From the TUC

Protectionism would be a disaster no matter what Stephanie Flanders says

04 Feb 2009, by Guest in Economics

Stephanie Flanders (BBC Economics Editor) has posted a worrying entry on her blog arguing that the Great Depression was caused by a collapse in global demand not by protectionism.  Flanders is clear she is not a protectionist, she just wants to set the historical record straight.   She argues that it was attempts by nations to shrink domestic demand for imports in order to protect their gold reserves that really caused the Depression rather than US tariff barriers.  But I think this is to draw a very narrow definition of protectionism.  Any unilateral action by a government to protect its own economic or financial position at the expense of others can be protectionist, or can at least amount to a “beggar-thy-neighbour” policy. Such policies presents a very high risk of global economic decline if everyone pursues the same approach. So to argue that protectionism did not cause the Depression because the evidence suggests that US tariff barriers did not cause the Depression is misleading.

The argument made by Flanders is worrying because this sort of analysis will be seized on by those who will argue for protectionist measures over the coming months. This is a real concern because whatever the economic facts, the rise of protectionism in the 1930s also ramped up political tensions between nations creating a very sour international environment which contributed to the conflicts which led to the Second World War. I have no doubt that a serious drift to protectionism now would have an even bigger impact on jobs across the world than the current slowdown in demand, particularly in China and the rest of Asia, which could easily lead to the rise of ultra-nationalist sentiment and to serious international tensions.

The obvious political lesson of the 1930s is that we have to find a solution to this crisis based on international co-operation and co-ordination not unilateral policies which save national economies by destroying others.  A fact, to be fair, Flanders does ackowledge.

However, there are two other points Flanders makes which need to be scotched.

Firstly, she quotes the Milton Friedman argument that what caused the Depression was the failure of the US Federal Bank to inject capital into the collapsing banking system.  This is a case of free market economists having their cake and eating it.  For them economies only grow when the market is given free rein but they only collapse when the state fails to come to their aid.  The truth is the Fed failed to react adequately to the banking crisis but it didn’t cause the Depression.  Just like today, an under-regulated and self-serving financial sector went into meltdown and dragged the world down with it.

And just like today, you won’t have to go far to find economists and bankers who claim the cause of this crisis is the weak monetary policy of the USA.  It’s important to resist this line of argument because it will be used to prevent future constraints on the financial sector.  And to come back to the earlier point, I can imagine some politician sooner or later saying that protectionism is fine so long as you have the right monetary policies in place because it’s the latter that causes Depression not the former.

Secondly, Flanders claims that Keynes argues for protectionism in his essay National Self Sufficiency which I have mentioned elsewhere.  This is a terrible line of argument because with Keyne’s credibility as an economist higher than it has been in decades, we must be careful not to present him in a way that allows him to be used to legitimise protectionist arguments.  In fact, in that essay, Keynes is very clear in his rejection of the protectionist policies of the 1930s:

In those countries where the advocates of national self-sufficiency have attained power, it appears to my judgement that, without exception, many foolish things are being done.

What Keynes is actually saying is that given that the free trade approach has made such a mess of things and we don’t really know yet what may replace it, it may be time to allow a series of national economic experiments to bloom to find out the best way forward and this may involve some national isolationism.  But he is clear that if we do do this, it has to be a very careful slow process:

Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.

Keynes reveals a certain naivety in this essay but by the time we get to the post-war period, there is no doubt that Keynes prefers an ordered and well-governed form of global trade.  Indeed, he argued hard at the Bretton Woods conference for a radical new approach to global economic governance that would reduce global economic instability and render protectionism unnecessary. Unfortunately, the US vetoed his plans and we are still paying the price today – more than ever maybe.

12 Responses to Protectionism would be a disaster no matter what Stephanie Flanders says

  1. Jesse Bickel
    Feb 6th 2009, 4:36 pm

    Milton Friedman is hardly a free market economist, for precisely the reason you stated. He believed in a central banking system.

    “Keynes’ credibility as an economist [is] higher than it has been in decades”? God help us all. I agree, unfortunately. Nearly every economist in any major newspaper, on any major television show, or in any mainstream books is a Keynesian.

    We should be thankful for true free market economists, and the fact that their credibility is expanding faster than any other school of thought.

  2. Charlie Marks
    Feb 7th 2009, 3:53 pm

    Protectionism for the rich – bailing out the bankers – has been a disaster. Can we please have some protectionism for working people?

  3. Adam Lent

    Feb 7th 2009, 10:13 pm

    Ah yes, Milton Friedman, the wicked state socialist with his oppressive monetary policy. I remember him.

  4. xavier goossens
    Feb 11th 2009, 9:59 pm

    Can you explain how Japan recovered from the catastrophic saecond World War, if not by protectionnism ?

  5. Adam Lent

    Feb 13th 2009, 2:17 pm

    To Xavier,

    In fact all the economies affected by the Second World War recovered under conditions of protectionism, bilateral trade agreements and a healthy injection of aid from the USA. But this was protectionism that was agreed to at an international level after the war and implemented at a time when the global economy was already wrecked. A sudden shift to protectionist policies at a time of widespread global trade and without political agreement at multilateral level is a very different affair. That’s what happened in the 1930s with the consequences I mention in the post.

  6. Vovka
    Feb 14th 2009, 1:52 am

    Interestingly, both Hoover and FDR were strong advocates and activists of interventionism and it was a combination of their policies (Hoover’s Smoot-Hawley tariff and FDR’s New Deal and the NRA) coupled with the Fed’s inflation of the money supply (largely responsible for the 1929 crash) which caused and prolonged the Great Depression. Historically, the economy had always managed to self-correct (1893 and 1921-22) and thus avoid the catastrophic “boom and bust” cycle so favored by interventionist socialist governments. The lesson to be learned is “hands off”, ie the separation of Economy and State. Until that happens, we will always be victims of all the economic distortions caused by over-regulation bureaucrats. As for those who claim that all our financial problems are due to deregulation, explain, if you can, the fact that housing and banking are the most regulated sectors of the US economy (there have been 51,000 new laws governing these sectors over the last 12 years). Also, there is the infamous Community Reinvestment Act that tied lenders hand and foot. May Americans return to respecting the best Constitution in the world and become the first country in history to institute a free-market capitalist system. The resulting real prosperity would help to rid the world of socialist interventionist envy-mongers.

  7. Adam Lent

    Feb 15th 2009, 6:34 pm

    There is so much wrong with the previous comment that I don’t know where to start and don’t really have the time to respond. Suffice to say that fundamentalist free marketeers now remind me of those marxists who, so terrified of having to ditch their beloved ideology, spent countless hours developing ever more elaborate explanations for why the evidence really didn’t prove them wrong.

    And just to say that I guess I’m a socialist after a fashion but I’m certainly not envious. People who devote their lives to making vast sums of money seem to me to have missed the point of life. They deserve pity rather than envy.

  8. Vovka
    Feb 15th 2009, 9:43 pm

    Interesting how frequently socialists use the “argument from intimidation” technique (there is so much wrong with the previous comment that I don’t know where to start…), rather than reasoned, factual and objective debate. They would deserve pity if they weren’t so terribly destructive. As for those who devote their lives to making vast sums of money, provided they don’t engage in fraud, they would not be forbidden to do so in a free society. And, yes, many of them HAVE missed the point in life; in a free society you may not always act in your best interests, but you are certainly not to be barred by law from pursuing any activity that doesn’t harm other people or cause damage to their property. Now, those who seek to loot huge sums of money through fraud, like Bernard Madoff, Ken Lay, Al Gore, as well as all the various dictators of the past, present and future, add to that the billions of dollars that the various “anti-monopolies commissions” and “antitrust regulators” are able to loot through their “fines”. Yep, they really have missed the point in life. Apart from the essentials to survival – a cave, a bearskin and a lump of meat – what does a human being need? He or she is not forced to buy the products of those industrialists who make a fortune through selling their products to un-coerced customers, so Bill Gates and others like him deserve every dollar they make.

    Enough, I don^t have time for this. Good night to all those Europeans who still uphold reason.

  9. Charlie Marks
    Feb 17th 2009, 1:50 am

    I don’t think that was an argument from intimidation so much as an argument from bewilderment, Vovka.

    I can only speak for myself, but I would like to see Gates and co. make their fortunes in a free society that did not depend upon the state enforcing their “right” to own both the enterprises and the intellectual property created by their employees. I doubt that without the legal sanctions on workers’ ability to unionise and the property rights guaranteed by the state, such sums of wealth could be accumulated by individuals.

  10. Vovka
    Feb 18th 2009, 10:19 pm

    The point is that I am totally opposed to any government interference (bailouts, antitrust “fines” and all the other nonsensical things governments get up to) in the economy (otherwise known as people’s lives and the decisions they make to live the best they can), but I am in complete agreement with you as far as there being the necessity of having the state guarantee individual rights, property rights and all its corollaries. The state can’t stop someone from mugging you, but it can pursue and punish the villain. Having said that, the system has become so topsy-turvy and PC that there are now far too many cases where the victim, through some weird process of left-wing liberal doublethink, becomes the villain! Speaking of unionizing, I am totally opposed to a person’s being obliged to join a union in order to secure a job, and I am also opposed to any company’s being forced to employ only those who are members of a given union. This in no way interferes with the choice someone makes to become a member of a particular union if it is in his or her interest to do so. As for calling these sums “accumulated”, it is showing disrespect for the moral process involved in creating wealth from the production of goods people desire. Mugabe, Marcos and others of that ilk accumulated their “wealth” through looting their countries, countries where property rights and most other rights did not exist at all, despite massive state power and control. As I say far too often, I look forward to the day when this earth will host a truly free, capitalist, productive and happy society. The First World has occasionally come close, but then it always regresses towards socialism, a system where only the few have to think for the many. I believe in a system where it would be perfectly natural to expect the many to think, and think for themselves.

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