread than would be necessary under free trade. And since there are always low-cost producers in any industry, those European wheat farmers who are more efficient than that marginal French wheat farmer just automatically reap high profits—while the people in general have less bread and other goods and services.”

Paying More Is Good?

By now, the students are horrified, of course. It’s just inconceivable to them that any people are so gullible as to pay twice as much as they need to pay for products and services. Then, to give them an even worse example, I take them to Japan and the “orange situation.” I explain that the Japanese insist on paying perhaps four times as much for their inferior domestic oranges as they need to pay for superior California oranges. We Americans have been trying for years to sell our excellent oranges to them at exceedingly low prices. The Japanese refuse to let us do it, however, and continue to insist that they’re better off when they pay three and four times as much as we are willing to charge.

At that point, some of my students become so angry at this “Japanese inscrutability” that they seem almost willing to go to war again to straighten those people out. You doubtless have guessed what I do next — I bring them back home and point out that we Americans insist on forcing ourselves to pay at least 50 percent more for an American car than the Japanese are willing to charge us for a similar or better car.

A chill settles over the classroom. The students who’ve been deriding those inscrutable Japanese are suddenly quiet. Then I begin to hear the all-too-familiar arguments you hear every day in Congress and read every day in your local newspaper—precisely the same arguments Bastiat heard as a member in the French Chamber of Deputies in 1848. “But we must protect American jobs. Those Japanese have the advantage of efficient and disciplined labor. It’s a part of their culture, and it’s obviously not fair. We Americans truly believe in the free market, of course, and competition. But the competition must be fair.” And so on and so on.

Truly, most of us Americans honestly believe that a nation prospers by paying more and getting less. Were that not so, tariffs and all other restrictions against peaceful people freely exchanging their goods and services would disappear immediately. We blind ourselves to reality by concentrating on the producers and their problems instead of on us consumers and our problems. We worry about who produces, instead of what is produced and at what price. We just don’t seem to understand that a nation and its people are better off when we get more for our money, i.e., when we have more products and services, not less.

I now understand what Bastiat meant when he observed that logic is not in any way related to laws that (in various ways) take money from people who have earned it and give it to people who have not earned it. According to Bastiat, that process is the mainspring of socialism, and it’s a sure way to the destruction of both the producers and the consumers in any nation.