Democrats & Liberals Archives

Externalities Rule

“The Economy” is a major topic of this election year, and how it works is the source of a constant battle between those who think everything is all right and those who don’t. Not all of the people on either side of the issue are partisans. Many of them are true believers in one economic theory or another, and “Free Trade” gets mentioned a lot by both sides of this issue. Almost no one on either side is talking about the same thing when they use the words “Free Trade”, and while this makes for a wild and wooly debate, it hardly is likely to lead to a common conclusion in the end. Some of the people on both sides use GATT (General Agreement on Tariff and Trade) and the WTO (World Trade Organization) as if they were interchangeable. They are not. Some focus on world economic growth and ignore what happened in places like Indonesia and Argentina, or dismiss it with vague phrases like “Crony Capitalism”. Some focus on the issues in the USA caused by exporting jobs and ignore real growth in China and a few other nations. Some just want everyone to believe that “Free Trade” is good regardless of how it is implemented and what the results of that implementation are in the real world.

This leaves those of us who think that this puzzle is only solvable by people who seriously want to solve it and not argue endlessly about ill conceived phrases and generalities that cannot be tested, frustrated. How “Free Trade” is implemented is extremely important. More important than those who use the term blindly as a magic phrase to ward off evil disagreement with one party’s stance or another can conceive. It is the external process of implementing trade agreements that defines how much success will be had within those agreements not the Abstraction of “Free Trade”. The agreements have all of the impact on what that that success will be, not some abstract “Free Market” that can never exist inside the externalities of agreements that are only there to confine it. “It’s the externalities stupid” this little voice screamed in my ear this morning. That voice comes from the part of me that understands everything, my subconscious. My conscious mind is too tied up in its own blind prejudices to have such a fundamental insight.

Often when human beings argue they grab on to the ideal that seems most true and use it to bolster their arguments. It is a powerful tactic and we all use it regardless of how valid our application of that “Ideal” really is in the given situation. The problem with using “Ideals” like the phrase free markets, to bolster arguments about international trade is the ideal exists nowhere in the real world. The Iraqi black market in oil today is closer to what free trade really is than any set of constructs imposed by wealthy nations on the rest of the world. The last really free market probably ended when Grog grabbed the wheel from his cousin Grim and bashed his brains out with it, thus proving that any great idea can be misused. Externalities imposed on markets by institutions like governments and corporations and sometimes even individuals dominate all markets today. Certainly money, the currency used to trade for the things for sale, is an externality all by itself. Try composing a market without externalities in today’s world, it will not happen.

That is why any argument about “Free Trade” has to deal with the issues of how the externalities affect the marketplace. If the ideal that we are seeking is a free market then all we have to do is abolish all laws constraining markets. The thieves would love that approach. Externalities like laws are essential to the safe operation of all markets. That is the first corollary to the axiom, “it’s the externalities stupid.” The second axiom is the golden rule. Stated simply it is, “them what has the gold gets to make the rules”. The third corollary of International Trade is, “without the power to enforce an agreement no agreement exists”. This fact does bring us back to the phrase “economic imperialism” and how that externality impacts “Free Trade” as a factor in the International Marketplace!

I might even be willing to grant that the rich nations of the world are trying their best to make free trade work. If they are their limited clarity about externalities works against them. They cannot both build trade agreements that ignore the impact of externalities on the “Free Market” and impose rules that focus the benefits of those agreements on their own economies and expect the system to work. The current system is working to create vassal economies everywhere in the world. These now are economies that are so far buried in debt to the dominant nations and their banks that they will never see daylight under the current system. This will not sustain itself; it is an inherently unstable system and cannot survive the awareness of those vassals about their state of oppression. Wars like the one in Iraq are symptoms of this instability. It’s the externalities that form markets today, try to prove otherwise and show me your proof if you can. God bless and keep you all safe in your daily attempts to create an economic world worthy of your efforts. Perhaps if we watch the impact of the externalities we can all succeed.

Posted by Henri Reynard at January 9, 2004 11:39 AM