Tuesday, June 14, 2011

Refutation of Classic Free Trade Arguments - Vox Day on Hazlitt

Writer Vox Day has begun a formal refutation of the classical arguments for international free trade.  It is a worthwhile public service, as many people are still unaware of the advances in economics which allow us to criticize the classical theories.
His choice of target is one many of us are familiar with: Henry Hazlitt's Economics in One Easy Lesson.   Like Vox Day, I also have fond memories of that book.  I read it as a self-education project when I was 17 years old, while I was a freshman in college.  It is no exaggeration to say that Hazlitt's book provided the foundation of my economics knowledge, and a fine foundation it is.  Unfortunately, the explanation of free trade is out of date, written as it was in 1946 when economic and monetary conditions were vastly different than today, and thus, justly requires amendment. 
Below are my concise summarizations of V.D.'s criticisms.  (You can find the full text here: http://voxday.blogspot.com/2011/06/mailvox-hazlitt-international-trade.html
1 - Hazlitt's theory deals with tariffs as protection from foreign competition, not protection from domestic companies that offshore their production. Thus, the assumption that the primary beneficiary of the tariff is the manufacturer is wrong.  The primary beneficiary is the worker. 
2 - Hazlitt mistakenly assumes that the reduced price for the imported good (if the tariff is eliminated) will go somewhere else in the domestic economy.  If fact, is more likely than ever to get spent on another import. 
3 - Foreign business do not have to recycle their trade-gained dollars back into the American economy; they may just hold on to them, or spend them elsewhere, as the dollar is the international currency of trade. 
4 - It is a mistaken assumption to assume those foreign-held dollars will ever get re-spent into the U.S. economy.  Quoting here, regarding the extended period of time over which the U.S. has run a dollar-shedding import surplus: "35 years and counting is a long time to wait for this postulated inevitable return, and is unlikely to do any good for the worker who lost his job more than three decades ago."
5/6 - It is a mistaken assumption that overall employment will not go down as a result of lost jobs. "There is no reason to assume that the loss of a job in one sector will create any additional demand in another sector, indeed, to the extent there is worker mobility between industries, all the loss of the job in the one sector will do is create downward pressure on wages in the other sector."  
7 - Assuming that cheaper consumer goods pay for lost jobs is a fallacy.  An unemployed worker cannot also be a consumer, meaning, production comes before consumption;


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