"Cosmopolitan Protection"; an Oxymoron?
by Keith Rankin
Paper for the Symposium
Massey University, Albany Campus, 13 February 1999
This short paper takes issue with the standard assumption that arguments for free trade are typically cosmopolitan in character, whereas arguments for trade protection are necessarily nationalist. The standard interpretation seems in part to have arisen from Friedrich List's mischaracterisation of Adam Smith's Wealth of Nations as "cosmopolitical economy", in contrast to his "national system of political economy". Both from my reading of works on the late nineteenth century international economy and contemporary and historical works about the recovery from the Great Depression, I argue that appropriate forms of protection have stimulated rather than retarded the growth of the international economy. Furthermore, in the late-twentieth century, there is a form of political economy - Green political economy - that is overtly cosmopolitan and overtly protectionist. I argue that, while Green paradigms remain inchoate in form, that the conflation of internationalism and protection is a central strength of Green economics, and not a fatal flaw. I also argue that other arguments for a policy shift in a protectionist direction are, in many cases, consistent with a cosmopolitan worldview.
One of the most enduring debates in international political economy is that of "Free Trade vs. Protection". The issue has been settled within international economics in favour of free trade, thanks in part to a game of word association that links protection with "mercantilism", and also to economics' Platonic emphasis on unrealisable "first-best" representations of the world economy.
The alternative to global free trade is represented today, in many economists' minds, by the terms "protectionism", "mercantilism" and "economic nationalism". These terms are generally regarded as synonyms. With one of the nuances of one of these terms (mercantilism) being the fallacy that a nation's wealth is represented by its share of the world's currency reserves, the whole spectrum of ideas covered by these three terms is easily dismissed with a degree of contempt. Protectionism is equated with nationalism, which is in turn equated with zero-sum (or negative-sum) economics. On the other hand modern international economics is unambiguously "cosmopolitan" (or "multilateral") in its orientation. If protection is nationalist, and free trade is cosmopolitan in its orientation, then, international economists will argue, "cosmopolitan protection" must be an oxymoron.
There is a fallacy, however, behind such reasoning. While the modern free trade argument is cosmopolitan in its orientation, that does not mean that "cosmopolitical economy" necessarily requires free trade. Similarly, it is possible to present purely nationalist arguments for free trade. "Free trade imperialism" (Semmel 1970, Gallagher and Robinson 1953) is not only not an oxymoron; it's a realistic assessment of British commercial (and fiscal) policy.
The "Free Trade" and "Nationalist" Schools of the Nineteenth Century
Free trade is linked to the French physiocrats (François Quesnay) and the British classical school, through laissez-faire, Adam Smith's 1776 critique of the "mercantile system" and "vent-for-surplus" theory of international trade (Myint 1958), Ricardo's comparative cost theory (1817), Wakefield's philosophical radicalism (Semmel 1970) and through the cosmopolitan visions of British MPs Richard Cobden (Hughes 1938) and John Bright (Sturgis 1969). The modern free trade school is built on Ricardo's analysis and Cobden's radical vision of globalism.
Quesnay, Smith and Wakefield are better understood as nationalists than as cosmopolitan thinkers. Douglas Irwin (1996), in his Intellectual History of Free Trade, says of Adam Smith:
Smith created such a compelling and complete case for free trade that commercial policy could no longer be seriously discussed without contending with his views.... Smith's case for free trade was based on its being in the national economic interest, not on some cosmopolitan ideal as he was later accused of by Friedrich List and others.
Smith, more concerned with the efficacy than the aims of mercantilism, said in the paragraph of The Wealth of Nations preceding his discussion of consumer sovereignty (book 4, ch.8):
The laudable motive of [mercantilist] regulations is to extend our own manufactures, not by their own improvement, but by the depression of those of all our neighbours, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals.
He was espousing an alternative response to Dutch merchant capitalism. Smith's better way, while overtly nationalist, was also cosmopolitan. Smith's recipes represented constructive rather than destructive rivalry. Furthermore, Smith believed that protective policies were not required to induce the kind of national improvement that he sought. The "Invisible Hand" guided capitalists to, ceteris paribus, favour investment at home rather than abroad, and consumers to prefer to buy goods produced at home over imports. In the full text of his "Invisible Hand" passage (in contradistinction to the truncated version [eg Samuelson 1975]), Smith (1776, book 4, ch.2) was a strong advocate of domestic industry:
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
As an example of one of Smith's "many other cases", Smith himself can be said to have been guided by an invisible hand to promote, unintentionally yet effectually, a school of cosmopolitical economy.
Edward Gibbon Wakefield was the dominant personality of a group known in the 1830s and 1840s as the Philosophical Radicals (Semmel 1970). The group, which included Jeremy Bentham in his later life, strongly influenced John Stuart Mill. They were more politically influential than were Cobden and Bright who were outsiders from the political establishment. Wakefield was an acolyte of Smith (indeed he edited and heavily annotated a new edition of Smith's Wealth of Nations in 1835) while a critic of Ricardo. He developed an imperialist approach to commercial policy that linked free trade to British expansion (Semmel 1970).
Not only was free trade advocated for nationalist reasons, but it often meant something less than global free trade. Wakefield's project, like Smith's before him (Smith 1776 bk.5 ch.2, Nicholson 1910), was a "project of an empire", and free trade came to mean to colonists much as it did to Quesnay: internal free trade (ie internal to an empire). Furthermore, revenue tariffs - the dominant source of public revenue in free trade Britain - had significant protective effects. For example, tariffs on wine protected the British brewing and cider industries.
There were other reasons for the promotion of free trade in 1820s' and 1830s' Britain. The prophets of the age were two economist clergymen: Thomas Malthus and Thomas Chalmers (Hilton 1991). The spirit of the age was eschatological; preachers such as Chalmers believed that people needed to be prepared through discipline for the world's downfall, and that the discipline of international market forces could contribute to that. Free trade was favoured because it eroded ordinary people's expectations of comfortable living; not because it fuelled them. While this view was not nationalist, it reflected a national mood, quite different to that of, say, France.
As Irwin noted, it was Friedrich List, a key figure of the "Nationalist School", who loudly criticised Smith's "Cosmopolitical Economy", and explicitly wrote a manual for a "National Economy". J.S. Nicholson stated, in his 1904 forward to List's major work, that List had misinterpreted Smith's argument. List, Nicholson thought, had not read Smith with much care, if at all. List had been critical of Smith on account of his popular reputation; a reputation that List's critique reinforced. For List it was "cosmopolitical economy" that was the pejorative term; now it is "economic nationalism" that is a term of disendearment. If anything, List - who saw nationalism as a stage that each nation in the temperate climatic zone must take on the way to creating a global "economy of mankind" and protectionism as a necessary policy for such a stage - was more a prophet of globalism than was Adam Smith. List could not be called a cosmopolitan protectionist though; he did believe that free trade would be the modus operandi of an economy of mankind in the distant future, and he believed that consumers did pay an immediate price for protectionist policies.
Semmel's writing draws on the reinterpretation of British imperialism by Gallagher and Robinson (1953). Their conclusion that British economic policies were essentially imperialist throughout the century were echoed in more a recent publication by Paul Bairoch (1993). Bairoch's empirical analysis shows that free trade was the best nationalist policy for Britain in the third quarter of the nineteenth century. Likewise, protectionism was the best nationalist policy for all of the countries seeking to catch up with Britain at the end of the 19th century. More importantly, he showed that the massive expansion of world trade in the 50 years before World War I was much more a consequence of the growth of trade participation by the protectionist countries than by Great Britain.
Protectionist policies proved to be a dominant ingredient in the growth of the world economy from the beginning of the first industrial revolution in the late eighteenth century. Protectionist countries contributed the most to the growth of world trade. (This does not contradict the economists' view that the ratio of trade to production is higher in a multilateral free trade environment.) Protectionism was a prerequisite for industrialisation and that the consequence of industrialisation was more rather than less trade. The development of the international economy followed from each country emphasising its investment in its own productive capacity.
The Recovery from the Great Depression
Another of the myths that Bairoch addresses is the popular view that protectionism in the 1920s created the Great Depression of the 1930s, and the even greater depression of world trade.
The alternative explanation is that the level of protectionism in the 1920s was in fact no greater than in the years before World War I, and that it was a number of other non-protectionist policies that had the "beggar-thy-neighbour" effects - in particular attempts to deflate prices to conform with inappropriate fixed exchange rates, and a general preference for limiting wages as a means of raising exports while reducing imports. Every industrialised nation wanted to produce more wage goods, without raising wages.
In 1933 J.M. Keynes advocated protection as a means by which countries might get themselves out of depression without exacerbating the problems of other countries. And so it proved. Protection was a necessary component of Britain's recovery (Rooth 1993, Glynn and Booth 1987), and Britain's recovery stimulated rather than retarded the recovery of the international economy. National protection had international benefits. International trade had recovered significantly by 1939, although world trade-to-production ratios remained below their 1920s' levels.
Unfortunately, word association operates to gives modern economists - or at least the growing proportion of them who have studied just a little economic history - a quite erroneous impression of the international forces that created both the Great Depression and the following recovery. The term "beggar-thy-neighbour" immediately brings to mind "mercantilism" and negative-sum "nationalism", and we have learned to associate those terms with "protection" (Rankin 1998, p.218).
The Green View - think Global, act Local
Green approaches to economics are holistic (meaning planetary, global), yet they emphasise local action and the mutual advantages of every society and community tilting their national and local "playing fields" in favour of their own producers. This is little different from Adam Smith's view that, ceteris paribus, investment in domestic industry should be favoured over investment in foreign trade or in the international carrying trade. The difference is that Green political economists such as Herman Daly believe that incentives need to be offered to facilitate such local investment.
By reducing the likelihood that the market forces at play in any nation - indeed at any location within a nation - will change suddenly, the downside risks faced by local entrepreneurs are minimised. A society with moderate across-the-board tariff protection is a society with a high probability that relative prices tomorrow will be similar to today. Such a society is conducive to local innovation and to new small business activity. The tariff serves to buffer local economies against international fluctuations. Local substitutes will, at the margin, replace imported commodities (Douthwaite 1996; also Hazledine 1998, p.160).
Such societies with strong local economies remain exposed to the international price mechanism; they are simply less exposed to market noise. Fickle changes in world demand schedules, supply shocks that significantly increase or decrease the amount of a commodity on the market in one year compared to the next, and the dumping of surpluses at marginal cost can destroy capital-intensive local industries well before pay-back time. I noted in 1998 that "overexposure to global markets makes New Zealand [and any small country] particularly vulnerable to global market failure" (Rankin 1998, p.211). In the standard economists' formulation of the international economy, all countries are small.
The Green argument works for any country unilaterally, and works even better for all countries together. International capital cannot threaten to exit from protectionist economies if all are equally protectionist.
The Green argument is a stabilising argument that sees massive market failure in the power relations of an unpartitioned global economy; especially in the externalisation of production costs made possible by producer interests setting nations and communities against each other like prisoners in the famous dilemma. The environmental commons is the first victim when rational "prisoners" are pushed into lose-lose strategies. Nations can buffer themselves from the destructive external forces over which they have no control. Import restrictions can act in each country like a valve; letting in only what facilitates constructive international economic relationships.
A particularly important source of instability to Green writers is the international capital market, which moves literally trillions of dollars in a single day (Hazledine 1998, p.152) mostly focussed on one or few fashionable investment opportunities which may only be marginally superior - if that - to those to which capital does not flow. In the end, these massive flows of capital destroy the investment opportunities they were attracted to by making them into objects of speculation, by raising the local exchange rate to the detriment of other industries in the capital-importing nation, and by stimulating a flow of imports into that economy. Such capital is prone to leaving as quickly as it comes, leaving the formerly favoured nation with a huge interest bill and a damaged tradeable sector.
Prominent presenters of the Green economic view include Richard Douthwaite and Herman Daly. Their writings are quite explicitly protectionist. Without fully appreciating the dichotomy between national and cosmopolitical economy, they are concerned about global rather than national welfare. To favour any form of beggar-thy-neighbour policy that could damage all nations simultaneously would be totally contrary to their paradigm.
The Green paradigm contrasts with the Hamiltonian "strategic trade" worldview that continues to dominate American trade politics. Sicklen (1998) is an Australian paper in the Hamiltonian tradition. Much writing on the American left is concerned solely with protecting manufacturing to create American jobs. While the writing is quite unashamedly nationalist in orientation, the suggested protective policies may be little different to those advocated by Green writers. The differences between the Green cosmopolitan and the Hamiltonian nationalist arguments for protection are exaggerated by their highly contrasting attitudes towards economic growth. However, given that protective policies have both intended and unintended effects, it is not inconsistent for both groups to support similar policies while emphasising different effects. If the USA limits its purchases from the rest of the world, then other countries may be inclined to pursue domestic-led rather than export-led development strategies.
Much of the growth in the international economy since the 1870s has been an unintended (or downplayed?) consequence of development policies that were implemented for nationalist reasons. Protection in each nation can have global benefits, especially in a world with high unemployment. Protection enables domestic reflation without a balance of payments constraint. World trade grows, as the 'income effect' dominates over the 'price effect' of tariffs. Conversely, policies implemented under the auspices of internationalist free trade rhetoric can prove to be damaging to the development of the international economy. For example, the New Zealand government in 1999 pursues a rhetoric that favours tax cuts (Birch 1999) and wage constraint as means of raising New Zealand's international competitiveness - very much a beggar-thy-neighbour approach. New Zealand seeks to divert capital from employment in other countries.
A Modern Unbalanced Growth view
Scholars who study the historical growth of the world economy tend to emphasise "unbalanced growth" processes. The two names are most associated with unbalanced growth theory are those of Joseph Schumpeter and Albert Hirschman. "New Growth Theory" (or "endogenous" growth theory) - most associated with the name of Paul Romer - is neo-Schumpetarian in its orientation.
While this new approach to growth theory is dynamic and historical - quite the opposite of the neoclassical approach - it is neither explicitly protectionist nor explicitly cosmopolitan. Romer himself favours free trade internationally (Kelly 1996), and certain forms of domestic intervention within national economies.
This new growth view conforms with Green views on complexity. Outcomes are unpredictable; the insights of chaos theory are important. The world economy is inherently unstable - moving like "stormy seas" (Easton 1997) from one state of disequilibrium to another. For the Greens that is a contingency from which all should seek protection. For the Schumpetarians it has many positives as well as negatives. What both views suggest is that the level of allocative efficiency in the global economy may be irrelevant to the future of the world economy, and that a blind pursuit of free trade may be consistent with a third-best outcome and not the first-best solution that is possible only in theory (Rankin 1998, p.218). Protection, universally applied by national governments - like ships deploying stabilisers when in stormy seas - gives all parts of the world economy some shelter. Furthermore, as Hirschman (1958) suggests, economic development can be enhanced by barriers, bottlenecks and other problems. While protection may contribute to those problems which stimulate innovation, it also gives entrepreneurs, worldwide, some breathing space in which to solve those problems creatively. In the second quarter of the nineteenth century, England and Ireland faced Malthusian scenarios. It was protected England (and Scotland) and not exposed Ireland which found the space to industrialise its way out of its dilemma.
Whatever one makes of unbalanced growth arguments, because they emphasise growth through innovation and not through international market share, they cannot be categorised as attempts by one nation to grow at the expense of others.
Final Comments - Regulation, Protection or Anarchy?
The regulation of international trade can help to overcome international market failure, just as regulation within a national economy can enhance competition and allocative efficiency. Protectionist policies, mutually applied and in moderation, can enhance the efficiency of an unregulated unstable international economy. The advantage is that protectionist policies can be applied, to insulate national economies and stabilise the global economy, while we wait for a regime of international regulation and macropolicy to evolve. After all, free trade works within national economies because they are subject to regulation, to a legal system, and because public goods are available.
Protection may be second best to an international system supported by democratically accountable international government. But such protection, universally applied, is better than the anarchy that characterises international laissez-faire. National protection for the good of the international community is not a contradiction; rather protection, generally and moderately applied, buffers all nations from globally destabilising forces, while allowing each nation to seek full employment while taking advantage of global forces that facilitate sustainable economic development. Protection is not autarky. Cosmopolitan protection is pro-trade, but (as Adam Smith argued strongly) tends to see the growth of international trade as a consequence rather than a cause of the growth of local and national economies.
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