The World of Neo-Mercantilism

While List did believe in free trade as an end in it itself, he saw the means to that differently than many of the contemporary classical-liberal accounts of free trade and its development, such as those of Ricardo or Smith. While the liberals believed that an economy should be opened up to international trade and competition, List believed that infant-industries should be protected by the nation-state so as to develop their competitiveness and give a particular nation economic power and advantage internationally. Further, he believed that the economy should be a servant to the nation, and that free trade served the individual and not the nation. While Listian critiques of free trade have become popular, particularly with neoliberalism and the developing economies, the idea that trade policy should be given over to the nation is fundamentally flawed, as we live in an international world where national interests are becoming abstract and arbitrary. The idea of giving economic power to a nation-state has been shown as flawed by Hayek and his concept of praxeology, whereby economic actions are a microcosm of different information that can’t be collated by a national authority. Also, giving the nation the ability to create trade policy opens it up to being corrupted by corporate and industrial power that influences policy in their favour, much we like see today. The problems of Listian conceptions of trade are also seen with the way many Western countries protect uncompetitive industries from international competition, thus locking developing economies into a poverty trap as they can’t access other markets. It then seems that while List’s ideas of trade and protectionism are attractive for developing and developed economies, the consequences mean that individual choice is hampered and the ability for businesses and individuals from developing economies to access other markets becomes nearly impossible, thus entrapping them continual poverty.

List’s primary critique of free trade was in relation to the nation. He believed that trade and the wider economy should serve the nation rather than serving individual interests on an international scale. Thus he saw pure free trade as a subjugation of lesser-developed nations to developed nations, stating “The result of a general free trade would not be a universal republic, but, on the contrary, a universal subjection of the less advanced nations to the predominant manufacturing, commercial and naval power”[1]. As a result, he believed that nations should be able to develop by means of protectionism so as to be able compete and work with the industries of developed nations. He further states “The system of protection… appears to be the most efficient means of furthering the final union of nations, and hence also of promoting true freedom of trade.”[2]. This statement also shows that List didn’t disagree with free trade in its entirety, but instead believed that for nations to develop to be in an equal union of nations, they needed to protect infant industries from international competition and develop some form self-sufficiency. This developed his critique of the pushing of free trade by dominant nations such as Britain, which he saw as hypocritical as they developed by means of targeted protectionism. On this point Chang notes “Britain had been an aggressive user, and in certain areas a pioneer, of activist policies… relation to woollen manufacturing, the leading industry of the time”[3]. List saw this hypocrisy as dominant nations kicking away the ladder so as developing nations couldn’t compete with them and thus became reliant upon them. However it now must be asked whether this critique of free trade and belief in infant-industry protectionism is correct and whether it does actually help developing nations in lieu of free trade.

The conception of limiting free trade in developing nations does seem quite attractive, as it suggests that developing nations can develop a level of competitiveness and industrial strength that is on par with developed nations. However this has not been the case. Instead competition has been stifled which in turn lowers innovation, meaning particular industries don’t have an ability to develop from an infant stage as there is no incentive from outside competition. An example of this was the Brazilian government putting strict import controls on foreign computers so as to develop the computer industry in Brazil. In the end that industry never became competitive and instead these protected industries copied cheap computer designs from abroad and sold them for more. Thus we see that without the incentive of competition to develop a competitive industry, they never develop. On the flip side, the few example of free trade we have in the modern world show a reduction in poverty and better purchasing power. Further removals of restrictions of trade would also yield even greater prosperity, as the World Bank states “Liberalizing trade would remove all tariffs and quotas, and allow goods and services to sell only for what they are really worth… the resulting changes in trade could lift more than 140 million people out of poverty”[4] showing that trade liberalisation done on a scale much larger than today would yield many benefits for developing economies. Further I find it strange that putting trade policy into the hands of government is even considered a good idea, as government involvement at the macroeconomic level has usually led resource misallocation and an ability for corporate interests to dictate policy to governments. Within trade, it is supply and demand that dictates who buys what and for what price. When the government involves itself in this system, we usually see price distortions, particularly as a result of trade interventions and protectionism. Hayek explains by saying “the “data” from which ‘the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.”[5] meaning that a central planner can never know the microcosm of information that exists within the market, thus it cannot adequately allocate resources and positively affect supply and demand. Rather, these protectionist policies that List envisions serve to stifle innovation and competition, thus raising prices and stopping the development of infant industries in the first place. We can see this Listian conception happening now within the global economy, with many Western protecting vulnerable industries and encouraging things like ‘Buy American’ or ‘Buy British’, thus stifling international competition.

What we see with much of the modern global economy is a Listian conception of trade. Many Western countries have massive, targeted protectionism so as to protect vulnerable industries from international competition. When Chang says “We can only conclude that the rich countries are trying to kick away the ladder that allowed them to climb where they are”[6] he’s right, but not because Western countries are now engaging in free trade and subjugating developing nations to them, but rather because Western nations are protecting their vulnerable industries from developing economies’ competition. This is particularly relevant in the case of agriculture, where we see massive subsidisation and protection through tariffs and quotas by America and the EU. For example, Walker shows that “the Fairtrade Foundation revealed last year how the $47bn in subsidies paid to rich-country producers… 5 million of the world’s poorest farming families have been forced out of business and into deeper poverty because of those subsidies”[7]. These subsidies are keeping developing nations’ populations in continual poverty as a result of their protection of vulnerable industries. This also goes back to why trade policy shouldn’t be put into the hands of government, as they are influenced by vested interests, in this case lobbying by corporate farmers, meaning that the consumers have limited choice and must accept higher prices and other producers have no ability to compete and are thus entrapped in poverty. This is why the Listian idea of trade for the benefit of the nation is wrong, as it removes both choice and competition, and creates continual poverty both at home with higher prices and in the developing world where they can’t access international markets.

List’s critique of free trade as being a benefit only for richer individuals and not benefiting the welfare of the nation is an attractive argument. However, what we see today is a Listian economy in the area of international trade where protectionist barriers are used not to protect developing economies but rather to protect vulnerable industries within developed nations. It also places a major macroeconomic element, trade, into the hands of government, which has been continually shown to be inept at allocating resources effectively, as it stifles supply and allows for continual inflation in the prices. So we now see that developed countries are indeed kicking away the ladder when it comes to trade, but only because we protect vulnerable industries in the Western world and don’t allow for competition from developing economies. It then follows that the government should have no role in the way trade works, and instead trade decisions should be at the lowest level, that of individuals, businesses and communities.

[1] List, F, 2006. National System of Political Economy. 2nd ed. Ann Arbor: University of Michigan Library. 102.

[2] List, F, 2006. National System of Political Economy. 2nd ed. Ann Arbor: University of Michigan Library. 103.

[3] Chang, H. “Kicking Away the Ladder”, Post-Autistic Economics Review, issue no. 15, September 4, 2002, article 3. http://www.btinternet.com/~pae_news/review/issue15.htm

[4] World Bank. (). Trade. Available: http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:23262073~pagePK:51123644~piPK:329829~theSitePK:29708,00.html. Last accessed 16th Feb 2014.

[5] Hayek, F (1958). Individualism and Economic Order. London: The University of Chicago Press. 77.

[6] Chang, H. “Kicking Away the Ladder”, Post-Autistic Economics Review, issue no. 15, September 4, 2002, article 3. http://www.btinternet.com/~pae_news/review/issue15.htm

[7] Walker, A. (2011). The WTO has failed developing nations. Available: http://www.theguardian.com/global-development/poverty-matters/2011/nov/14/wto-fails-developing-countries. Last accessed 15th Feb 2010.

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