According to some accounts, when President Obama recently slapped tariffs on tire imports, it caused the explosion of the heads of hundreds, perhaps even thousands, of free-market ideologues.
See, to the free-traitors... I mean, "free-traders," the idea of government stepping in to protect American jobs and American industries from destruction via cheap imports, produced with cheap labor, on cheap soil, is tantamount to heresy. While sane individuals would note that protection of the general public is the first and most important reason for government's existence, the free-traders would prefer that government function solely as a predator, tasked with little more than collecting highly-regressive taxes in order to fund a police state to keep the peasants in line.
To justify this immoral lunacy, proponents of free-trade policies cite the need for "competition" to encourage "efficiency" in industry. They also often fall back on a priori economic dogmas, most famously the idea of "comparative advantage." While most of free trade proponents have been duped into genuinely believing this doctrine, with a little examination, it is easily exposed as a complete fraud.
The Anatomy of the "Race to the Bottom"
To make any sense of this issue, we must first competently identify the reasons free trade was initially promoted, and continues to plague humanity to this day. The standard story, which is also the only acceptable position amongst academic economists today, is that cheap is good. "If we can buy a widget from China for $10, but it costs $15 to produce it here," they tell us, "who is the government to say we can't? Why should consumers have to pay more for widgets?"
While this is a plausible argument, it is ultimately bankrupt, as it is founded on an incompetent understanding of the nature of economic wealth - namely, the idea that wealth is monetary in nature. By this thinking, it follows that every time government involves itself in the economy, it merely takes money from one actor and transfers it to another. Since this supposedly zero-sum transfer entails overhead costs, it cannot result in more wealth being produced, it can only destroy what wealth currently exists.
Yet, wealth is clearly not monetary in nature. It is a tautology that "what is not produced cannot be consumed;" thus, it is plain to see that the ultimate source of wealth is not money, but the production of basic commodities and manufactured goods. Financial wealth assets are merely conceptual claims on the real, physical productivity of the economy. Without production, the value of all financial assets would fall to zero, as there would be nothing of value to redeem for money, financial securities, government debt, etc. Productive power, not the holdings of financial assets, is the ultimate source of a nation's prosperity.
To illustrate this for those with their heads still stuck in the sand of monetarism and free-market dogma, let's go back to the widget example. True, the market price of the Chinese widget is lower than that of the American widget. However, this in and of itself does not necessarily mean that it is was produced more efficiently in any real sense; to the contrary, it was almost certainly produced in a less physically efficient manner (e.g., it required more materials and labor time to make). So then, how can it be cheaper? Simple: the workers making it were paid next to nothing. In reality, labor "costs" are not economic costs at all, as every dollar in labor costs is also income for individual workers and the nation as a whole. But, because monetarist thinking treats all costs equally, this real inefficiency is obscured by the fact that the Chinese workers are so poor that they'll work for subsistence wages.
In the short term, if we buy Chinese widgets for $10 (suppose that 30% of the cost is labor, 30% materials, and 40% profit) rather than the $15 American widgets (say 70% labor content, 15% materials, and 15% profit) we are indeed saving $5. However, in so doing, we're eliminating $10.50 of income paid to widget-makers, and $2.25 in corporate income. Even assuming the Chinese lend us back some of the income they gain, the savings from the cheap imports ($5 per widget, plus maybe $2 they loan back to finance domestic investment) cannot possibly compensate in full for the loss in income from domestic production ($12.75 per widget). Over the long run, the effect of this is to shut down our income sources. Under "free trade," the only way for us to regain the ability to produce our own widgets is to radically lower the income paid to widget producers.
Repeat this process millions of times over, and the primary reason for the decline of our domestic industries becomes clear: the winner in the marketplace is no longer who can produce best, but only who pays the least. Thus it is that free trade policies cause a continuous relative and absolute decline in per-capita real wages, government services, product quality, and the economy and society as a whole.
Free Trade, Taxation, and Economic Justice
The above example is rather crude in a number of ways, but most importantly, because it fails to take account of the impact of taxation. Free trade creates a situation in which nations must compete against each other as regards wages, but a similar problem exists with regard to taxation. Simply put, under free trade policies, imports are given the special privilege of exemption from taxes. As a result, the entire tax burden must fall on domestic production. Needless to say, if you're taxing domestic production but allowing free imports, it's going to make domestic goods uncompetitive.
Therefore, the imposition of import tariffs at least as great as the tax burden on domestic production is not only an economic imperative, it's an issue of elementary justice. That any government would approve policies which disproportionately punish domestic industry while giving foreign imports special dispensation, is appalling to anyone with even a modicum of morality. It's also a crime against the nation so great that it could very arguably be considered outright treason, for what difference is there between the official who willingly betrays the nation through economic policy and the one who does so by collaborating with an enemy to destroy a country's productive power directly? The effect is the same.
Additionally, in my opinion, it is the blatantly immoral, unjust nature of free import/free trade policies, which most exposes their fraudulent nature.
The Sophistries of Adam Smith: Free Trade as Fraud
Now, while it would seem - at least to those not possessing a degree in economics - to be obvious that a nation must produce for itself rather than buy from others in order to become prosperous, and that tax policy should encourage, rather than discourage domestic production, this understanding has become obfuscated by the aforementioned laissez-faire dogmas, such that the thinking of "mainstream" economics has degenerated into what could be called, without much exaggeration, mass professional insanity. In fact, the whole idea that a nation becomes rich by consuming the cheapest goods rather than producing the best goods is so utterly ridiculous that one might even wonder if it was consciously promoted as a fraud. Indeed, the evidence suggests that is in fact the case.
To understand this, we must look back at the history of the period in which Adam Smith's teachings originated. The extraordinarily destructive Seven Years' War (the North American theater of which is better known in the US as the French and Indian War) was ended in 1763 with the Peace of Paris, leaving the British Empire as the dominant colonial power in the world. However, this victory came at a very high cost. The British war effort was financed by private banking interests, who demanded high interest rates on loans and saddled the Empire with an unpayable debt. In other words, the British Empire (and the world generally) was effectively bankrupt.
Yet, because of the power they acquired during the war, these banking interests and the ruling oligarchy become essentially one and the same. So, rather than reorganize these bankrupt debt holdings, the Empire attempted to draw out of the real economy sufficient wealth to save the paper debt holdings of certain financial interests. A primary source of the necessary revenue was to come from taxes levied on the American colonies. Naturally, the American colonists, many of whom sacrificed for the British war effort, thought it a great injustice that they should be forced, without any say whatsoever, to lower their standard of living to save the paper assets of British banking oligarchs. The protest against this economic exploitation eventually became a full-on revolt against British Imperialism.
So, in the event that the American Revolution could not be suppressed militarily, the British oligarchy sought to devise a doctrine which would allow them to continue robbing the colonies through more subtle means.
Enter Adam Smith. At the time, Smith was an ambitious intellectual with deep ties to the British oligarchy, which were cemented in 1773 with his election to the Royal Society of London - the intellectual arm of the Empire. Because his sophistic Theory of Moral Sentiments had already greatly impressed the oligarchs, Smith was contracted to devise an intellectual justification for the continued exploitation of Britain's colonies, which was to also induce nations which adopted his policies to willingly destroy themselves by brainwashing the political intelligentsia of targeted nations into allowing what common sense and morality would otherwise demand that they halt (i.e., the destruction of domestic industry by way of British dumping of cheap slave-labor produced goods). What Smith devised was a doctrine of slavery he absurdly referred to as free trade, which worked as follows:
- Beginning in West Africa, the British East India Company, the Royal Africa Company, and others, captured or bought slaves.
- These slaves were then shipped to the western hemisphere, particularly the southern United States, to provide cheap labor for the production of agricultural commodities.
- These commodities were then exported to Britain at low prices, with no benefits accruing to the vast majority of the population.
- In dangerous, exploitative conditions, English peasants worked for Shillings to turn these commodities into low-quality manufactures, particularly textiles.
- These manufactures were then shipped and sold to India and the new world. The Indian subjects, denied the right to produce for themselves, in turn paid for the low-quality British manufactured goods with opium.
- The Indian opium was then shipped to China, where it was forced on the Chinese people for enormous profit, addicting millions to the life-sucking drug (the same was also true to a lesser extent with tobacco from the American colonies).
- In consideration for opium, British traders secured large volumes of actually valuable Chinese exports, such as tea and silk.
- All of Britain's colonies were denied the right to develop their own infrastructure or domestic industry.
The pivot of the system was British naval supremacy: by preventing the development of interior land masses, the Empire forced all trade to travel by sea. Since no one colony was able to produce for itself, it could not become independent of the Empire in any real sense. Thus, the real goal of Smith's Wealth of Nations was to fool the revolting Americans into continuing to go along with this slave system of "free trade," which Smith cynically characterized as "buying cheap and selling dear."
After the colonies won their independence, British Imperial charlatans, as well as various traitors to the new American Republic, continued to attempt to deliver the nation back into Imperial control through "free trade" economic warfare. The primary reason for this (among others) is that the United States of America's very existence, premised on the idea that All Men are Created Equal, stood as a living and absolute rejection of the British oligarchical system of racial hierarchy, social castes, predatory government, and economic exploitation.
The American System of Economics: Hamilton Defeats the British Empire
As the impotence of the government constituted by the Articles of Confederation became more and more apparent, so too did the recognition of the fact that if the United States was to be truly independent of the British Empire, it would need a strong federal government which was able to put the principles expressed in the Declaration of Independence into effect and unify the states into one cogent nation - not just on paper, but in practice. To do this, the new federal constitution made provisions to catalyze internal development in a number of ways; together with the principles and ideas expressed by Alexander Hamilton in his reports, they formed the basis of the American System of Political Economy.
Hamilton's American System, like the United States itself, was an absolutely rejection of the British System represented by Adam Smith. Whereas the British System of free trade was founded upon auto-cannibalistic competition, exploitation, looting, usury, and oligarchical control, the American System was created explicitly to develop the creative abilities of the population by protecting and fostering the development of the nation's industries, agriculture, public infrastructure and republican government. Hamilton's reports, based on universal principles, proved that the way to do this was by:
- The creation of a system of a national financial infrastructure based on sovereign credit. Such a system grants the sole power to create money to the government (the House specifically). In contrast stood the British oligarchical financial system, where private interests controlled the creation of money and credit, enslaving entire nations to unpayable debts through usury that crushed their ability to pursue their own development.
- The creation and public financing of physical infrastructure to reduce the costs of industrial production by lessening the expenditure of effort and resources wasted on transport overhead. In this way, the USA developed its internal territory, freeing itself from reliance upon British-controlled sea trade.
- Support for industrial development through the provision of low-interest credit and the fostering of protectionist measures, so as to prohibit British dumping of cheap goods, thereby freeing American workers from competing with Imperial subjects for the world's lowest wages and living standards.
The Post-Civil War Period: The Triumph of the American System
While the degree to which these policies were adopted by government varied over time, Henry C. Carey, later gaining prominence as chief economic advisor to President Lincoln, described in his 1851 Harmony of Interests why American System protectionism prevailed over British free trade:
Two systems are before the world; the one looks to increasing the proportion of persons and of capital engaged in trade and transportation, and therefore to diminishing the proportion engaged in producing commodities with which to trade, with necessarily diminished return to the labour of all; while the other looks to increasing the proportion engaged in the work of production, and diminishing that engaged in trade and transportation, with increased return to all, giving to the labourer good wages, and to the owner of capital good profits.
One looks to increasing the quantity of raw materials to be exported, and diminishing the inducements to the import of men, thus impoverishing both farmer and planter by throwing on them the burden of freight; while the other looks to increasing the import of men, and diminishing the export of raw materials, thereby enriching both planter and farmer by relieving them from the payment of freight.
One looks to compelling the farmers and planters of the Union to continue their contributions for the support of the fleets and armies, the paupers, the nobles and the sovereigns of Europe; the other to enabling ourselves to apply the same means to the moral and intellectual improvement of the sovereigns of America.
One looks to the continuance of that bastard freedom of trade which denies the principle of protection, yet doles it out as revenue duties; the other to extending the area of legitimate free trade by the establishment of perfect protection, followed by the annexation of individuals and communities, and ultimately by the abolition of custom-houses.
One looks to exporting men to occupy desert tracts, the sovereignty of which is obtained by aid of diplomacy or war; the other to increasing the value of an immense extent of vacant land by importing men by millions for their occupation.
One looks to increasing the necessity for commerce; the other to increasing the power to maintain it.
One looks to underworking the Hindoo, and sinking the rest of the world to his level; the other to raising the standard of man throughout the world to our level.
One looks to pauperism, ignorance, depopulation, and barbarism; the other in increasing wealth, comfort, intelligence, combination of action, and civilization.
One looks towards universal war; the other towards universal peace.
One is the British system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of elevating while equalizing the condition of man throughout the world.
However, it was not until after the secession of the pro-free trade states of the Confederacy that principles of Hamilton's reports were fully put into practice. Lincoln staunchly supported the American System and passionately opposed free trade; his assassination only served to further advance his ideas. By the 1890's, the United States had had 3 decades of high tariffs, and then-Congressman William McKinley emerged as one of the strongest proponents of the American System, obliterating the dogmatic arguments for free trade with fact:
What has this Protective Tariff law of 1890 done? Why, it has increased factories all over the United States. It has built new ones, it has enlarged old ones. For example, we used to buy our buttons made in Austria by the prison labor of Austria. We are buying our buttons today made by the free labor of America. We had 11 button factories before 1890; we have 85 now. We employed 500 men before 1890, at from $12 to $15 a week; we employ 8,000 men now, at from $18 to $35 a week.
Due to the success of his protectionist tariff act, passed in 1890, McKinley went on to run for the Presidency in 1896, on what could well be described as the first modern progressive platform: trade protection, infrastructure improvement, national unity, industrial progress, and shared prosperity for all citizens of all classes and ethnicities. McKinley's progressive agenda and unflinching support for the American System won out handily over William Jennings Bryan's proto-monetarist positions. Immediately after taking office, McKinley signed legislation creating even greater increases in trade protection, and the results spoke for themselves once again. From 1896 to his assassination in 1901, American industry experienced an unprecedented boom. Production increased across the board:
- Locomotives and railroad cars: +73%;
- Steel: +156%;
- Musical instruments: +125%;
- Farm equipment: +149%;
- Ships and boats +211%;
- Industrial and commercial electrical equipment: +271%;
- Agricultural output per acre: +48%;
Source: Historical Statistics of the United States, 1789-1945 (Washington D.C.: U.S. Department of Commerce, 1949)
Meanwhile, the average hourly earnings for workers in all U.S. industry increased by approximately 10 percent, while the cost of living, despite the predictions of free trade proponents, actually declined. Near the end of his life, McKinley remarked on the triumph of protectionism and the American System over the slave system of free trade:
30 years of protection has brought us to the first rank in agriculture, in mining, and in manufacturing development. We lead all nations in these three great departments of industry. We've outstripped even the United Kingdom, which had centuries the start of us. Her fiscal policy, for 50 years past, has been the free-trade revenue tariff policy of the Democrats. Ours, for 31 years, the protective tariff policy of the Republicans. Tried by any test, measured by any standard, we lead all the rest of the world. Protection hath vindicated itself!
Even still, there were those who refused to let go of their cherished a priori dogmas supporting free trade. Others, many of them servants of oligarchical interests (primarily foreign oligarchies in this period), who cynically supported free trade to maintain the dominant position of those interests.
Sadly, this golden age of the American System ended when President McKinley died as a result of complications from an attempted assassination in September 1901. After this tragedy, United States policy drifted back towards free trade and laissez-faire, leading to trend of decline in real production per-capita. This process of decline eventually led to a complete economic collapse in 1929, and it wasn't until Franklin Delano Roosevelt revived the tradition and principles of the American System that the collapse was halted.
There will be much more on that in part 2, which will appear whenever I get around to writing it.