Free Trade, the Primrose Path, and the Blinkered Blindness of macroeconomists

 - by New Deal democrat

Here's what I learned today: the origin of the phrase "being led down the primrose path." 

It turns out that in medieval times, one meaning of the word "primrose" was the "prime," or first or loveliest, rose.  Thus taking the primrose path was a particularly lovely journey. At least by the time of Shakespeare's "Hamlet," where Ophelia speaks of the "primrose path" to Laertes, the connotation developed of the use of a lovely and seductive experience to lure a mark to their misfortune or doom.

The doctrine of free trade is macroeconomists' primrose path.  Today's example comes from Tim Haab's blog "Environmental Economics," in the below post entitled "Quote of the Day: Both sides win from free trade . . . sheesh," which I am reproducing in full:

That moment you realize the Chinese administration understands economics better than the U.S. administration...

From the Steve Bannon interview story:

"In reality, China and the United States' long term cooperation has brought about real benefits for both countries' peoples, any unbiased person will clearly see this fact," [Chinese Foreign Ministry spokeswoman Hua Chunying] told a daily news briefing in Beijing.

"We have also said before, a trade war has no future. A trade war does not serve the interests of any party, as fighting a trade war will not produce a winner. We hope that relevant parties can stop viewing issues of the 21st century with a 19th- or 20th-century mentality."

 Hua's quote is in reaction to Steve Bannon's claim that the U.S. is losing the trade war with China:

"It's in all their literature. They're not shy about saying what they're doing. One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path," he was quoted as saying.

"If we continue to lose it, we're five years away, I think, 10 years at the most, of hitting an inflection point from which we'll never be able to recover."

Now, I am no fan of Steve Bannon, but alas in this case it is economist Tim Haab who has the worse argument. Here's why.

Let's assume that Haab is completely right in what he says: that free trade in the aggregate absolutely benefits both countries which engage in it.  End of story?

No, and here is where macroeconomists' blinkered blindness to human behavior is on full display.

Wealth is, generally speaking, not accumulated for its own sake, but rather to be spent of stuff that you really want. So Country A and Country B can use the increased wealth from free trade to fund the stuff they really want.  

So let's suppose that while both Countries benefit from free trade, Country A's wealth increases by an additional 5% a year, while Country B's wealth increases by an additional 1% a year. By the magic of compounding, over 10 years Country A's wealth increases by 63%, and over 20 years by 265%. Meanwhile Country B's wealth has only increased by 10% in 10 years and 22% in 20 years.

Suppose further that what Country A really wants to do with this wealth is invade and take over Country C, which alas is an ally of Country B, meaning that Country B will have to go to war to defend it.

Is Country B's 22% increase in wealth worth the loss of life and destruction it will incur defending Country C?  This calculation nowhere appears in any of the arguments by free traders.

Meanwhile, if I am the leader of Country A, I am more than happy to lead Country B down the primrose path of free trade, knowing what I have in store at the end.

What's worse, we have already been through this exercise  once before, with calamitous results,  In 1909, Norman Angell's "The Great Illusion," argued that countries that trade with one another would never go to war, because it was so illogical.  At the time, free trade had burgeoned among the countries of Europe.

But it turns out that wasn't the priority of Kaiser Wilhelm or other European monarchs.  Only 5 years later, all of that wealth was poured into a catastrophic war.

Even though the historical facts devastatingly rebut the macroeconomic theory, macroeconomists ignore the facts. Since the uses to which ocountries might put the increased wealth obtained by trade lays outside their theory, they are blinkered and blind to it, and assuming that it does not exist. That World War I rebuts their argument is waved away as ancient history, even though human nature has not changed one wit.    In their blinkered blindness, macroeconomists fail to see that  free trade can be used as the primrose path.