Pragmatism versus Principle – the role of the economist in the EU debate

Pragmatism versus Principle – the role of the economist in the EU debate

by Eben Wilson
article from Thursday 19, January, 2017

AT A PRIVATE dinner recently I listened to a professional academic economist offering an erudite view on the prospects for Scotland of Brexit.  Like many in academe he appeared to be a dedicated “remainer”; and along with many in our profession in Scotland offered a pragmatic world view reflecting the prevalent tendency to statism in matters of governance.

In this, he mirrored the views of Sir Ivan Rogers, our now resigned Brexit negotiator, when he declared that he was fed up of those who purported to offer “free trade” as a giant prize on offer from Brexit. He supported Sir Ivan’s sentiment that “free trade does not just happen… increasing market access to other markets and consumer choice in our own, depends on the deals, multilateral, plurilateral and bilateral that we strike, and the terms that we agree”.

There is, however, a distinct group of other economists like me, of a liberal persuasion, who are extremely cautious about such pragmatism based on what might be called the realities of the “regulated now”. We take this stance because our profession, in its analysis of social order has to recognise that certain economic principles apply and that pragmatism can often slip into an acceptance of persistently bad contemporary policy – based on false ideas.

Milton Friedman used to say that there were two things that almost every economist could agree on; namely that free trade creates good – and a minimum wage creates unemployment. Well, “almost everyone” appears not to include many Scottish economists and Sir Ivan.

The despairing criticism of that pairing echoes those who snort at “free competition” as nonsense on the basis that there are no such things as totally free competitive markets.  Any liberal economists worth their salt can agree, but must add that they have missed the point. The principles of competition, the freedom to trade privately, and the risk of loss are all important facets of economic success – and policy makers should be urged to strive towards the free competitive ideal, not least because the controlled market alternatives are observably dire for human wealth and happiness.

Similarly, the anti-Brexit lobby that castigates economic liberals for assuming that free trade is possible, because pragmatism tells them that we live in a world of state controlled horse-trading, are wrong not to aim at dismantling such cosy statist deals; on the principled basis that this would make us all wealthier and happier. 

While Scotland adheres to the ideas of a statist polity that believes in controlled markets , backed by academic intellectuals who have forgotten that their objectivism should be rooted in economic principle and not prevalent political practice, the great mass of working people, especially the less well-off among us, risk facing a poorer future.  

The reality of this hard truth lies in changing market circumstances worldwide. Globalisation, in which many of the products we use in the developed world are sourced from other low wage countries, to a large extent also involves commoditisation; production that is repetitive, with a low cost per unit of output. Think electronic components, household goods, vehicle parts, packaged textiles and all the other generally less customised supplies that we consume – usually rapidly through built-in obsolescence.  

Money is made this way using the money, machines and, crucially, the organisational systems of the developed world.  Think lawyers, accountants, software companies and technical system integrators.

Global trade patterns expand or retreat following a law of comparative advantage – one of the only really difficult concepts in economics to understand. Commoditisation and bespoke customisation compete globally, but this competition does not mean that we all make the things that we are best at – enjoying competitive advantage. Instead we make the things that will not stop us making other things that we are even better at producing – choosing comparative advantage. 

The textbook example of this is to ask why it is useful for an executive to manage a personal assistant who does things that could be done perfectly well by the executive.  The answer is that the slightly less efficient PA frees up the time of the executive who can then find out how to be even more productive with his or her high level skills.

In industry, the Chinese therefore decide to make toasters; but what do we make? In a technological world this Ricardian competition has another facet … discovery.  That’s why I used the term “find out” in the sentence above.  The economist Friedrich Hayek (pictured) pointed out that competition was always at its heart a knowledge process; the means by which we discover better ways of producing and, indeed, being.  He saw markets too as a discovery process in which producers and consumers share perceived values and so know what to produce and purchase.

And it is here where those who say free trade is a chimera and want instead to manage trade are wrong.  The knowledge needed to understand what to trade is not available for it to be managed.  That’s why they are right to say that totally free trade is unattainable, but wrong to then conclude that by controlling it there will be a general advantage for those agreeing to the controls.

There is another common error in the discussion of free trade that emerges from this. Too often, statist economists stress how important it is to retain exports and that imports will destroy our capacity to live in affluence.  In reality, they have that backwards; exports are indeed useful, because they earn the foreign money we need to purchase imports, but imports are crucial because they tell us what to produce or not produce. That is, they tell us what not to waste our time on producing under the principle of comparative advantage. 

When trade control is undertaken, the floodgates are opened to all the special interests who believe they have a greater right to trade than others.  What this actually means is that all of those who are making money out of product supply chains developed yesterday are claiming the right to block the development of the new supply chains of tomorrow; in essence destroying the chance for local producers to find out what they should produce.  That way leads to gradual impoverishment; the Ricardian principle that allows for the best use of resources between all parties is wrecked.

For a nation like Scotland, desperate to find out how best to create wealth for itself in a globally trading world, the EU and its protective coddling of international trade is precisely the wrong place to find out what to produce.  The EU will protect customised food, traditional textiles, and any half-forgotten supply chain that has a powerful trade association competent in lobbying in Brussels, but it will also use tariffs to slow down the arrival of innovatory products in the technical industries or make them more expensive through non-tariff barriers. 

Through time, Scotland’s knowledge of what might be done is locked out by measures to ensure what we already know how to do is still done – even if quaint, subsidised and out of date.  That kills off potential new jobs for those who need them, and promotes large corporates who can cope with the niceties of politicised trade in markets while selling over-priced goods that make poor people poorer.

Pragmatic economists who forget these dynamic processes in change and knowledge that underlie economic advance and instead turn their minds to static calculations of what may or may not happen if controlling states make this or that decision are doing their profession a dis-service.  Economic principles are not things that economic advisers choose to offer policy makers; they are the essence of the predicament of Man trying to make a better and more comfortable world.

 

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