Economists preach free trade. Rarely do countries practise it. International trade theory is essentially microeconomic theory, extended because of a border in between. In microeconomics, there are two theorems known as fundamental theorems of welfare economics. They state competition and the invisible hand are best, from a welfare point of view. However, that ideal of perfect competition rarely exists. Yes, government intervention has costs. But the ideal of capitalism, where free market prevails, doesn’t exist either.
In similar fashion, all theories of international trade, no matter how sophisticated, are based on assumptions. Free trade doesn’t exist. Free flows of goods and services don’t exist. Free cross-border flows of capital and labour don’t exist. Factor (capital and labour) prices aren’t equalised across countries. These are ideal assumptions that serve a modelling purpose. They guide policy and no more. Indeed, trade negotiations have reciprocity built into them. Barring WTO accepting new members, since the conclusion of the Uruguay Round, which took place prior to WTO formation, there has been no liberalisation under the WTO umbrella. Therefore, invoking WTO to argue for free trade is a non-sequitur. Economists will be aghast. But I am not arguing for autarky, absence of trade. I am only urging caution.
When we were undergraduate students, a teacher used to urge us, “Read the classics.” That’s remarkably good advice, because unlike the present crop of economists, classical economists were well-grounded in political economy and appreciated the real world better, since the real world hadn’t been replaced by equations and a clutch of Greek symbols. In the 20th century, one of the best political economists, and not just an economist, was John Maynard Keynes (1883-1946). The inter-war years, between the two World Wars, were a period of protectionism and trade wars, eventually leading, through Bretton Woods, to the establishment of GATT in 1948. In 1933, Keynes wrote a paper in The Yale Review. The paper was titled “National Self-Sufficiency”. I don’t think this paper has been translated into Indian languages, say Hindi. Were self-sufficiency to be translated into Hindi, what would you call it? Atmanirbhar, I guess.
To quote Keynes, “I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage… As lately as 1923 I was writing that free trade was based on fundamental ‘truths’ which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words. Looking again today at the statements of these fundamental truths which I then gave, I do not find myself disputing them.
Yet the orientation of my mind is changed… To begin with the question of peace… But it does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country’s economic resources and the influence of foreign capitalists, and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace… Let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.” The circumstances in which these words were written should sound very familiar.
There is a statement attributed to John Maynard Keynes. Evidently, one of his detractors once accused him of being inconsistent and Keynes retorted, “When the facts change, I change my mind. What do you do, sir?” Sometimes, a different combination of words is used, but the purport remains the same. There is no actual record of Keynes ever having said anything of the sort. But it does sound like the kind of thing Keynes might have said. Indeed, in 1970, Paul Samuelson said, “Well when events change, I change my mind. What do you do?” and in 1978, he attributed the words to Keynes. Two famous economists, both articulating virtues of not being consistent. Given what’s going on in the world today, we should become inconsistent and parrot the virtues of free trade a little less.
To get back to the Keynes paper, “A considerable degree of international specialisation is necessary in a rational world in all cases where it is dictated by wide differences of climate, natural resources, native aptitudes, level of culture and density of population. But over an increasingly wide range of industrial products, and perhaps of agricultural products also, I have become doubtful whether the economic loss of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the product and the consumer within the ambit of the same national, economic, and financial organisation.
Experience accumulates to prove that most modern processes of mass production can be performed in most countries and climates with almost equal efficiency…National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford, if we happen to want it…Thus, regarded from this point of view, the policy of an increased national self-sufficiency is to be considered, not as an ideal in itself, but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued.” That last sentence is especially worth thinking about. In 1933, Keynes had Russia (not so much Germany) in mind. The intended country has of course changed.
Bibek Debroy
Chairman, Economic Advisory Council to the PM. Views are personal
(Tweets @bibekdebroy)