Free Trade Does Not Work

Few economists have bothered to think about the issue of offshoring, preferring to dismiss concerns about it as manifestations of the old protectionist fallacy. They learned in graduate school that free trade is always mutually beneficial and ceased to think when they passed their exams. This is especially true of "free market economists," who believe that economic freedom, which they identify with the freedom of capital, is always good. Thus, most economists mistakenly believe that offshoring is protected under the authority of free-trade doctrine.

Free-trade doctrine is based on the assumption that domestic capital seeks its comparative advantage in its home economy, however, specializing where its comparative advantage is best and, thereby, increasing the general welfare in the home economy. David Ricardo, who explicated the case for free trade, rules out an economy's capital seeking absolute advantage abroad instead of comparative advantage at home.

Jobs offshoring is not only a problem for displaced U.S. manufacturing employees -- displacement that Princeton economist and former Federal Reserve Vice Chairman Alan Blinder says will also impact 30 million to 40 million high-end U.S. service sector jobs, as well -- but also a problem for economic theory.

Economic theory assumes that capitalists pursuing their individual interests are led to benefit the general welfare of their society by an indivisible hand. But offshoring, or the pursuit of absolute advantage, breaks the connection between the profit motive and the general welfare. The beneficiaries of offshoring are the corporations' shareholders and top executives and the foreign country, the GDP of which rises when its labor is substituted for the corporations' home labor. Every time a corporation offshores its production, it converts domestic GDP into imports. The home economy loses GDP to the foreign country that gains it.

Recently, Ralph Gomory, co-author with William Baumol of "Global Trade and Conflicting National Interests," the most important work in trade theory in 200 years, pointed out that traditional trade theory has broken down because companies are no longer bound to the interests of their home countries. Offshoring has decoupled the link between a company's motivation for profit and a nation's desire to improve the wealth of its citizens. "Most economists," Gomory observed, "have not acknowledged this fundamental change and its implications for economic theory."

COPYRIGHT 2007 CREATORS SYNDICATE INC.

*The above article has been excerpted from Paul Craig Roberts’ article “Cato's Trade Report: Blinded by Ideology.” Mr. Roberts is an economist. He served as Assistant Secretary to the Treasury in the Reagan Administration where he earned the nickname the “Father of Reaganomics.” He was an editor and columnist for the Wall Street Journal and Business Week. In 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States. Currently he is a nationally syndicated columnist for Creators Syndicate and a frequent contributor to EconomyInCrisis.org.

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