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Home | Blog | Steven Pearlstein's Unreal Economics

Steven Pearlstein's Unreal Economics


Tags Free MarketsInterventionismMonopoly and Competition


Steven Pearlstein's "From Old World to Real World" is a remarkable piece on the economics of international trade and protection. It manages to somewhat accurately portray problems with obstacles put in the place of free trade in describing Intel's decision to build a $2.5 billion chip fabrication plant in China when such plants in China are heavily subsidized by the state, label free trade as a positive thing, and then essentially say that the problem with free trade is such episodes as this Intel investment, and that more protectionism is needed to fix free trade.

Pearlstein's analysis is deeply flawed because he criticizes free trade with either vague and undefined or shifting definitions of free trade and the benefits of it, then advocates protectionism while denying the protectionist label. He begins by talking about David Ricardo's analysis of comparative advantage as being outdated and in need of revision, explaining,

Economics has developed considerably since then, but the logic of free trade has remained essentially unchanged. Therein lies a problem. Because in the real world of many countries and many goods, of multinational corporations and the free flow of technology and capital, 'free trade' may not be the win-win proposition that economic theory suggests.

It appears that Pearlstein is making the neoclassical fallacy of attempting to use Ricardo's theory not as a deduction showing causal forces in trade that have their basis in human action, but attempting to hold up Ricardo's theory as a model which accurately depicts the variables in trade through the passage of time. Naturally, no such modeling of human behavior is possible, but Pearlstein implies that the inability to successfully timelessly equate human action as such should mean a reaction away from any possible, sensible theory of trade.

Why would I not be surprised to learn that Pearlstein has not read any Bastiat or Hazlitt?

Though Pearlstein comes out as condemning the Chinese state subsidies to industry in one paragraph, in a few previous paragraphs he actually says that it would be preferable for the Chinese computer chip plant that Intel is investing in to have been produced solely in China. He says:

It would be one thing if the Chinese had developed the capacity to make advanced microchips on the basis of their own investment and ingenuity. But it is quite another when the technology for the chips and chip production has been created by American researches and American companies, and transferred wholesale to a developing country that makes no secret of its intention to use that knowledge and experience to improve its own industry.

Oh, the horrors of peaceful, productive trade and the division of labor! These people dare to get the benefits of American occupations without having to hold those occupations themselves!

Pearlstein never specifies what, exactly, is the problem with the interspatial dividing up of labor and trade, whether down one's own street such as when a consumer benefits from the productive efforts of his local grocer, and going farther back, wholesalers and farmers around the world. Surely he has in mind some discrete and qualitative reason why this particular instance of producing a good-computer chips-and using them as part of an investment in some other area, whether this area is across a city or ocean, is inferior to producing a good solely by one's own efforts.

Of course, computer chip production would not be possible if everyone adopted this idea, but this is the implication of Pearlstein's analysis. Otherwise, his condemnation of dividing up investment and production to where labor is more productive is arbitrary and unjustified if he does not support such a principle. For such interspatial trade and investment happens with any division of labor, whether from Pearlstein's own home to his job or from a computer plant in China and Intel's American offices.

And what should these boundaries be where trade ceases to be beneficial? What if everyone adopted Mises' view of it making no difference for states where boundaries are drawn, and we found ourselves with tens of thousands of small state territories? Pearlstein's argument cannot hold up against a mere arbitrary change in state drawn boundaries. This shows how problematic politicizing trade is. But it is no problem for the material increase in welfare that we all face in the absence of restrictions to trade.

Further down in his article, Pearlstein sounds like a veritable free trader, condemning the government subsidizing of industry. On this he says:

...a study by the Semiconductor Industry Association found that 90 percent of Asia's cost advantage over U.S. production is attributable to government subsidies and tax breaks. In the case of Intel's new plant, I'm reliably told that those subsidies amount to about $500 million. That's a sum well beyond anything available to Intel in the United States. And it hardly fits into any common-sense notion of free trade or fair and open competition.

That's pretty insightful. I just don't know what Pearlstein thinks the insight is, since a "common-sense notion of free trade" ought to provide him with an understanding of why these subsidies are so harmful. I'll first explain what he doesn't point out in order to emphasize what he does.

These subsidies deflect money from their productive, voluntarily deemed best use. The will of consumers is thwarted and a move towards primitivism is made both in China and America when a government subsidizes a company that does not make its money by satisfying consumers' most urgently demonstrated, voluntarily expressed wants.

These industries are artificially made more profitable, not by removing natural obstacles to consumer wants peacefully, but by getting political favor through violent appropriation. By providing subsidies absent where consumers voluntarily deem best, mal-investment is occurring because industries are now serving the government on the one hand and consumers less desirably than if they were free to dispose of their money where they felt satisfied. Increasing these subsidies just increases mal-investment.

These subsidies will serve to give Intel monopolistic privilege, since they are already insulated from having to compete with other businesses for consumer patronage. And it means that the Chinese government will be in a stronger position to hold Intel hostage to their decrees. Firms that buy goods from Intel will have to pay more to a company that's just that much more insulated from competition, and must cut back expenditures somewhere or alter them. Or, they can hire lobbyists and send money towards agitating the state for subsidies themselves.

This is what Pearlstein does not say. What he does say is essentially that after the Chinese government has shot one foot, the US government should shoot the other by imposing countervailing duties on Chinese imports, raising taxes on the beneficiaries of globalization, and more strongly tax outsourcing companies while reducing taxes on non-outsourcing firms. He merely wants "economic policies as tough and effective as China's."

He seems to have some grasp on how antagonistic such policies are, yet he says we ought to impose them on ourselves! At the very least, the likely consequence of further escalation from China in retaliation for such a blow should deter one from advocating a move towards total trade isolation.

Yet this program isn't nearly prescriptive enough, both for the reasons I've stated above and because it means increasingly escalating a low intensity warfare with China where competition is no longer entrepreneurial, peaceful, and productive, but one of two competing ways of life in which each country's respective governments must use force to overcome each other.

In such a state of affairs, the way to get the resources and benefits of the division of labor between countries is not through peaceful trade, but through violent conquest. Surely, death and war are greater evils than blows to one's sense of national pride.

Not surprisingly, Pearlstein mentions Lou Dobbs, who I've criticized strongly, as increasingly popular because people are not longer being fooled by free trade rhetoric.

The sky is the limit as to how intensely the US and Chinese governments can put obstacles in the way of trade, investment, and ultimately, peace, and move us towards primitivism and war. Though Pearlstein gives a "No" to whether we should stop all trade and investment with China, such a move is the most fully protective and nationalist form of economic nationalism that he advocates. By advocating escalations in the low intensity warfare of protectionism, political calculation rather than economic calculation becomes each person's goal. And this kind of competition is eliminative, not cooperative.

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