More than half a century ago, when I was an unabashed grammar-school pupil, I enjoyed the company of a cheerful, bright, and energetic chum whom I shall call Chet. Whether on the playground or in the classroom, Chet put his all into his work, and conveyed an optimism which elevated each of us.
What added to Chet’s power to inspire was the fact that he dealt with a highly discernible disability. One of his arms and one of his legs were much shorter than the others. Chet had been the victim of polio.
It was alleged by most people I knew that Chet could have avoided the disease and its crippling consequences. However, his parents had a religious conviction which precluded them from utilizing modern medical techniques and vaccines. Theirs was a belief in faith-healing devoid of modern medicine. Consequently, Chet was resigned to go through life with his preventable physical adversity.
In contrast to Chet’s parents, most people of faith adhere to a conviction that modern medical discoveries are divinely inspired, and as such, are given to us for our benefit. Spiritual individuals see faith as a vital ingredient, yet feel that discarding medical discoveries is tantamount to casting aside alms from the Almighty.
I mention this to draw a parallel to modern thinking within the world of economics. From time to time I encounter people who insist that all we need to get our economy on the right track, and keep it there, is to get rid of all regulation and shrink the government down to its smallest possible size. This philosophy is actually touted as a “school of economics.” Sometimes it is referred to as the “Austrian school of economics.”
This is not a school or branch of economics. In reality, it is the antithesis of economics. It suggests that economics should go no further than to let markets operate without intervention.
Never mind all of the countless market failures which are observed in the real world when we leave the classroom of theoretical philosophy. Never mind that externalities cause markets to be inefficient. Never mind that many “public goods” – services which everyone would like, such as national defense – will never be produced by free markets. Never mind that numerous types of insurance suffer from incomplete markets and high transaction costs. Never mind that many markets tend toward monopoly or monopsony. Never mind that numerous other market failures abound. These should not be studied and addressed. Faith in markets is all that we need.
Such is this brand of philosophy. And to be sure, this is not a school of economic thought. It is indeed quite the opposite. It is faith-healing without any regard to modern discoveries of how our economy actually works. Just as faith can play a vital role in healing, so do markets in our economy. But we have many more tools at our disposal within medicine as well as within economics.
We can find more parallels when comparing our modern and marvelous economy to our ancient, yet far more marvelous, body. Both our economy and our bodies exhibit a degree of homeostasis. Our bodies are designed to maintain temperature, blood pressure, and so forth despite external environmental conditions. Our economy, through market mechanisms, is designed to maintain employment and production despite changes in technology, commodity prices, natural resources, and so forth.
Yet we have limits to how well our bodies can maintain, for example, temperature. In the winter we put on extreme layers of clothes to help our bodies sustain that all-important 37 degrees Celsius. We even build houses and other structures to protect our bodies from the elements, despite the intricate systems we have within our bodies for homeostasis.
Our economy is similar. Markets can do many things, just as our bodies can. But economic life without the safety nets, regulations, and public services put in place by intelligent governments around the world is like a physical life without warm clothes and housing.
We can still go further with this comparison. One of the confusions which arises within economic discourse involves appropriate policy. So often, policy prescriptions from yesteryear are drummed up as if they should be applied today. For example, I have heard some folks retrieve Milton Friedman’s ideas from the 1960s and suggest that this is what we need today. An extreme version of this type of reasoning comes from our conservative constitutional adherents, who often argue that our founding fathers knew everything we need to know about running an economy and we should be following their model.
In the real world, an economy, like a human body, evolves over time. Its requirements today often differ from its requirements last decade or last century. A patient may come to a physician who diagnoses high blood pressure resulting from too little physical activity. Some years later the same patient may develop extremely low blood pressure as a consequence of heart problems. Imagine how it might work out for the patient if the doctor’s advice in both cases is to increase physical exercise, since that is his dogma, his pet doctrine.
Like our bodies, our economy needs specific policies according to current conditions and requirements. A doctrinal or dogmatic approach has never been the best way to deal with economics. Successful economies are established and maintained on principles of pragmatism, on policies which are timely and efficacious, on prescriptions which fit the patient and her current conditions.
Further, just as a man suffering from high blood pressure would be foolish to contact talk radio to diagnose his malady, so it is with our economy. Proper diagnosis requires a pragmatic and open-minded expert.
Now we come to our question of the day: What foreign trade and globalization policies should we be pursuing at this juncture? Should we be embracing a free-trade stance? Or should we nudge the economy in a protectionist direction?
Interestingly and ironically, the one presidential candidate who most closely resembles our founding fathers’ approach to domestic industrial protection through tariffs is Bernie Sanders. Donald Trump is close on his heels with his own isolationist rhetoric.
The subject of globalization has many facets and complexities. It includes trade, flows of speculative and investment funds, immigration, patents and intellectual property, investor-state dispute-settlement clauses, labor laws, and employment, to name just a few.
The chin-stroking pundits on both sides of the political aisle have devoted countless pixels to this topic. Over the next few weeks we will delve into this subject from the perspectives of both economic theory and practice as well as where our economic patient, namely the U.S. economy, happens to be today.
(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at firstname.lastname@example.org.)