Tuesday, November 24

Free Trade, Liberalism, and Peace

by Richard M. Ebeling

The classical liberals of the nineteenth century were certain that the end of the older mercantilist system — with its government control of trade and commerce, its bounties (subsidies) and prohibitions on exports and imports — would open wide vistas for improving the material conditions of man through the internationalization of the system of division of labor. They also believed that the elimination of barriers to trade and the free intercourse among men would help to significantly reduce if not end the causes of war among nations.

The economists of that earlier era had demonstrated the mutual gains from trade that would develop and be reinforced from specialization in productive activities among the people of the world. No longer would the material improvements of one nation be viewed as the inevitable cause of the poverty and economic hardships of other countries.

Mutual benefit based on comparative advantage

With the addition of the theory of comparative advantage, these economists were able to show that even the “weak” and less productive in the world community could find a niche for their material betterment in the network of trade among nations. At the same time, the “strong” and more productive in that same community of nations would improve their circumstances by purchasing goods from the less productive so they could be freed to specialize in those lines of production in which they enjoyed a relative superiority.

Suppose that in the country of Superioristan, one yard of cloth can be produced in four hours and one bushel of potatoes can be harvested in one hour. In the neighboring nation of Inferioristan, producing a yard of cloth takes twelve hours and harvesting a bushel of potatoes takes two hours. Clearly, Superioristan is a lower-cost producer of both products in comparison to Inferioristan. Superioristan is three times more productive at cloth manufacturing and twice as productive in potato harvesting.

But equally clear is the fact that Superioristan is comparatively more cost-efficient in cloth manufacturing. That is, when Superioristan forgoes the manufacture of a yard of cloth, it can harvest four bushels of potatoes. But when Inferioristan foregoes the manufacture of a yard of cloth, it can harvest six bushels of potatoes.

Classical liberals were confident that with freedom of trade would come a world of peace.

If Superioristan and Inferioristan were to exchange cloth for potatoes at the price ratio of, say, one yard of cloth for five bushels of potatoes, both nations could be made better off, with Superioristan specializing in cloth manufacturing and Inferioristan in potato harvesting. Superioristan would receive five bushels of potatoes from producing and selling a yard of its cloth, rather than the four bushels it would cost if it harvested at home all the potatoes it consumed by forgoing the production of a yard of cloth. Inferioristan would receive a yard of cloth for giving up only five bushels of potatoes, rather than the six bushels if it manufactured at home all of the cloth it used.

Already in the middle of the eighteenth century, Scottish philosopher David Hume could declare in his famous essay Of the Jealousy of Trade, “I shall therefore venture to acknowledge that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself.” The wealthier and more productive a nation’s potential trading partners, the greater the number and the less expensive the array of goods that it may be able to obtain through exchange in comparison to being solely dependent for its material well-being upon its own domestic productive capabilities.

Freedom of trade also could foster peace among nations.

The classical liberals also believed that free trade meant more than just a more plentiful supply of goods and services. They also were confident that with freedom of trade would come a world of peace and international tranquility. As the French economist Frédéric Passy expressed it in the 1840s,

Someday all barriers will fall; someday mankind, constantly united by continuous transactions, will form just one workshop, one market, and one family….  And this is … the grandeur, the truth, the nobility, I might almost say the holiness of the free-trade doctrine; by the prosaic but effective pressure of [material] interest it tends to make justice and harmony prevail in the world.

War, in the eyes of those nineteenth-century economists and classical liberals, is not only destructive but also contrary to the long-run economic well-being of all possible belligerents because it disrupts the existing or potential bonds of the division of labor from which the prosperity can come to replace the poverty and conflicts of mankind. “War,” Passy declared, “is no longer merely a crime; it is an absurdity. It is no longer merely immoral and cruel; it is stupid. It is no longer merely murder on a large scale; it is suicide and voluntary ruin.”

Trying to prevent but failing to stop war

The nineteenth century was not without war and international conflict. But in comparison with earlier centuries, and certainly in comparison with the twentieth century, the hundred years between the defeat of Napoleon in 1815 and the opening shots of the First World War in 1914 were a period of relative peace as well as international attempts to devise rules of warfare.

If a war were to still break out, then it should be controlled and limited in its destructive effect on life and property, especially that of innocent noncombatants of the belligerent countries and the citizens of neutral nations. There were a wide variety of international conferences and treaties in the nineteenth century and first decade of the twentieth that specified what should be the rules of war on land and sea and in the air.

All of the treaties and agreements and all of the hopes that international trade would establish a web of mutual interdependency in the areas of commerce, culture, and communication, which would make war impossible or at least more “civilized,” died on the battlefields of Europe in 1914. Economic nationalism then joined political collectivism in the two decades between the two World Wars. And the Second World War threw to the winds all restraints on the conduct of nations, as unrestricted methods of warfare were joined by mass murder and the barbaric brutalizing of tens of millions of innocent and unarmed men, women, and children.

The half century following World War II witnessed wars, civil wars, and massacres of millions, once again, in Asia and Africa with the end of European colonialism on those continents. And for that entire period, the world was split in two by the ideological and military rivalry of the United States and the Soviet Union. As a result, the United States fought two major wars, in Korea and Vietnam. The Soviets violently repressed opposition and revolts in East Germany, Hungary, and Czechoslovakia, and fought a ten-year war in Afghanistan.

In the post-Soviet era, and in spite of the end of the Cold War, wars have continued around the world, including the Persian Gulf War in 1991 and the disintegration of Yugoslavia and foreign intervention in Bosnia and Kosovo. Following the terrorist attacks in New York and Washington, D.C., in September 2001, the United States entered its longest and still continuing war in Afghanistan, followed by its invasion and occupation of Iraq in 2003. Both America and Russia have put their hands in the long-running civil war in Syria, making it even more deadly and destructive.

Free trade is not responsible for wars.

None of the wars, conflicts, and mass murders of the twentieth century can be blamed on free trade or explained in terms of free trade. The entire last 100 years and more were a revolt against the ideas and ideals of the classical liberals of the nineteenth century. When the United States and Great Britain at the end of the Second World War stated their intention of establishing a new economic order for the world, their goal and the goal of institutions arising from their intention was for a new internationally managed trade, not real global free trade. During the Second World War, Austrian economist, Ludwig von Mises observed,

A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together, they condition each other. Economic nationalism is the corollary of the present-day domestic policies of government interference with business and of national planning as free trade was the complement of domestic economic freedom.

The interventionist and planning ideas during the last 100 years meant that trade among nations could not be left outside government oversight and control, lest its directions and patterns undermine and frustrate the goals and purposes of national governments in their domestic affairs.

Free trade was unable to prevent war in the twentieth century, because by 1914 very few people believed any longer in the idea of liberty. The spirit of economic freedom reached its zenith in the 1860s and 1870s. From then on, a counter-revolution began against freedom. Germany was a major catalyst for the change in ideological and policy directions with its return to protectionism and the implementation of many programs of the modern welfare state.

But France also started to move in that direction with regulations and pressures that gave the government increasing influence and, in fact, control over the patterns of French foreign investment in other countries to reinforce its political foreign-policy objectives, as well as with restrictions on foreign investments made inside France.

Even in Great Britain, which retained the closest approximation to free-trade principles for the longest time — until the opening shots of the First World War — the London investment houses would informally make sure that their foreign loans and investments did not conflict with the wider policy goals of the British government. The First World War was the culmination of that process, with nation and state completely becoming one, as belligerent powers made all aspects of social and economic life subservient to the ends of war.

Only the liberal mentality can prevent war.

In the aftermath of the First World War, Ludwig von Mises explained in 1924 that no institution for peaceful cooperation is secure if the ideological currents shift and public policy becomes dominated by the spirit of interventionism and war:

Only one thing can conquer war — the liberal attitude of mind which can see nothing in war but destruction and annihilation, and which can never wish to bring about a war, because it regards war as injurious even to the victors. Where Liberalism prevails, there will never be war. But where there are other opinions concerning the profitability and injuriousness of war, no rules or regulations, however cunningly devised, can make war impossible.

The context in which Mises made his remark was whether or not a full, 100 percent gold-coin monetary system would have been able to withstand the trend toward war, if government needed control of the monetary system to fund its war expenditures.

If war is regarded as advantageous, then laws regulating the monetary systems will not be allowed to stand in the way of going to war. On the first day of any war, all the laws opposing obstacles to it will be swept away, just as in 1914 the monetary legislation of all the belligerent States was turned upside down without one word of protest being ventured.

Nor would a completely free banking system, totally outside the control of the government, have fared any better in 1914. Mises believed, “The answer to this question seems to be that it would not have done so. The governments of the belligerent — and neutral — States overthrew the whole system of bank legislation with a stroke of a pen, and they could have done so just the same if the banks had been uncontrolled.”

Institutions help, but ultimately it is ideas that matter.

Great Britain, in spite of the growing protectionism and interventionism in other European countries in the years leading up to 1914, had followed an open, free-trade policy throughout its Empire. There had been free movement of goods and free movement of men, the latter without either passports or visas. And capital moved without restriction both into and out of Great Britain itself and throughout the far reaches of the Empire.

Yet overnight, barriers and restrictions went up all across the European continent, Britain included, once war was declared and the opening volleys were fired in the summer of 1914. Almost seventy years of British free trade, with all of its benefits, were brought to an end with a few strokes of the pen of war-emergency acts.

Mises did not discount the significance of institutional barriers to arbitrary government actions. He pointed out that, indeed, if the countries of Europe in 1914 had still had gold standards fully based on gold coins in circulation, to which the people were accustomed and which in their minds symbolized the security and soundness of the monetary system, governments may very well have had a harder time justifying the abolition of the monetary order and the resort to inflation to finance their war expenditures. “It will not be so easy for governments to disavow the reactions of war on the monetary system; they will be obliged to justify their policy.”

But neither the gold standard as practiced in 1914 nor international freedom of trade as existing in 1914 could withstand the winds of war. The “spirit of the times” had long before changed from being a belief in individual freedom, limited government, and free markets with the accompanying depoliticizing of interpersonal relationships, including relationships in international commerce and investment, into a reborn desire for protectionism, nationalism, planning, and imperialism.

Free trade cannot prevent war when men no longer believe in peace. 

Free trade cannot prevent war when men no longer believe in peace. Free trade is premised on the idea that human relationships should be voluntary and based on mutual consent. It is grounded on the understanding that the material, cultural, and spiritual improvements in the circumstances and conditions of man are best served when the members of the global community of mankind specialize their activities in a world-encompassing social system of division of labor.

It requires the conviction that the moral condition of individual men and mankind as a whole is fostered the most when people acquire the things of the world that they desire by peaceful exchange rather than by theft and plunder; and when men attempt to change the way their fellow human beings think and live and act by using the methods of reason, persuasion, and example instead of using of compulsion, power, terror, and death.

That is why wars still plague us. Too many men still don’t believe in peace, because they don’t believe in the prerequisites for peace and the freedom of trade that accompanies their implementation. The task we face today is the same as when Ludwig von Mises wrote in 1924. We must continue to argue for and hopefully prevail through reason and argument against what Adam Smith referred to in 1776 as the “prejudices of the public” (the economic ignorance of our fellow men) and the opposition of the “private interests” (those who wish to use the power of the state to plunder others in society). Until we do, free trade will neither replace nor fully prevent future wars.

Posted with permission from the Future of Freedom Foundation.

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