Economic Ideas Have Consequences . . . Indirectly.

Remnant Review

In the year 1750, the greatest philosopher in the world was the Scotsman, David Hume.

Toward the end of the century, the philosopher who replaced him as the greatest philosopher in the world was Immanuel Kant. Yet, Kant wrote the following: "I freely admit that it was the remembrance of David Hume which, many years ago, first interrupted my dogmatic slumber and gave my investigations in the field of speculative philosophy a completely different direction." David Hume was the heavy hitter, philosophy wise, in the middle of the 18th century.

In 1752, Hume wrote an essay defending free trade: "On Commerce." A quarter of a century later, his close friend Adam Smith wrote The Wealth of Nations, which was basically an 800-page extension of David Hume's original essay.

Most economists today favor free trade. There are a few exceptions, and there have always been exceptions. In contrast, in their judicial capacity as voters, the general public has never been persuaded of the free trade position. Even among the voters who claim to be defenders of the free market, when push comes to shove, they are still mercantilists. They still hold the economic position defended by the early economists of the late 17th century, against whom David Hume and Adam Smith directed their intellectual firepower.

We get back to the bedrock reality of human thought, namely, that most people cannot follow long chains of reasoning. Only a relatively small group have this ability, and only within their specialties. Even they get sidetracked when it is in their economic self-interest to stop following a particular chain of reasoning.

FREE TRADE AND FREE MEN

The touchstone of whether a person really believes in the free market is his attitude on free trade. This has certainly been true since 1776, when Smith wrote his book. The basic arguments in favor of free trade have not changed since 1776, or even 1752. The basic arguments for mercantilism have not changed since about 1670. We can find defenders of both positions among professional economists.

American manufacturers are almost instinctively mercantilists. They don't want competition from abroad, and they scrounge around in search of any kind of argument to defend the imposition of federal sales taxes on imports, which is what all tariffs are. It has nothing to do with logic. It has everything to do with pocketbooks.

We find that there are few defenders of free trade among American textile manufacturers. We find that special interest groups in the manufacturing sector hire professional economists to defend the special interest group's call for tariffs, import quotas, and other restrictions on competition from outside the borders of the United States. They always find economists who are willing to abandon their commitment to free market principles for the sake of a high salary. These economists journey to Washington to testify before congressional committees, and they present graphs, arguments, and even equations in favor of government restrictions on imports.

Beginning before World War II, the Rockefeller Foundation began sponsoring conferences in favor of free trade. This was part of a global effort to create an international trading community. Large-scale American manufacturers that were involved in international trade wanted lower tariffs. It was clear that these large manufacturing organizations could compete successfully, so their senior managers favored free trade. The internationalists, of which the Rockefeller interests were the most notable agents, favored free trade as a means of extending international trade, international finance, and international law. So, the interests of the Rockefeller Foundation and large American corporations -- today called multinationals -- were unified.

The Rockefeller Foundation began holding conferences of professional economists. Free market economists, such as F. A. Hayek, Wilhelm Roepke, and Ludwig von Mises, were paid to participate in these conferences and to write books. These free market economists were internationalists in the area of economic trade, so the Rockefeller Foundation put up the money to help promote their ideas on trade. Other economists fell in line because in the history of economics, ever since the time of Adam Smith, free trade has been the dominant position.

But there was an exception to the internationalism of the Rockefeller Foundation and large American corporations. They did not like the international gold coin standard. That was because they did not like it domestically. The gold coin standard placed limits on the manipulation of the domestic economy by central banks. The internationalists have always been great promoters of national central banks. This goes back to the creation of the Bank of England in 1694. So, when it comes to internationalism, the internationalists do not favor the single institution which has done more than any other to promote international trade: the international gold coin standard. They opposed it throughout the 20th century.

Professional economists virtually all fell into line. You cannot find a college-level economics textbook that does not promote central banking. You also cannot find one that openly favors the international gold coin standard. Always, the textbook writers, in the name of free enterprise, promote central banking, yet the economics of central banking is exactly the same as the economics of every other cartel. The government creates a cartel to favor a special interest group within the economy. The textbooks all go into detail regarding the nature of this special arrangement, and how cartels reduce customer satisfaction and consumer wealth. But, when it comes to the chapter on central banking, the authors are careful to separate this chapter from the chapter on cartels. The economics are identical, but the chapters are separated. This is not random. This is self-conscious.

Throughout the 20th century, the Rockefeller Foundation and the Federal Reserve system put economists on the payroll, or granted financial aid to economists who would promote the interests of central banking. The entire economics profession in the United States got the message, with the exception of the Austrian school. This is why the overwhelming majority of professional economists are persuaded that the best possible way to run an economy is by means of a central bank. They may not favor central planning in any other area, but they do with respect to the central institution of all economies, namely, money and banking. Here, they favor government regulation. Here, they favor committees of expert economists who will guide the economy by means of manipulating the money supply.

In other words, economists are true to their real commitment, which is their confession of faith: self-interest is supreme. Money talks. People follow their own self-interest in making decisions, and then they create justifications for these decisions.

This was Marx's line of reasoning. He said that the mode of production is fundamental to society, and philosophy and ethics are simply justifications for the prevailing mode of production. The mode of production is the substructure, and philosophy is the superstructure. What matters is the mode of production. This was Marx's view, and when push comes to shove, this is also the view of most free market economists. They really do believe in self-interest as the motivating factor of most people, or even all people, most of the time, or even all of the time.

VOTERS VS. CONSUMERS

Most voters favor tariffs and import quotas. Most voters are operational mercantilists. They have never believed Adam Smith.

Nevertheless, voters have been thwarted ever since the presidency of John F. Kennedy. There has been a constant push from the presidency to reduce tariffs, reduce import quotas, and extend the authority of bureaucratic international organizations, of which the supreme model is the World Trade Organization. So, we have seen the triumph of reduced tariffs. We have seen a tremendous increase in foreign trade within the American economy over the last generation. The voters have not gotten their way.

Above all other special interest groups, the trade unions have not gotten their way. The trade unions vote Democrats into office, and then most Democrats turn on them by promoting reduced tariffs, greater trade, and therefore greater competition from low-wage countries. The result has been the steady elimination of trade unions in the United States, except in the various levels of civil government.

Here is the amazing fact. Trade union members vote against their self-interest every time they vote for a Democrat to represent them in Congress. Surely, they vote against their own interests in electing Democrat presidents. Historically, the Republican Party has favored tariffs. Historically, the Democrats have favored free trade. Yet the trade union movement since 1912 has been in favor of the Democrats. These people never catch on. The Republicans wanted free trade in labor services inside the United States, and the Democrats did not. But the Democrats favored free trade across American borders, and while most Republicans since 1970 also favored this, there were more Republicans opposed to it than Democrats. It didn't matter. Free trade has pretty much destroyed the trade union movement, yet trade union members are registered Democrats.

Trade union members did figure out that free trade, whether domestic or international, undermined the union movement. The union movement is based on government coercion that favors trade unions. The great growth of trade unions came after Franklin Roosevelt was elected in 1932. But trade unionists never figured out how to deal with the problem of Democrats who are in favor of free trade across America's borders. These Democrats, while officially opposing right-to-work laws, and officially opposing the Taft-Hartley law of 1947, nevertheless consistently voted for lower tariffs. That was sufficient to undermine the trade union movement in manufacturing.

THE LIMITS OF LOGIC

I recognized a generation ago that arguing in favor of free trade was probably futile with respect to the average conservative voter. I said this specifically back in 1973. I wrote this in my book, Introduction to Christian Economics.

We come now to the economic issue that separates the economists from the special interest pleaders. There are a lot of supposedly free market capitalists who shout the praises of open competition, but when the chips are really down, they call for the intervention of the monopolistic, coercive State to keep Americans from trading with other Free World countries. Competition among Americans, but not between American companies and foreign companies: here is the cry of the tariff advocates. The fact that less than 5% of our economy is directly involved in foreign trade never phases these enthusiasts: free trade is "destroying" the other 95% of the American economy! Somehow, the principles of capitalism operate only within national boundaries. Somehow the intervention of the State will "protect" Americans. Henry Hazlitt's classic little book, Economics in One Lesson, so completely destroys the arguments of the tariff supporters that there is nothing left of their position; still they keep coming. For two centuries their position has been intellectually bankrupt; still they keep coming. Tariffs hurt all consumers except those on the public dole of tariff intervention, e.g., the "infant industries" such as steel or textiles. Yet the advocates say that all Americans are "protected." The logic of economics cannot seem to penetrate otherwise rational minds (p. 341).

Yet this mercantilist mindset of the voters did not translate into federal trade policy.

I still spend time arguing in favor of free trade. I have even set up an entire department arguing in favor of free trade. Why do I do this? Because I believe that, in the long run, righteousness wins out. In the long run, those economic policies that are in favor of forced wealth redistribution by the government, direct regulation by the government, and all the rest of the modern Keynesian economy, will ultimately fail the test of competition.

Free-market policies lead to greater benefits for consumers, and ultimately consumers make the final decisions. They have the money, and money is the most marketable commodity. Consumers demand to be served, and even when they go into the voting booth and vote in favor of politicians who say they will vote in favor of tariffs, this will not be successful. What people do in the voting booths will not overcome what they do in the marketplace. They want better deals. They want cheaper products. They ultimately don't want to buy American when American-made products don't meet their criteria. They are going to vote with their pocketbooks; they are going to vote for economic efficiency. Self-interested behavior in the marketplace will ultimately overcome self-interested behavior in the voting booth.

I am in the business of promoting ideas that will ultimately triumph in society, not primarily because of their logic, but because of the tremendous power of the free market to overwhelm all forms of interventionism. It was not Adam Smith who won the case for free trade. It was the British Empire, which was based mostly on free trade. By the early nineteenth century, the British Empire of trade was no longer based on political favors to the East India Company. It was based on open competition. This favored British producers, and this favored British consumers. It favored consumers in every nation. That is why Adam Smith's outlook won.

In other words, I believe in consistency. I believe there is cause-and-effect ethically in the universe. I believe that right makes might. I believe that customer authority will eventually triumph over voter sovereignty. I believe that money talks. And I believe that when it talks, it talks in favor of liberty. When people go out to spend their money, which is what really matters in the free market, they spend it in favor of those producers who compete most successfully internationally, which means those firms that profit most in terms of free trade.

There will always be lots of arguments in favor of mercantilism. In the long run, they will fail. They will fail precisely because people, in their capacity as customers, vote with their money in favor of better deals, and widespread competition increases the number of good deals. This applies also to Keynesianism, which is a form of mercantilism.

This is why Keynesianism cannot survive much longer. This is why tariffs and quotas cannot survive much longer. This is why central banks will not be running the political or economic show at the end of the 21st century. Consumers will then go in search of moral and ideological justifications of those institutional arrangements that have triumphed in open market competition.

CONCLUSION

Ideas have consequences, but in matters economic, consumer spending has far greater consequences. Consumer spending is going to determine which people adopt which ideas.

I think Keynesian logic, like mercantilist logic, will fail to persuade the vast majority of self-interested promoters. The most influential self-interested promoters are customers. They have the money, and money is the most marketable commodity.