A Question About Free Trade

Political Philosophy
1

I had a few questions about Ayn Rand’s economic ideas.

International trade today, thanks to organizations like the WTO and NAFTA, is very similar to Rand’s laissez-faire capitalism. For the most part, corporations are allowed to trade between countries free of taxes, tariffs, or restriction by any government. While this does keep costs and inflation down, it has a tendency to create situations like this:

Suppose in Kenya, Kenyans grow rice and sell it to each other. This creates jobs and keeps Kenyan money in the country, allowing Kenya to maintain a stable economy. Then let’s say a rich, established American company sets up shop in Kenya and begins selling rice at a much lower price than Kenyan rice farmers are able. Kenyans lose jobs, and as Kenyans spend money on American rice, their money is funneled out of Kenya’s economy and into the pockets of Americans. Done on a large scale, actions like this deplete the economy of this third world country, causing widespread poverty. Government intervention could restrict or tax the amount of rice sold by this foreign company, alleviating the situation, but this is not possible due to free trade agreements.

This is a very common and controversial situation with the current system of free trade.

Ayn Rand said that no one should have to make money at the sacrifice of others, but it seems like her purported system of trade cultivates people like this, people who take advantage of a free economic system to exploit others and force them to sacrifice their well-being. This seems to me like requiring someone else to live for you.

According to my understanding of capitalist and Objectivist philosophy, it seems that this would be justified because the wealthy American corporations worked hard to secure their own wealth, and by undercutting foreign economies, are merely living by the Objectivist ideal of self-preservation. Is this so?

This is a paradox I am having trouble grasping. I’m new to this whole Objectivism thing, my understanding of it may not be entirely accurate.

2

FunDunn, the practicality of free-trade is something that has been argued for a few centuries, way before Objectivism. The best approach would be to familiarize yourself with the arguments of people like Adam Smith or Milton Friedman (more accessible) or Henry Hazlitt (his book is aimed at laymen and is available free on the web – Chapters 11 and 12 address free-trade). These economists disagreed on many things, and were wrong about many things, but you’ll find that they substantially agree (and are correct) on the issue of free-trade.

The really short answer to your question is: people will not sell rice to Kenya unless they can use that money, which means they want to buy Kenyan goods. So, the Kenyans who were farming rice, will move into other occupations and some of them will be producing things to export.

3

Can we assume that the American comes to Kenya to grow and sell rice, or are we assuming that he’s importing rice from the US. If the former, it’s a good thing for Kenya as a mass because he still hires the Kenyans to work the fields and maintain the machines. It may suck for the owner of Uncle Kamau’s Rice Farms, who will have to switch to another business if he can’t compete. If he’s importing, it has to be cheaper than the local stuff to be effectively marketable. But that’s good for Kenyans. If everybody in Kenya is unemployed and cannot afford imported rice (whatever the cause of the unemployment), then they go back to cassava, millet, maize, and home-grown rice.

I have particularly harsh things to say about the idiotic consequences of import restrictions in Tanzania in the late Nyerere and into Mwinyi regime: that is what destroyed their economy. What depletes an economy is not the free importation of goods, but restrictions on the exchange of goods. To put it in an African context, this refers to the free inflow of goods into Africa, but the restriction of flow of good out of Africa. It’s not a problem with free trade, it’s a problem with un-free trade.

4

The really short answer to your question is: people will not sell rice to Kenya unless they can use that money, which means they want to buy Kenyan goods. So, the Kenyans who were farming rice, will move into other occupations and some of them will be producing things to export.

I don’t quite understand Hazlitt’s argument. Why must a company spend the money it makes on a foreign transaction in that country? Can’t they exchange currencies?

5

I don’t quite understand Hazlitt’s argument. Why must a company spend the money it makes on a foreign transaction in that country? Can’t they exchange currencies?

Yes, a U.S. rice-seller can take the Kenyan Shillings and exchange it for US$. However, ask why the currency trader would buy those Kenyan Shilling from the US rice-trader, if he could do nothing with them? The currency-exchange just means the Kenyan Shillings return to Kenya in multiple “hops”.

By the way, in reality, the poor countries that have opened up considerably to global trade (China and India) are exporting more than they import. Since they have cheap labor, they are able to undercut U.S. manufacturers in many industries, not the other way around. If Kenya were to open up its economy, it could be exporting clothes, shoes, and (since English-language skills are pretty good) even take on some call-center business. These days, one keeps hearing of U.S. workers losing jobs to low-paid foreigners, rather than the other way around.

6

people who take advantage of a free economic system to exploit others and force them to sacrifice their well-being. [emphasis added]

You see the inherent contradiction in this premise.

Capitalism, which is the only moral political system, is moral because it is free. Under capitalism, by definition, no one is forced to sacrifice their well-being.

Under a free economic system, no one could force Kenyans to buy American rice, or to buy rice at all, or to do anything.

7

As a generality, it is easy and convienent to see the short-term consequences of free trade; it is much more difficult to see the long-term benefits.

Combine this with a sham “democracy” concept, like America relies on, and you have a large mass of people and interest groups who cannot/don’t want to understand why free trade is ideal voting for people who rally against free trade in order to receive votes.

sNerd: I somewhat agree with you. Let us suppose, for example, that all countries were on a gold standard, with gold being the medium of exchange. A company does not necessary have to spend the gold that it receives in the same country it receives it in. The primary reason why free trade is best is not because “a company will only sell rice to Kenya if it plans to use Kenyan currency within Kenya.” It is because if an American company sells rice at a lower price than a Kenyan farmer, the benefit is distributed to all consumers of rice within Kenya, who pay a lower price for rice. The money saved by Kenyans will serve as a tool for investment within other industries, as it will be spent elsewhere domestically. Therefore, the jobs lost in the rice fields will appear within other industries; industires which Kenya has a competitve advantage in. That is: industries in which Kenya can create a product cheaper than anyone else can. Since they produce the product cheaper than anyone else, they will encounter demand on the world market for the product, and so they will export it.

This situation is so easy to understand when it applies to one individual or company but people make a mess of it when applying to a nation. The link that you gave summarizes the reason why free trade is best at the bottom of Chapter 12:

This is, as John Stuart Mill so clearly pointed out, that the real gain of foreign trade to any country lies not in its exports but in its imports. Its consumers are either able to get from abroad commodities at a lower price than they could obtain them for at home, or commodities that they could not get from domestic producers at all. Outstanding examples in the United States are coffee and tea. Collectively considered, the real reason a country needs exports is to pay for its imports.

8

Let me clarify

The issue is not loss of jobs, it is the fact that money is being taken out of Kenya (just using Kenya as an example, by the way), destroying their economy, making the nation poorer as a whole.

also,

Under a free economic system, no one could force Kenyans to buy American rice, or to buy rice at all, or to do anything.

Of course they’re not being literally forced to do anything, but considering the degree of poverty, they have little choice. Saying “well, they don’t have to buy rice if they don’t want” is just ignorant. They need food to survive, and they have almost no choice but to buy it from the lowest bidder, even if that does more damage in the long run.

9

The issue is not loss of jobs, it is the fact that money is being taken out of Kenya (just using Kenya as an example, by the way)

However, every time there is any international trade, money is taken out of one country and ends up in the other. That’s completely insignificant per se. The point that you may have missed is that with free trade, the wealth of each nation, in terms of total value, increases.

destroying their economy, making the nation poorer as a whole.

There’s the mistake: Kenya ends up net-richer.

Saying “well, they don’t have to buy rice if they don’t want” is just ignorant.

Why do you think they need to buy rice? Explain, concretely, why you think that rice is vital to the survival of Kenyans (e.g. what are the essential ingredients of obusima, irio and ugali?; how much rice is used in mkate?; what is the relative dietary importance of ndizi / ekitooke compared to rice?; what percentage of the population lives on obulo compared to rice?). I think obsessing over rice imports is like obsessing over papaya imports in America. I really do like papaya, but even as a rich American, I think the price is too high and it’s simply not important enough to spend the money on, except occasionally.

10

The issue is not loss of jobs, it is the fact that money is being taken out of Kenya (just using Kenya as an example, by the way), destroying their economy, making the nation poorer as a whole.

As has been explained above, this is not the way things work.

11

However, every time there is any international trade, money is taken out of one country and ends up in the other. That’s completely insignificant per se. The point that you may have missed is that with free trade, the wealth of each nation, in terms of total value, increases.

Then how do you explain the incredibly disproportionate distribution of wealth in the world? The fact is, the worldwide gap between rich and poor is increasing. Why are African countries trapped in poverty despite the amount of money and resources thrown at the problem? If these economic barriers do not exist as you claim, shouldn’t we see a trend of steadily improving economies and living conditions in these third-world countries?

This is obviously not the case. Free trade has succeeded in making rich countries richer, but has been nothing but destructive for the developing world. The evidence for this is apparent.

There’s the mistake: Kenya ends up net-richer.

No. Kenya does not end up net-richer. The few dollars saved by individual consumers does not make up for the long-term damage to the economy. You can say this is not the case, but it’s obvious that developing countries such as Kenya are in terrible economic conditions, and that free trade has not helped.

Why do you think they need to buy rice? Explain, concretely, why you think that rice is vital to the survival of Kenyans (e.g. what are the essential ingredients of obusima, irio and ugali?; how much rice is used in mkate?; what is the relative dietary importance of ndizi / ekitooke compared to rice?; what percentage of the population lives on obulo compared to rice?). I think obsessing over rice imports is like obsessing over papaya imports in America. I really do like papaya, but even as a rich American, I think the price is too high and it’s simply not important enough to spend the money on, except occasionally.

I’m using rice as an example. I don’t even know if they farm rice in Kenya. How about instead of “rice,” just “food”. Or for that matter, any necessity.

12

Then how do you explain the incredibly disproportionate distribution of wealth in the world? The fact is, the worldwide gap between rich and poor is increasing. Why are African countries trapped in poverty despite the amount of money and resources thrown at the problem? If these economic barriers do not exist as you claim, shouldn’t we see a trend of steadily improving economies and living conditions in these third-world countries?

This is obviously not the case. Free trade has succeeded in making rich countries richer, but has been nothing but destructive for the developing world. The evidence for this is apparent.

African countries are poor because of a lack of freedom and the negation of individual rights, not because of free trade with developed nations. Many of these African countries are little more than kleptocracies being run by murderous thugs. When nations adopt the rule of law and begin to protect individual rights, they invariably see increased living standards.

13

Then how do you explain the incredibly disproportionate distribution of wealth in the world?

Well, Zimbabwe is a dictatorial crapocracy with a government that counterfeits their own currency like the best of the thieves. So people who do productive work in Zimbabwe and are paid in Zimbucks are basically working for free, and they cannot make any money. The details differ, the theme is the same. If you want more specific details, you’ll have to name the country and the time period. For example, Tanzania was East Africa’s crapistan up to the mid 90’s but has improved; Uganda was heaven, then hell, then higher-class purgatory. It really depends on the severity of the dictatorship, and it is very well predicted by the dictatorial nature of the current regime.

Why are African countries trapped in poverty despite the amount of money and resources thrown at the problem?

Two reasons. First and foremost, the corruption and brutality of their governments and second, the amount of money and resources thrown at the problem.

If these economic barriers do not exist as you claim, shouldn’t we see a trend of steadily improving economies and living conditions in these third-world countries?

Sure, if they had free markets, but they don’t. In fact, the economic barriers to trade in Africa are huge, both at the level of official impediments and black-market impediments. (I assume you are clueless about Africa in reality: I suggest having the experrience, and see how long you can manage as an individual without bribing someone. I’m betting, chai in 2 months or less).

You can say this is not the case, but it’s obvious that developing countries such as Kenya are in terrible economic conditions, and that free trade has not helped.

There has never been anything marginally resembling free trade in Kenya. The closest they have come is weak socialism. BTW why did you pick on Kenya; is that because it’s the only African country you’ve heard of, or was there something specific you had in mind? A comparison of Kenya and Tanzania would be instructive, but of course I don’t want to presume that you know anything about either country.

I’m using rice as an example. I don’t even know if they farm rice in Kenya. How about instead of “rice,” just “food”. Or for that matter, any necessity.

Ah, okay. Well, you then were apparently ignorant of the fact that rice is a marginal crop in Kenya grown in a limited coastal region; not as trivial in quinoa in the US, but probably as important as rice is in the US (i.e. not very). Maybe you were thinking of “China” or “Korea”. One approach that some people find effective is researching the topic in advance.

14

You know what, Mr. Odden? There’s no need for that condescending bullshit. I was simply asking a question based on my understanding of international trade, which is apparently wrong and inferior to yours. Now I know.

Sorry for having offended the world’s foremost African rice expert. If you’ll excuse me, I’m gonna go wallow in my own ignorance.

15

Oh, also:

Well, you then were apparently ignorant of the fact that rice is a marginal crop in Kenya grown in a limited coastal region; not as trivial in quinoa in the US, but probably as important as rice is in the US (i.e. not very). Maybe you were thinking of “China” or “Korea”. One approach that some people find effective is researching the topic in advance.

The topic is not the history of rice and Kenyan crops. The issue was free trade. I believe I said that i was using rice as an example. But i’d like to take this opportunity to apologize for not extensively researching the fascinating topic of rice before foolishly using it as a hypothetical example as you obviously have.

All right, here goes:

I am very, very, very, very, very sorry for being ignorant of the fact that rice is a marginal crop in Kenya grown in a limited coastal region; not as trivial in quinoa in the US, but probably as important as rice is in the US (i.e. not very).

Rice was an example. Kenya was an example. You could just simply answer my question, because i was genuinely curious about the matter and wanted to learn more about how an objectivist would interpret it. But i suppose nitpicking irrelevant details like my knowledge of rice crops in Kenya to prove the vastness of your superior intelligence as a means of invalidating my views works, too.

16

Well, Zimbabwe is a dictatorial crapocracy…

We should also not forget the significant subsidies the American government pays to its farmers, especially in the cotton and sugar industries(two crops that have proven successful in parts of Africa), which effectively keeps all African goods of that nature out of the market.

In fact, all farming subsidies are essentially harmful to developing nations as those states have huge human capacity, but little else. The small or non-existent professional class in African nations, coupled with poor systems of education means that the industrialization India and China have enjoyed is almost impossible. The nations of Africa are then left to find another profitable export. What can a country full of cheap labour produce more efficiently than their more industrialized neighbours? Food or cash crops.

Proper farming techniques and a huge workforce with no better options can produce these things at a far cheaper rate than anyone in an industrialized nation. Or they could, if foreign governments did not provide massive subsidies to their farmers. We see these sorts of subsidies across the G8 nations, Canada’s wheat, Japan’s rice, the aforementioned cotton and sugar in the United States. We would also do well to remember that those government subsidies are paid from your taxes, in effect, you are paying to keep Africa poor. Free trade will never be free until the governments of the first world stop propping up inefficient industries.

17

Gentlemen, forget about rice, forget about Kenya, forget about farming–we have one and only one fundamental problem in this thread:

International trade today, thanks to organizations like the WTO and NAFTA, is very similar to Rand’s laissez-faire capitalism.

International trade today, especially in the third world, is absolutely NOTHING like, not even remotely close to, not bearing even a slight resemblance to what Ayn Rand calls laissez-faire capitalism. Quite on the contrary, it is totally UN capitalistic: Governments think that people are their “subjects,” and only have “rights” to the extent that the government is gracious enough to grant them. This is the very opposite of the capitalist principle, which is the recognition of the fact that individuals are born with certain inalienable rights, in other words that those rights are a part of their nature, and the government must respect their rights and is subordiante to individuals, rather than individuals being subordinate to the government. As long as you have governments “agreeing” to allow “free trade” when and where they, the governments, choose–in other words, as long as the government thinks it has all the power in the world and it is up to it, the government, to decide how much of that power to delegate to those pesky little individuals–you have oppression, not freedom; statism, not capitalism; NEP-like concessions made by a system that couldn’t survive if it were practiced consistently, not laissez-faire.

FunDunn and people asking similar questions must be told to stop looking at instances of statism and interpreting them as laissez-faire. The inevitable consequence of that error is to blame laissez-faire for the failures of statism. If you want to get an idea of what true laissez-faire looks like, there is only one example in history you can look at, and it is still quite far from perfect, but at least it is good enough to give you an idea: 19th century America, north of the Mason-Dixon line. Look at the wealth and population of America at the time Cornwallis surrendered at Yorktown, and compare it to the state of America when it entered World War I. The difference is what an (almost) laissez-faire system makes possible.

18

The topic is not the history of rice and Kenyan crops. The issue was free trade.

So moving off of the false claim about rice, you can suppose that in Elbonia, there is a native industry of making screw-drivers out of nails. About 10% of the population is employed making these lousy screwdrivers. An American entrepreneur sees how to make better screwdrivers more efficiently; he sets up shop, hires Elbonians, pays them 10% more, sells the product for 10% less, and very soon everybody is buying his product. The native Elbonian industry cannot compete, their sales plummet, the workers flock to the American plant to work (for higher wages). The American makes a substantial profit and exchanges his Elbonian froller for American dollars, and send the dollars home. Read up on currency exchange if you want: let’s keep this about the business. About 10% of the Elbonian laborers originally working in the native factories don’t get hired in the American’s factory because they’s more labor that he needs. Because of the higher wages at the American factory, Elbonians have more money, and they can afford to buy luxury items like shoes. Shoe sales expand, and the temprarily unemployed 10% get hired in the expanding shoe factories. The former owners of the screwdriver factories, Thag and Ogg, capitalize on this demand (they were just poor screwdriver makers, not useless as businessmen), and hire everyone they can, at higher wages (because labor is in higher demand). The net result is that Elbonians realize about a 10-20% increase in personal wealth, simply because one man introduced a more efficient way to manufacture screw drivers.

That’s the basic economics of it. Forget this nonsense about money being taken out of the country. There is no damage to the local economy, there is a benefit. It’s only through force and restrictions on free trade that you can prevent men from enjoying this benefit. Your emphasis on Africa and steadfast unwillingness to face the reality of African dictatorships strongly supports the conclusion that it is about the rice and it is not about the economics. The evidence for this is apparent.

19

FunDunn,

Exploring another relevant issue that may help you to understand the economics of trade (of which international trade is just an example):

Money is essentially worthless in itself. Even with commodity based money (such as gold), the greater part of the currency’s value is due to it’s “tradeability” and not to the commodity itself. With modern-day fake-money, the money is litterally worthless - except in trade for something else.

Why is this important? Your concern about “money leaving the country” is irrelevant. Wealth is not measured in money, it is measured in goods - stuff that actually serves human needs. When Kenya buys food for money, it is getting goods in exchange for paper. If the trade is free, one can assume that both parties benefit (i.e. the importer values the food higher than the cash, the exporter values the cash higher than the food). Looking at the importation itself, there is no loss - but a gain for Kenya (strictly speaking, for Kenyans).

Which leads us to the second point (which has already been touched uppon). What does the exporter do with the cash? He can’t eat it or use it to directly satisfy any human need - its only value is in trade. Assuming a national fake-currency, the only use for that cash is to buys stuff from the same country he just sold the food to - Kenya. The money may go through a hundred money-traders, but it has to end up being used to buy stuff from that country.

Assuming a commodity money (such as gold), things are a little more indirect. Gold, unlike national fake-money currencies, actually can be used to directly satisfy human needs or even in trade with other countries. It need not ever return to Kenya. But what happens if Kenya continuously exports gold in trade for food? Little gold will be left in Kenya, gold prices for all Kenyan goods will lower (since everyone has less gold) creating an irresisible magnet for international traders - Kenya becomes the best place to get goods for their gold (due to the low gold prices). Which in turn brings gold back into the coutry. As you can see, the whole thing tends towards stability - even with commodity currencies.

Money leaving the country is never a problem, when the goods entering the country are worth more - which they will always be if trade is free.

20

Proper farming techniques and a huge workforce with no better options can produce these things at a far cheaper rate than anyone in an industrialized nation.

This doesn’t seem to ring true. I doubt that one man farming one acre would be more efficient than one man farming 1000 acres.

In fact, all farming subsidies are essentially harmful to developing nations as those states have huge human capacity, but little else.

I agree that subsidies are evil and should be abolished but they are harmful mostly to the citizens of the subsidizing nation who are forcibly taxed. That money is then essentially given to the buyers in developing nations.

If this one industry is the developing nation’s sole means of production, then they have more serious problems than being offered a product at a discount.