Free trade: checks and balances

When you consider what liberal capitalism has achieved over the past century and a half, not to mention the record of its rivals, the fact that its virtues and its very legitimacy remain so contested is surely remarkable. Avowed anti-globalists are not the issue here: the marchers and window-smashers are not the only, and not the most important, sceptics of the liberal order. Markets continue to function under a surprisingly widespread presumption of guilt. People ask, how could billions of disconnected selfish interactions ever yield an outcome that is collectively right? Adam Smith answered that question 240 years ago but those who believe what he said are regarded by many fair-minded people as slightly mad. Over the past 160 years, the world made hitherto-unimaginable progress in human welfare, however you measure it. Yet nowadays, never has so much seemed so bad to so many.

Short-term problems are usually exaggerated. Undeniably, the world economy just now looks especially fragile. The consequences of the burst bubbles of the 1990s have not yet been worked through. Deflation is a risk: in Japan it is a fact, and in Germany close to becoming so. This makes orthodox economic remedies difficult to use. It is worrying- but this is no terminal systemic crisis. Long-term success, on the other hand, is turned upside down. For astounding improvements in life expectancy, read population time-bomb. For unparalleled advances in prosperity, read rape of the planet. For eradication of poverty (as once defined) in the industrialised countries, read widening North-South gap. Show us an economic miracle, and we will show you the failure of capitalism.

While these attitudes prevail, it is necessary to remind readers that liberal capitalism has been a stunning success. But beating back grossly misplaced fears about where capitalism is leading is not enough. For one thing, the prominent anti-capitalist spokesmen make it too easy. Dwelling too long on their bogus concerns is apt to rot the intellect. More important, liberal capitalism as practised in the West today does actually have some defects. Orthodox anti-capitalists are too intent on root-and-branch repudiation to draw attention to the far narrower, yet still important, issues that warrant action.

Among other things, the main dangers to the success of capitalism are the very people who would consider themselves its most ardent advocates: the bosses of companies, the owners of companies, and the politicians who tirelessly insist that they are “pro-business”. Many of the corporate scandals that America, especially, has endured in recent years reflect outright criminality. A lawful order knows what to do with criminals, and pro-business politicians are in truth militantly anti-capitalist if they flinch from cracking down on bosses’ crimes. The other great ongoing scandal is not a matter of law-breaking: it is that bosses have grown accustomed to rewarding themselves like owners, though bearing few risks of ownership - while the real owners, shareholders in the companies concerned, have let them get on with it. A system that gives a charter to brazen unchecked greed is a system in peril.

Economic liberalism, much like political liberalism, puts great weight on checks and balances, on limits to power and hence to abuses of power. In economics, the most potent checking force bar none is competition. Bosses, shareholders and pro-business politicians all loathe it. They stand to gain, in one way or another, from conspiring to gull the public into regarding competition as a threat to the greater good, rather than to themselves. This is the context of free trade. Liberal trade is nothing but enhanced competition. Anti-globalists have the logic exactly backwards. Far from empowering global fat cats, free trade holds corporate power in check and assaults the excess profits that protectionism, courtesy of pro-business politicians gouges from the public.