Trading on Ideas, Review of Douglas A. Irwin's Against the Tide: An Intellectual History of Free Trade
Mini Teaser: Irwin has attempted to write an intellectual history of free trade. The book divides into accounts of the origins of the doctrine and the controversies it has aroused--fifteen sections in all, examining in detail the ideas of leading theorists fro
Review of Douglas A. Irwin's Against the Tide: An Intellectual History of Free Trade (Princeton: Princeton University Press, 1996).
Free trade is, as always, in trouble--the best tribute to its power and effectiveness. But, also as always, the centers of support for and opposition to free trade are shifting. Ross Perot focused his 1988 campaign on resistance to free-trade doctrine. Even the U.S. Trade Representative's Office, long a sanctuary for openness, was headed in the first Clinton term by Mickey Kantor, who said publicly that Americans had never been keen on the idea and tried to act accordingly. His successor and ex-deputy, Charlene Barshefsky, a classic example of the bookkeeper taught to read, busies herself with the theology of bilateralism while running interference for America's most vested interests in the name of anti-dumping.
Amid such turbulence, we should welcome an overview of the intellectual history of free trade. Douglas A. Irwin of the Chicago Business School has attempted such an undertaking, appropriately entitled Against the Tide. The book divides into accounts of the origins of free-trade doctrine and the controversies it has aroused--fifteen sections in all, examining in detail the ideas of leading theorists from Adam Smith to Harry Johnson. It depicts the turmoil of intellectual countercurrents and criticism as acutely as the positive arguments on behalf of free trade. Irwin's essentially chronological presentation quotes widely and judiciously to provide a useful and economical synopsis of the literature, especially valuable for bringing to bear the views of such great twentieth-century thinkers as Jacob Viner. The historical and intellectual connections play illuminatingly backward as much as incrementally forward.
After a brief chapter on "Early Foreign Trade Doctrines", Irwin focuses in earnest upon the mercantilists, as they came to power in the principal countries of Europe around 1650; for "mercantilist doctrines not only constitute a major epoch in economic thought, but provide the immediate backdrop for the emergence of free trade thought." He further points out that mercantilist thinking broke with previous economic doctrine in actively promoting the expansion of trade, albeit under state guidance. From mercantilism Irwin progresses to Adam Smith's counterattack, seeking, among other things, to show how Smith's thinking originated in what he terms the "physiocratic and moral philosophy" of the previous century, and emphatically not in the economic literature of his own epoch.
Having clearly and capably articulated Smith's arguments, Irwin closes his first section with a general treatment of free trade's part in classical economic doctrine before moving in his second section to treat the influence and arguments of Robert Torrens, John Stuart Mill, Frank Graham, and Mikhail Mano•lescu. He follows these with omnibus intellectual sketches of "The Australian Case for Protection", "The Welfare Economics of Free Trade", "Keynes and the Macroeconomics of Protection", and "Strategic Trade Policy." The book's brief conclusion is clear, to the point, and well expressed, but the chapter on Mill and his classic defense of special-case protection--the famous infant industry argument--stands out. This is a well chosen case to emphasize, because Mill's argument is one entirely grounded on economic, not political, considerations. The doctrine that the state should be obligated to nurture significant domestic industries that would otherwise perish under the leveling winds of international competition is one of the earliest and most enduring cases for state intervention in the economy.
Irwin's work, then, is admirable in its choices and basic sympathies--which makes all the more disappointing its substance. Much of Irwin's strictly intellectual history is arguable and he shows real epistemological deficiency in the overall approach to his task. His exposition of the intellectual history of free trade concerns itself with the history of economists rather than of economies or of societies. He has produced a discussion of intellectual, or theoretical, analysts from Adam Smith to the present day with a certain emphasis upon free traders, but he leaves out too much of economic reality in the process. Perhaps most unfortunate of all, he does not discuss internal free trade, crucial though the issue has been over the last two hundred years. Theories rightly deemed to hold true across international borders are never put to the very interesting tests of internal application; binary international trade relations are taken for granted as the staples of trade theory, whereas the taxation and subsidy of such internal facilities as roads, canals, or railways are passed over.
The imbalance in Irwin's treatment of ideas is sometimes striking. The merit of Ricardo's original issue-framing analyses is that they extended Smith's depiction of comparative advantage into the larger postulate that two countries should engage in commerce even if one is more efficient in producing all traded items, because the consequent differentiation of type and price will lead both countries to maximize their output. But such key refinements to the central elements of free-trade doctrine go neglected, while secondary economists are indulged with entire chapters. This is like a study of Elizabethan literature that offers us nothing on Antony and Cleopatra, while devoting whole chapters to Greene's Groatsworth and All's Lost By Lust.
In reviewing marginal speculations, Irwin awards the palm for the most penetrating criticism of the classic argument for free trade to the Englishman Robert Torrens, who elaborated an entire theory of the optimal tariff as he believed it to operate upon a purely bilateral system of trade, which Irwin solemnly intones to be "the most durable and important exception to free trade ever conceived." If this indeed be so, no one wearing an Adam Smith necktie will ever choke. With a formalism characteristic of his age, Torrens posited a precise binary trade relationship between two countries, a remarkably frozen model that allows no substitution--a constriction that the real world very rarely imposes. Torrens' own, almost eccentrically special, instance is the Anglo-Cuban trade of the 1840s, in which Cuba had neither the incentive nor the short-term capacity to substitute any other commodity for its sugar exports. But substitutions are the long-term rule of our experience of trade, and a multiplicity of trade relations clearly works to overwhelm any single binary fiat that may underlie the calculus of an optimal tariff. Such a closed-system economy as Torrens erects into his model for the world as a whole was even then unusual; today it is totally inapplicable.
Irwin's chapters delineating other trade theories are little more successful, despite his considerable powers of exposition; and the reason, again, is that he seems to forget that ideas are modified more profoundly by experience than by collision with other doctrines. A reader coming unprepared would imagine that the principal arguments over trade have been preserved in aspic for the last hundred and fifty years, and that the forms of the world's economy and the content of their profitable exchange have been similarly pickled. Against the Tide never even mentions any of the literally thousands of technological initiatives that have, even in the last half century, carried the world into another age. Nor does it give any weight to how different forms of corporate organization and the stunning range of cultural differences exercise transforming force on the ways the world's societies reach out to each other.
Although Irwin repeatedly cites, and with justifiedly high approval, the late and extraordinary Canadian economist Harry Johnson, he seems to have drawn surprisingly little from Johnson's superb exposition of the ever more important technological factors in modern trade, and the richness of Johnson's thinking about "human capital." His model presents productive knowledge as the most powerful force in economic success; research and development are the essential potentiators of technological renewal. So it has been for many years. As early as the late eighteenth century, the primacy of talent and motivation over raw material made itself felt in such cutting-edge technologies as were employed by the great Carron Iron Works in Scotland to turn out advanced artillery and the first commercial steamships. Today it is difficult to find a sector of the economy not continuously being remade by education, training, research, and development, all of which must be figured as prime factors in the relentless accounting of planetary comparative advantages.
The first classic example of the transformation of an entire nation by a human capital revolution was nineteenth-century Germany. By mid-century, a third of Prussian schoolchildren were enrolled in technical schools, and less than thirty years later they rewarded the oligarchs who had put them there by making their country the point nation in such knowledge-intensive fields as engineering, optics, and especially chemicals. German society's prosperity was, to a striking degree, an unintended byproduct of the military and administrative objectives of the state, whose horizons had been conditioned more by the production of explosives and artillery officers than the possibilities of the second Industrial Revolution. On the face of it, this presents a challenge to basic free-trade theory, for civil society gained greatly from zero-sum-intended state intervention. But, alas, Irwin nowhere engages the problem of the role of the state as anything but an obstructer of trade flows; certainly a curious omission, since traditional free-trade theory, classically exemplified by Adam Smith, is primarily concerned with what the economy can do for the overall betterment of its citizens, while mercantilist and neo-mercantilist doctrines limit their object to the prosperity of the state.
Nor does Irwin find it necessary to examine the larger questions of currency and exchange--a fact made the more curious because his chapter on Keynes displays a fine sense of how English "finance-capitalist" currency policies squeezed a million unemployed out of the British economy in the name of an overvalued exchange rate. But he does not carry his sense of currency doctrine and practice into the present, when competitive devaluations--the last refuge of a protectionist--are a common tactic in international trade and the European Union is pushing a common currency unit on its members to counter this.
Readers seeking a concise summary of what trade theorists from Louis XIV's time to the present wrote about each other will indeed profit from Irwin's book, but its major constituency will probably be graduate business students, such as those Irwin teaches at the University of Chicago. Generation X evinces little interest in history or geography, and appears to thrive on sound-bite encapsulations of all subjects, including the advance of the knowledge revolution and the world economy--among which brevities neoclassical theory, Keynesianism, and monetarism are likely to sound like impertinent academic fustian. Those who like their economic philosophy placed in an adequate context of history and technology should turn instead to Irwin's 1991 compilation of Jacob Viner's Essays on the Intellectual History of Economics--to which Irwin himself does not allude, despite frequent and well chosen references to Viner.
This is how it must be placed, because at no point in history has world politics been less than an equal partner of world economics, however much some may wish otherwise. Given so rich a world, Irwin could have fleshed out his purely intellectual examination of trade theory not just by considering how historical experiences mold a society's choices of how to marshal its possibilities, but by considering as well the head-on challenges that technology continuously poses to policymakers. Had he offered a single example of how one given application has helped or hindered economic development, or imparted vitality to some academic doctrine, his presentation could have leapt to life with the authority of those who actually make money and benefit others. Instead he indulges in an astonishing conceit--though he is hardly unique in resorting to it--to imagine that a doctrine of trade and economics can migrate from mind to mind, century over century, and never establish significant commerce, as it were, with the world of wealth and struggle, which, after all, gave it birth.
Irwin's reluctance to provide this proper context is especially glaring when seen against the model of change--intellectual and otherwise--literally before our eyes today. Although he cites Joseph Schumpeter several times, Irwin does not seem interested in the great Austrian's pioneering theories of innovation. Schumpeter emphasized that there comes a point in development where economies are more dynamized by the ongoing incorporation of new technologies than by the perfection, however skillful, of existing ones.
Traditional--and, at earlier stages of development, not ill-founded--conceptions of innovation as deriving from individual inventors and entrepreneurs are now being displaced by "systems" approaches. Scientific teams and expertly staffed laboratories are the drivers of change, and given that crucial breakthroughs are usually so expensive, private industry may well lack the capital and time horizons to develop them, compelling the state, alone or in partnership with private interests, to make up the resources necessary to surmount the threshold. Advancing the cutting edge of high science cannot be completely left to an "invisible hand." The case for judicious use of state-directed resources, particularly but not exclusively in education, is the most likely means of bringing about what the ordinary competitively lean corporation dare not invest in.
The advantage of the "systems" approach that this ushers in means that otherwise invisible benefits steadily circulate through the economy rather than succeeding or failing at their supposed final point--just as the Jacquard loom provided the matrix for the computer. Christopher Freeman presciently wrote ten years ago:
"The new technological regime will differ from that prevailing in the 1950s and 1960s. . . . 'Intangible' investment in information systems and software is becoming the critical resource in all areas of the economy rather than dedicated fixed investment in plant and machinery."
The depth of this economic dimension can now be assessed by its extraordinary flow in both directions.
Had Irwin been as prescient in 1995, he would have written a book that could have provided a guide into the next decade. As Schumpeter wrote even half a century ago, "Most of the fundamental errors currently committed in economic analysis are due to a lack of historical experience more often than to any other shortcoming of the economist's equipment."
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