Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 14 November 2017

On free trade and free markets

Jonn Elledge had a nice piece in the New Statesman about free trade. The question he poses is how Brexiteers can exalt free trade but want to leave the most developed free trade area in the world, the EU. The answer he gives is to distinguish between ‘free to’ and ‘free from’. When economists talk about free trade they mean free to trade, which is what the EU has achieved through regulatory harmonisation in particular. Brexiteers mean ‘free from’ in the sense of trade free from government intervention.

I think we can go beyond what Elledge says and make exactly the same point about the term ‘free market’. A Brexiteer might think of a free market as a market free from government interference, including government regulations. An economist would be more likely to talk about a free market as one where people were free to trade in a socially optimal way. The state might be required to make that happen in many ways.

To take just one example, markets can sometimes not exist because of information asymmetries, but if those asymmetries are removed then people can beneficially trade. (Economists will immediately recognise this as Akerlof’s famous market for lemons.) Removing those asymmetries does not necessarily require government, but government could play that role. If it did, we would have a free market as an economist would define it, but only as a result of what some on the right might call government ‘interference’. As Mariana Mazzucato would argue, the state can also create markets through organising research and development.

Two governments that harmonise each others regulations can create better markets in both countries by increasing competition. Equally there are other government measures that make markets work better. The most obvious example is to reduce monopoly power, which reduces prices and increases the quantity traded in that market. In truth the idea of a market completely free from government is semi-mythical: all markets work within a legal framework created and enforced by the state. When some people complain about government interference in markets, and eulogise ‘free markets’, they are really just complaining about forms of interference they do not like and are using the notion of freedom to glorify their distaste.

Nevertheless, I think this distinction between ‘free to’ and ‘free from’ its perhaps a way of resolving something of a paradox that I talked about in my neoliberal overreach piece. The paradox was whether Brexit can be described as neoliberal, as it involves the apparent illiberal destruction of a free trade area. If you see neoliberalism in practice or ‘in action’ as not so much a coherent (if flawed) unified theory (as here, for example), but rather a collection of views that encompass not just free trade but also promotion of the market and dislike of certain market interference, then neoliberal overreach can occur in any of those dimensions. [1]

So those like Osborne who wanted a smaller state so taxes could be lower (and perhaps for other reasons to) went for austerity as a means of achieving that. Those, like most Brexiteers, who wanted less regulation (including no state interference in how they personally avoid paying tax) pushed Brexit, even though it involved reducing the ability to trade. What Colin Crouch calls corporate neoliberals turned a blind eye to growing monopoly and rent extraction.

While all three groups were happy to eulogise free trade and free markets, conflicts arise over the interpretation of free. For the Brexteers free trade means freedom from government interference, while for Osborne it meant free to trade. For corporate neoliberals free markets means markets that are free from government limits on monopoly and attempts to avoid rent seeking, while ordoliberals want the state to control monopoly so markets are free to work for society.

Today for most people most of the time the idea of freedom generates positive emotions (although that itself is a social phenomenon, as Adam Curtis among others explored.) It is therefore a word worth expropriating for a political cause if you can. But by noting that conflicts arise between ‘free to’ and ‘free from’ we can perhaps see that all politicians are doing is trying to promote a form of freedom that suits their cause.
[1] In an interesting piece, Will Davies argues against the need to want to define political or social terms precisely as if they “connect cleanly and unambiguously to some object”.

11 comments:

  1. Economics is largely a political and social construct and many terms mean, as you suggest, what it is decided they mean;in fact the positive and negative echo Isaiah Berlin's "Two Concepts".

    Berlin defined negative liberty as an absence of coercion or interference with private actions (freedom from) whereas positive liberty (freedom to) was more concerned with self mastery and the ability to make one's own life.If you accept this then the distinction you (and the article) draw is somewhat meaningless as the Brexit position is about both not being a member of a group that will interfere but also having the possibility of reaching out beyond what that group determines shall be accepted boundaries.

    These are political issues not economic ones but, as you say, markets need a degree of regulation to function properly and one cannot see that regulation will be abandoned wholesale even in the event of a hard Brexit.

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  2. That as always been obvious,the free market to abuse others like slavery or create monopolies like the East India Company over the right of citizens to trade is well document throughout human history! ps such monstrosities like the East India Company is the goal of the neoliberals,not free markets at all!

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  3. Hugh Gibbons is a law professor and economist who defines liberty as the ability to act according to one's own will without threat or experience of coercion. Libertarians want to be free to exercise will and free from coercion that restricts the exercise of will. The formal process by which consenting adults reach agreement is called a contract. The law enforces contracts via coercion which is approved by some libertarians and is a concern for others. The law remedies harm caused by torts and crimes in which consent is violated which most libertarians accept as a necessary evil (use of socially justified coercion to remedy private coercion). When you are talking about free to and free from you are talking about the former child in us all that has to deal with paternalism while developing a will of one's own in a social landscape. Beyond that is the problem of ethics: we do not agree on what is good and we do not always agree on how to cause the good. The two papers I find most useful are under the download links on biologyoflaw dot org. See Justifying Law and Of Humans and Squirrels The Origin of Rights and Duties both by author Hugh Gibbons. Hugh was my professor for Torts and Legal Philosophy courses.

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  4. There's a Milton quote I've always liked which is reminiscent of Elledge's point:

    "None can love freedom heartily but good men; the rest love not freedom, but licence."

    As has been clear for some time, those "free traders" who wish to leave the EU are in favour not for reasons of trade but for reasons of license: they wish to be free from the responsibilities that trading within the EU entails: financial contributions, free movement, having to accept EU court rulings and financial regulations, etc.

    Personally I've long distinguished between liberal attitudes with regards to the market or social policies, as they often don't go hand in hand. The EU is closest to the Lib Dems in sentiment, liberal both in economic and social outlook. Whereas generally the Conservatives, as a party, disagree with the EU mostly on social policy and Labour, under Corbyn, seem to disagree on the economic side. Both would thus be happy with some "freedom from", just in different areas.

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  5. I think this is a little unfair on many Brexiteers.

    If all the EU did was encourage free trade through regulatory harmonisation then I do not think many would object. Is the fact that it was perceived as going way past that that drove the Brexit movement.

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  6. The grass will always look greener on the other side.

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  7. A cursory glance at free trade throughout the world especially with the state of advancement in technology, should signal to most people that we are living in a totally different era than that which came before.

    In essence free trade to any country not already at the commanding heights in the world is pure illusion. Markets are already dead in the water, those with massive raw material resources are the only ones that can compete in a world dominated by the Asian block.

    The new paradigm is self sustainability, and that is really the only game in town, competition and world trade is old hat and totally irrelevant, it really is time to wake up and smell the coffee, we can create industries to serve our own needs and in specialist cases export some things, but in general economics has a limited view of the new world, which will be dictated by need, or if people don't wake up, corporate dictatorship.

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  8. I'm not sure the Chinese and Indians would consider the EU a free market.

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    1. You'll find that a remarkable amount of product comes into the EU from China with 0% duty.
      Also, have a look at your i-phone: that seems to have got into your pocket without too much difficulty, whether you are in the US, EU or anywhere.

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  9. Amartya Sen in "Rationality and Freedom" (which I am starting to read) distinguishes between:
    - the "opportunity aspect" of freedom (which economists tend to concentrate on); and
    - the "process aspect" of freedom (which political philosophers tend to discuss).

    Sen observes that it is possible for the two aspects of freedom to diverge. For example, giving (say) the British electorate more say over the rules of trade (i.e., expanding the "process aspect" of freedom) may leave the British people less able to achieve their wellbeing goals (i.e., a contraction of the "opportunity aspect" of freedom).

    Ideally (in a democracy), the social choice about which aspect of freedom is more important would be made through public discussion and good reasoning.

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  10. In general it safest to assume that anybody who talks about free trade ad free markets can be safely ignored, because neither is ever truly free, as they are defined within, for example, laws, agreements and, ultimately, ruled by naked power.

    In fact it occurred to me that while I understand that the phrase "free trade agreement" sounds nicer, what with the freedom and all, it's much more accurate to just call them trade agreements.

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