What Free Trade Really Means; J. Herbener

Delegates from the states sent to Consti tutional Convention in 1787put high priority on solving these problems of interstate trade. That's why the U.S. Constitution authorizes Congress "to coin money" and forbids the states from printing or coining money; it forbids the states from erecting trade barriers and authorizes Congress "to regulate commerce with foreign nations and among the several states." Dr. Herbener is Associate Professor ofEconom ics at Washington and Jefferson College and a Senior Fellow ofthe Ludwig von Mises Institute. By allowing the market to broaden, the integration of state economies had immense benefits. A uniform money removed the inefficiency of bartering different monies and the uncertainty of currency fluctua tions. Elimination of trade barriers allowed the division of labor to develop unimpeded, thereby greatly increasing productivity by an efficient allocation of factors of produc tion.

A dairy farmer in Pennsylvania could obtain a cigar more cheaply from a tobacco farmer in Virginia than by growing his own at the sacrifice of dairy products. Likewise a textile operator in New England could obtain milk more cheaply from the Pennsyl vania dairy farmer than on his own efforts at the sacrifice of clothing. Only on a free market where production is determined by consumer preferences can those preferences be satisfied to the greatest extent. Dairy farmers, tobacco farmers, tex tile operators, and all individuals not only obtain the highest quality products at the lowest prices but receive the greatest in come for the use of their factors in producing goods according to comparative advantage. The Role of Government All that government need do to foster wealth creation is protect private property and contract. By enforcing a legal code requiring restitution by criminals to prop erty owners for theft, fraud, and other violations, government is using its power to foster trade.

589 590 THE FREEMAN • SEPTEMBER 1995 When using its power to violate property and contract, however, government is man aging trade. Domestically, such a policy is called regulation; internationally, it is called mercantilism. Or it was, until recently, when apologists have taken to calling it "free trade." Both NAFTA and the Uru guay round of GATT were widely but mis takenly called free-trade agreements. Similarly, the ink was barely dry on the Constitution when the Hamiltonians began to embody their view that centralizing, Le., monopolizing, power over money and both interstate and international trade in the na tional government should be the fountain head of a system of domestic regulation and international mercantilism. Instead of adopting either a gold or a silver standard as a free market would, Congress opted for the Hamilton-Jefferson bimetallic standard, an unworkable hybrid that vacil lates between gold and silver. Worse yet, the legality of banking with fractional re serve notes and the imposition of the Ham iltonian central. bank were accepted.

Later, as Civil War emergency measures, the national government issued fiat paper money, forced its acceptance with legal tender laws, and established a federal reg ulatory system for banks in the National Banking System. This halfway-house to to tal national government control over money and banking was completed with the Federal Reserve System, which has given us the chronic inflation and business cycles of the twentieth century. A False Dilemma Whether or not the full exercise of na tional power over money in the Fed has been better than the devolution of that power in the states is an open question. But the dilemma the Founders saw is false. The way of escaping the detrimental consequences of power centralized in the national govern ment or decentralized in the states is to choose the free market. To argue that such power cannot be denied to government is to surrender to despotism. The concept of limited government necessarily implies that valuable powers can be denied to govern ment.

In monetary affairs this means govern ment protection of, and absence of inter vention into, private property and contract in money production. Entrepreneurs left to their own devices, within a system ofprivate property protection, will best satisfy con sumers with a pure gold standard-money as gold coin and notes and deposits 100 percent backed by gold. Such a system provides the benefits of uniform money without the drawbacks of arbitrary inflation. The benefits of eliminating state-erected barriers to trade were increasingly offset by the Hamiltonian policy, enunciated in 1791 in his "Report on Manufactures," of mer cantilism and regulations. In it he called for tariffs, quotas, pr~hibitions, inspections, regulations on foreign imports and prohi bitions of agricultural exportation, and sub sidies for domestic manufacturing to en courage domestic industrial development. Acceptance of Hamilton's pro-industrial, anti-agricultural, anti-British foreign policy led to a series of international trade barriers, like the Embargo Act and the NonInter course Act, that culminated in protectionist measures. Beginning with the tariff of 1816 these measures mushroomed into the Tariff of Abominations in 1828 that galvanized the agricultural South against the industrial North. South Carolina led the way in nulli fying the Tariff Acts of 1828 and 1832, and threatening secession if the national govern ment trumped its hand.

Having their agricultural economy dis abled for the benefit of manufacturing inter ests was a primary grievance the Southern states used to justify secession from the Union. The national government's war ef fort was used as reason for a vast expansion in national government power, and victory provided the excuse to consolidate it at the expense of the power of the states. It is doubtful that delegates from Southern states who signed the Constitution in 1787granting limited powers to the national government could have imagined in their worst night mares what their creation would eventually do to their states.

WHAT FREE TRADE REALLY MEANS 591 Since Reconstruction, this power has been used increasingly to regulate economic activity. The late-nineteenth century saw passage and enforcement of antitrust laws and regulatory agencies such as the Inter state Commerce Commission. The Progres sive Era extended the regulatory frame work, as did World War I. New Deal legislation, war powers during World War II, civil rights laws, and Great Society programs; all of them furthered the march of the Leviathan state. Whether or not the full exercise of na tional power over the economy has been better than the devolution of that power in the states is often hotly debated. But it too poses a false dilemma. America need not accept either centralized regulatory power in a national government nor decentralized regulatory power in the states. The free market, based on protection of private prop erty, will secure the blessings of liberty without government regulation of any kind, from any source.

The lessons from American history for deciding current foreign economic policy are clear. American prosperity depends on enacting a policy of free trade at home and abroad. Just as the states are forbidden to manage interstate commerce, the national government should be forbidden to manage internation~l commerce. Then the advan tages of\the division of labor could be extended to Pennsylvanians and Virginians not just between themselves, but with Ger mans and Japanese as well. Americans could have their standards of living raised by purchasing less expensive, higher quality Japanese cars, expanding the production of export goods where they have comparative advantage and surrendering the production of goods where they do not have comparative 'ldvantage. Far from being/ detrimental, giving up tasks where one has a comparative disad vantage to move into those where one has comparative advantage raises income. A Pennsylvania farmer who now devotes his land to growing tobacco will increase his income by shifting to dairy farming. Just as he has no worry about being an "unem ployed tobacco farmer," auto producers have no unemployment worries provided they are willing, like the rest of us, to accept employment in areas of their comparative advantage.

The transition of employing factors in different production activity is a normal, necessary part of any system that satisfies changing consumer preferences. In fact, the difficulty of transformation of production out of autos and into other activity exists only because past mercantilist policies have artificially built up domestic auto produc tion. Because of this, any move to free trade would entail a large, rapid reallocation; but if free trade had always prevailed, the re allocation would have been smooth and gradual. If Americans choose a political solution to the current international economic prob lems, they will face a disastrous dilemma. Maintaining the status quo forces America into the same role as one of the original 13 states in the late eighteenth century. We will continue to suffer the ills of managed trade: trade wars, balance of payments def icits, currency devaluations, and stagnating standards of living. Accepting the logic of centralizing political power, as with the GATT-created World Trade Organization, will lead to international regulation. Supra national institutions will come to command the economies of different countries in the way that the national government came to command the economies of the various states.

We must heed the lesson that so many Americans have paid so dearly in liberty and prosperity for us to learn. America must reject the false dilemma of managed versus regulated trade and choose free trade. That means that government at all levels must step aside and allow markets to work. D Economics on Trial Freedom for Everyone ... Except the Immigrant by Mark Skousen "We cannot continue to admit millions of legal and illegal immigrants if we wish to maintain our standard of living and our national identity." -Peter Brimelow, author, Alien Nation H ow often have we heard the refrain, "Well, I'm all for the free market except . . ." 1 It's particularly sad to hear it from Peter Brimelow, an otherwise friend of liberty in high places. Peter is a senior editor of Forbes magazine, the most influ ential business magazine in the nation. He has written eloquently about the bloated federal government and the demise of public education. He even wrote an article in Forbes praising Mr. Libertarian, the late Murray Rothbard.