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The Illusion of ‘Free Markets’ and ‘Free Trade’

Our elites have been responding to incentives which are beneficial to their institutions, and China, but detrimental to America.
USA - Economy - Urban Decay in Detroit

We have come to a point in our nation’s public discourse where there is a widespread realization that many of the economic policies pursued and promoted by our political, business and media elites have failed us in multiple ways. We have heard our trade policies called “Free Trade” and “Free Market”, but those statements were often dishonest.

When crafting these agreements, our elites have been responding to incentives which are beneficial to their institutions but detrimental to the well-being of American citizens.

Traditional conservatives have been observing and asking about these policy failures for some time and have been met with name-calling and general denigration. During this current pandemic crisis, the magnitude of the failure of these misguided agreements and policies has become unavoidably obvious.

Ludwig von Mises famously promulgated his Price Mechanism Theory, which observed the importance of permitting the market to make choices to determine optimum resource allocation. His theory presupposes the free exercise of private property rights unhampered by government interference.

It is an important theory and good lesson. It does require reliable information to determine prices. Before the end of the Cold War in the mid-1980’s, I spent a couple of hours with Milton Friedman in his San Francisco perch overlooking San Francisco Bay. He discussed his famous example of the information required to manufacture a simple pin and how it was too complicated for central planners to efficiently organize. The example is ever true and when our nation makes policy choices, these lessons should be kept in the forefront of our minds.

Based on personal experience of many years running small family businesses, these theories prove instructive and effective on a micro basis. In most cases the parties to these transactions have fairly simple interests. Deliver a good product at a price and quality acceptable to the customer.  The customer uses that product to create his product at a quality and price acceptable to his customer and so on. The communications and motives are uncomplicated and understandable.

Enter the Communist government of China, a nation desperate to employ its people and modernize its economy. Nothing wrong with that. They are creatures of political power, which is more important to them than profit. They also have the ability to command their economy to achieve political goals.

The Chinese can produce products far below our costs in America because they have cheap labor, which toils hard without any human or environmental safeguards. The Politboro can decide to sell goods to us at costs artificially low for them to put specific American industries out of business at will. If you believe economic efficiency is the primary value, you would say, “if the Chinese are stupid enough to sell us products below their costs, we should be happy to take advantage of their stupidity.” True enough.

In America we have certain standards we attempt (not always successfully) to maintain for our populace. Decent wages, safe workplaces, clean environment, safe neighborhoods, good schools, places of worship, good hospitals and other important cultural institutions. These all require money, and these costs are overlaid onto our cost of production. China has far lower standards.

In America, we can’t decide to build a mine and just go build it. We have all sorts of regulatory, political, and neighborhood issues to overcome, and these often take years and have high costs. In China, if the seven-member Politburo decides they need a mine, the property is acquired, pesky locals are forcibly “relocated,” and the mine is built.

The same is true for manufacturing businesses. The closing of a factory has huge costs for a neighborhood: unemployed people. Not just those from the factory, but the people who work at companies which supply goods and services to that factory. The consequences of a factory closing cascades through the economy. The tax base for that neighborhood is also eroded, which reduces the community’s ability to maintain and deliver essential services and support civic institutions.

We cannot just turn off a factory like a light switch and turn it back on at will when the Chinese decide to raise their prices at a later date.

None of this takes into account the quality of the goods that we receive. We have just become aware that more than 90% of our pharmaceutical antibiotics are manufactured in China. When you hear of the big drug recalls, keep in mind many of them are from China, which is famous for ubiquitous and flagrant corruption as well as a disregard for quality control. Do we really know if our antibiotics are safe?

Now, back to our leadership, which we have relied on to guide our nation. Their incentives often lead them to make choices which do not benefit the American people. The Chinese have famously made generous deals with a sitting vice-president’s son and a Secretary of State’s stepson that likely insured high level government silence about their predatory practices. The Chinese have purchased important media assets, such as the largest film distribution company in America and inked lucrative media deals with huge media companies to purchase silence about their predatory behavior. The same is true with many other industries.

Remember the fuss about sports stars being silenced over remarks supporting the Hong Kong resistance which displeased the Communist leadership. The bribes through special deals are spread all over our business, political, and media establishment. The Chinese have also poured large sums of money into our higher education system to access our technology and steal it, while purchasing silence from higher education elites. The list of examples of this behavior is long and spans the globe.

The Price Mechanism Theory only works well when there is honest and accurate information to understand the true costs, but our leadership is corrupt and has not been honest with us. In order to protect both American interests and American citizens, it is important to develop mechanisms to fully understand the consequences of many of our policies and who is making them. Who is making the decisions is often just as important as what is being decided.

George D. O’Neill, Jr., an artist, is the founder of The Committee for Responsible Foreign Policy and a board member of The American Ideas Institute, the parent of The American Conservative. Mr. O’Neill has been in the mining industry for more than four decades. He and his wife reside in Florida.