The Psychology of Economic Nationalism

Frank Knight once observed, “The free traders win the debates, but the protectionists win the elections.” Writing in The American Economic Review in March 1951, Knight’s words remain painfully relevant. Despite the visible gains from trade in recent decades—the international division of labor and the expansion of market size, to borrow Adam Smith’s terminology—the pull of protectionism persists. This persistence reveals something deeper about the political economy of trade: beyond economic logic lies a powerful psychological impulse, what Kenneth A. Reinert calls the “zero-sum” mindset in his book The Lure of Economic Nationalism.

What is Zero-Sum Thinking?

A positive-sum game is a social interaction in which all parties can benefit. In contrast, a zero-sum game assumes that one party's gain necessarily comes at another's expense, given fixed resources and rewards. While zero-sum games certainly exist—human history is full of them, from tribal raids to imperial conquests—the problem arises when positive-sum exchanges are misperceived as zero-sum. That, unfortunately, is the case with economic nationalism.

One of the first lessons in economics is that voluntary exchange benefits both parties. As Adam Smith famously argued in The Wealth of Nations, the “propensity to truck, barter, and exchange” is intrinsic to human nature. So if exchange is both natural and mutually beneficial, why does economic nationalism remain so politically potent? The answer lies in the prevalence of what we might call the organismic view.

Organismic View vs. Individualist View

When we talk about trade between individuals, there’s no need to invoke Smith or Friedman to explain why it's beneficial—it’s intuitive. But once the conversation shifts to trade between “nations,” things become murkier. The reason is the widespread adoption of an organismic view of international trade: the tendency to treat abstract collectives like “states,” “societies,” or “nations” as unified, decision-making beings.

This lens distorts our understanding. As Donald J. Boudreaux and Randall G. Holcombe put it in The Essential James Buchanan, “Only individuals possess preferences, only individuals experience gains and losses. Only individuals act and, hence, only individuals make choices.” The problem with the organismic perspective is that it disregards methodological individualism—the view that all economic and social phenomena result from individual actions. Once we abandon this view, we fall into a collectivist trap where trade is judged not by individual benefits, but by national metrics like trade surpluses and deficits.

In this mindset, a trade surplus means "winning," and a deficit means "losing." But nations do not trade—individuals do. And just as in all voluntary exchanges between individuals, both parties can come out better off. Yet, politicians and much of the public tend to view trade like a football match: someone must win, and someone must lose. The scoreboard? A misleading accounting figure called the trade balance.

As long as trade is viewed through a zero-sum lens, the temptation toward protectionism will remain strong. And when that happens, we end up, in the words of Henry George, “doing to ourselves in time of peace what enemies seek to do to us in time of war.”

Mani Basharzad