Adam Smith Institute

Tim Worstall (he of this parish) has a very good post over at the Globalisation Institute. He points out that coffee can be grown in Cornwall – indeed it has been, at vast expense. But should it? Adam Smith made a similar point in his Wealth of Nations:

By means of glasses, hotbeds and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about 30 times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of Claret and Burgundy in Scotland?

Surprisingly the aid brigade (by which I mean those who earn a good living by demanding aid for the world's poor) are almost unanimous in defending protection for domestic industries in the developing world. They deride free trade and claim, wrongly, that all nations need protection to become rich.

They are victims of the old urban myth of mercantilism, and still believe, along with hobgoblins, incubi and vampires, that nations get rich by selling exports and can then afford to buy stuff. In fact it's imports that help create wealth by getting you things cheaper than you could make yourself, thus giving you surplus spending power with the cash you save.

If developing nations have protective tariffs, it means their citizens pay more for stuff, and are poorer in consequence. It means that their businesses have to buy dearer materials, and thus make goods that can't compete on world markets. I'm often asked about this at schools, and surprise people with a rather laidback attitude. Yes, you can have protectionism and still get rich, but free trade is better. The point is that the free market is quite resilient. You can do a lot of things wrong and it still works to some extent, and you can still get rich. I tell them there are three things you can't do, however: genocide, civil war, socialism...

From Power and Plenty:

Another important economic link between Venice and the Ottoman Empire was the sale of high-quality Venetian woolen cloth to the latter. In the course of the 17th c., however, the Dutch and English, yet again, displaced Venice and the other Italian producers in the Levantine markets for these key manufactured goods. Charles Wilson pithily accounts for this by observing that "the Turks wanted cheap, light cloths. The Venetians offered dear, heavy ones." Constricted by guild regulations, Venice insisted on maintaining high quality and high prices. Meanwhile, northerners lowered quality and price... 

That old saw about those who ignore history being condemned to repeat it comes to mind really. Most obviously in the current success of clothing chains like Matalan and Primark: it appears that what the Brits want is cheap and light and so if you lower quality and lower price...

And so many  business disasters can be explained by that "constricted by guild regulation" line. No, it doesn't mean just unions, management has been just as purblind at times: the Austin Allegro was proof that there are things too light, too cheap and too low quality even for the British.

The basic lesson though is obvious, isn't it? The producers who actually provide what the consumers want prosper, those who attempt to supply what suits themselves do not. The next question I suppose is which side of that line Microsoft Vista belongs?

In an interview with the Financial Times earlier this week, Hillary Clinton again voiced her doubts about free trade. Having previously called for the US to take a "time out" on new trade agreements, she claimed the theories underpinning free trade might no longer hold true in an era of globalization, and questioned whether it was worth reviving the WTO's Doha round of trade talks:

I want to have a more comprehensive and thoughtful trade policy for the 21st century. There is nothing protectionist about this. It is a responsible course.

Of course, Hillary's stance is not neither responsible, thoughtful, or comprehensive. And not only is it protectionist, it is it is pure politics too (her attempts to ground it in economics have already been rubbished here, by Daniel Finkelstein). Hillary has blamed globalization for America's economic difficulties because it makes an easy scapegoat. Everything from job insecurity to squeezed living standards can be blamed on foreigners, and an easy solution can be suggested – restrict trade.

The suggestion is that free trade is inherently unfair – a way of shipping US jobs abroad, where workers are easier to exploit. This is nonsense: free trade simply means the freedom to engage in mutually beneficial transactions without the artificial barrier of national borders. It leads to a more economically efficient allocation of resources, boosting productivity and creating more wealth for everyone. As we have seen in India and China, the effect of trade liberalization on developing countries can be particularly benign, lifting millions out of poverty. None of this costs America jobs – just as the US trade deficit rose from $19 billion in 1980 to $786 billion in 2006, employment rose from 99 million to 145 million.

Trying to restrict trade will only hurt the US, accentuating rather than softening any economic downturn. It won't do the rest of the world much good either. Hillary Clinton should rethink her position.

I was speaking on BBC4's World TV programme about capitalism and globalization. Tony Benn deplored how undemocratic it all was, with WTO, World Bank and others not directly elected by the people. I said that it wasn't supposed to be democratic.

The idea that something so vast as a complex global market should be directed by a few elected politicians was laughable. It has billions of inputs which produce an unplanned social and economic order more intelligent and flexible than anything which human minds could direct.

Professor Jagdesh Bhagwati of Colombia University made several valid points about how poorer nations, including India, had thrived and prospered once they had entered that global market-place. He sided with the achievements of capitalism and trade, which I pointed out had lifted more people out of poverty last year than ever before in human history. I do hope and believe they will continue to do so.