Will the financial crisis lead to more protectionism?

In opening the WTO’s Public Forum for 2008, which is taking place in Geneva at the moment, Pascal Lamy, director-general or the WTO referred to newspaper headlines heralding a potential Great Depression Two. He noted that policy-makers in the United States and across the globe, are desperately seeking to avoid the series of mis-steps that accentuated the financial crisis of the 1930s. Lamy then added:

“They are all stressing that lessons from the Great Depression have been learned, and that the many policy mistakes that were associated with it will be avoided. But one of the important lessons of the Great Depression, which we must not forget, is that “protectionism” and economic isolationism do not work. They are policies of the past, which should have no place in our future” (here).

I suppose that quite a few economists who are concerned about the current financial crisis have recently revisited what Milton Friedman had to say about the origins of the great depression. My conclusion after re-reading the relevant chapter of “Capitalism and Freedom”, is that the policy mistakes that led to the great depression are unlikely to be repeated. I am less sure that the U.S. will avoid the policy mistakes that Japan made at the beginning of the 1990’s - but that is not what I want to write about at the moment.

After I had read what Friedman had to say about the origins of the great depression I then found myself reading his comments on trade liberalisation in the following chapter about international finance and trade. If Pascal Lamy has good cause to be concerned about a rise in protectionism in the current environment – as I think he has - it seems to me that the best way to defend against it would be to revive efforts toward trade liberalisation. The following comments by Friedman on approaches to trade liberalization seem to me to be particularly relevant in the light of the recent failure of international trade negotiations:

“Given that we should move to free trade, how should we do so? The method we have tried to adopt is reciprocal negotiation of tariff reductions with other countries. This seems to me a wrong procedure. In the first place, it ensures a slow pace. He moves fastest who moves alone. In the second place, it fosters an erroneous view of the basic problem. It makes it appear as if tariffs help the country imposing them but hurt other countries , as if when we reduce a tariff we give up something good and should get something in return in the form of a reduction in the tariffs imposed by other countries. In truth the situation is quite different. Our tariffs hurt us as well as other countries. We would be benefited by dispensing with our tariffs even if other countries did not. We would of course be benefited more if they reduced theirs but our benefiting does not require that they reduce theirs. Self-interests coincide and do not conflict” (Friedman, 1982: 73).

Friedman made it clear in the following paragraphs that he was using “tariff” to cover non-tariff impediments to trade as well as tariffs.

It is difficult for those who share Friedman’s views about trade liberalization not to view WTO negotiations as vaudeville. The negotiation process seems to exist to allow politicians to clown around on the world stage keeping their domestic audiences amused, while behind the scenes they continue to pander to narrow interest groups favouring high protection.

Does this mean that the WTO is worse than useless? Not necessarily. The WTO has potential value as a forum that can help member countries to resist the pressures of domestic interests seeking to retain or even increase trade barriers. It seems to me that it is not beyond hope that WTO processes could be used to help individual countries to develop trade negotiation strategies that would achieve the benefits potentially available to them through unilateral reductions in protection. If many countries can induce each other to do this simultaneously, all can also obtain the benefits flowing from reductions in trade barriers of other countries.

How this could happen? The best ideas I have seen are in a contribution to the WTO Public Forum by Bill Carmichael, former chairman of Australia’s Industries Assistance Commission (here).

Is liberty opposed to virtue?

Robert Skidelsky argues that we have come to think of morality as having to do only with rights and obligations (here). According to Skidelsky, where there is no right or obligation, morality has become silent:
“A man who, having fulfilled his obligations to others, settles down to watch porn on television all day may be foolish, disgusting, vulgar and so forth, but he is not strictly speaking immoral”.

Skidelsky claims that increased liberty, as advocated by J.S. Mill, is largely responsible for this apparent contraction in the scope of morality and in the decline in virtue ethics. As is well known, Mill argued in “On Liberty” that adults should be legally free to do as they choose as long as they do not interfere with the rights of others. However, he also argued against what he described as the “despotism of custom”:
“The human faculties of perception, judgement, discriminative feeling, mental activity, and even moral preference, are exercised only by making a choice. He who does anything because it is the custom makes no choice. He gains no practice either in discerning or in desiring what is best” (Chapter on Individuality).

Skidelsky claims that contrary to Mill’s argument, increases in personal liberty have not enabled people to become more self-directed and happier. He observes: “Modern Britain, for all its profusion of choice, is hardly a showcase of fully developed personalities”. I imagine that Skidelsky would also consider that this observation applies to other western countries.

Skidelsky uses the TV show, “Big Brother” as an example of what he means: “It panders to the greed and vanity of its participants and to the voyeurism of its viewers. ... Yet from a liberal standpoint, there is nothing to be said against it. The participants are there of their own accord and may leave any time they please. ... On some level we know it is vile, yet we lack the authority and words to say so”.

Well, I think he just said that “Big Brother” is vile. In any case, Skidelsky has not convinced me that liberty is opposed to virtue. The fact that many people do not use their liberty to make good choices does not make their liberty responsible for their choices, or for the apparent absence of the use of moral language in the discussion of the choices that they make. It is only the possibility of choice that enables anyone to consider the morality or rationality or any other characteristic of the choices that anyone makes.

It seems to me that while liberty is not opposed to virtue, it is possible to argue that those who have been unduly influenced by Mill’s attack on “the despotism of custom” may have been left without a moral compass. As Friedrich Hayek pointed out, it is unwise to disregard customary rules just because their significance and importance is not obvious to us. These rules may embody wisdom resulting from the experimentation of many previous generations. Hayek also made the important point that whereas coercive rules unambiguously restrict liberty, customary rules are not despotic. They “can be broken by individuals who feel that they have strong enough reasons to brave the censure of their fellows” (“Constitution of Liberty, 1960: 62-63).
It is also possible to argue that in emphasizing the role of reason, Mill and his followers have not been sufficiently sensitive to the role that emotions play in morality. The role of emotions had previously been asserted by David Hume: “Morals excite passions, and produce or prevent actions. Reason of itself is utterly impotent in this particular. The rules of morality, therefore, are not conclusions of our reason” (“A Treatise of Human Nature”, 1739, III, I, i).

Nevertheless, even if it is possible to pin some blame on Mill for a decline in unthinking adherence to moral conventions, he can hardly be blamed for the apparent absence of moral language in the public discussion of the choices that people make. If anyone thinks that certain behaviour is unhealthy or in some other way inconsistent with living the good life, there is nothing stopping them from giving reasons why they think that. People might even be prepared to listen if those delivering the sermons regard themselves as moral equals.

Are our preferences always governed by hedonic factors?

Hedonic factors have to do with pleasure and pain. It seems to me that the answer to this question depends on how broadly or narrowly pleasure and pain are defined. It may be possible to define pleasure and pain so broadly that we can assume that our preferences are always governed by hedonic factors.

The question becomes more interesting, however, if a narrow definition of hedonism is adopted. Clive Hamilton has a very narrow definition of hedonism in mind when he writes: “The pleasant life, or life of pleasure, is one motivated by hedonism – the desire to maximise the number of emotional and physical ‘highs’ that is the signature of modern capitalism” (“The freedom paradox”, 2008: 12). Hamilton goes on to claim: “The hedonic conception of happiness is the one assumed by the utilitarian approach of neoliberal or free-market economics”.

Once you strip the gratuitous nonsense out of those statements it seems to me that you are left with nothing more than the assertion that the preferences that people reveal in their market behavior reflect only their desire to maximise the number of emotional and physical highs that they experience. That seems to me to be an offensive view to have of the motivations of one’s fellow human beings. If Clive actually observed the market behavior of real people he would see a lot of people making a lot of decisions with a range of motivations, including the longer-term well-being of their families.

Do free-market economists assume that the market behavior of people is motivated solely by a desire to maximise the number of emotional and physical highs they experience? I can’t speak for everyone, but I would be surprised if many free market economists would make that assumption. I imagine that most free-market economists would accept Lionel Robbins view that economists do not have to make judgements or assumptions about motivations: “Why the human animal attaches particular values ... to particular things, is ... quite properly a question for psychologists or perhaps even physiologists. All we need to assume as economists is the obvious fact that different possibilities offer different incentives, and that these incentives can be arranged in order of their intensity” (“An essay on the nature and significance of economic science”, 1945: 86).

Free-market economists believe that whatever motivates the market behaviour of individuals their preferences should generally be respected. My personal view is that individuals are generally capable of making judgements in their own best interests, that no-one else is better placed to make such judgements and that individuals are more likely to flourish when they know that they have to accept responsibility for the consequences of their own judgements. However, I also believe that some contrary views, such as those based on the evidence of irrational behaviour presented by psychologists and behavioral economists, deserve serious consideration (see previous posts on the topics of ‘autonomy and responsibility’ and ‘self control’).

Are libertarians baffled by downshifters?

In his book, “The Freedom Paradox”, Clive Hamilton claims that libertarians are “baffled and distressed” by downshifters (Allen and Unwin, 2008: 22). Downshifters are people who voluntarily decide to reduce their income in order to free up time and energy for other pursuits. In attempting to support his claim, Hamilton poses the question: “If one believes that the world is populated by Homo economicus, rational economic man, what happens to that world when rational economic man freely chooses to transcend himself?”

Let us consider whether downshifting would actually puzzle some hypothetical libertarian whose economic education has been confined to the simplest thought experiments of neoclassical economics that employ the concept of rational economic man (REM). Would such a person have difficulty in incorporating downshifting decisions in such models? No. The REM in such models always choose to forgo some income in order to enjoy more leisure when this enables them to move to higher indifference curves. If our economist could find an appropriate article written by Gary Becker he/she might even be able to demonstrate that REM could transcend themselves (change their own preferences) by making appropriate investments in their “human” capital.

In any case, how many libertarians actually believe that the world is populated by REM? Many economists continue to use the REM concept where they consider that for the purposes at hand the added complexity of more realistic assumptions is not warranted. My guess is that, among mainstream economists, libertarians are less prone than other economists to employ the REM assumption where it is clearly inappropriate to assume that economic actors have perfect knowledge. This is because libertarians recognise the role of markets in integrating decisions of real people who have specialised and limited knowledge. Moreover, many libertarians have been influenced by the writings of Austrian economists who explicitly refrain from employing the REM assumption in their analyses.

Although Hamilton’s book contains quite a few silly claims, the author also develops a thoughtful line of argument to the effect that ethical behaviour needs to be based on inner freedom and a sense of purpose – living close to one’s nature - rather than on reason. Cassandra Wilkinson has written an excellent review article responding to Hamilton’s claims that western nations are descending into misery and moral decay (here). I might write more about some of Hamilton’s other silly claims later, but for the moment I want to focus upon his musings about ethics.

Hamilton’s line of argument is broadly as follows:

• It is possible to distinguish between three different approaches to wellbeing – the pleasant life, the good life and the meaningful life. The pleasant life is about seeking pleasure; the good life is about personal growth, capabilities and human flourishing; and the meaningful life is about commitment to a higher cause e.g. pursuit of virtue or selfless moral principles.(This classification is attributed to Martin Seligman, but Seligman’s definition of the meaningful life seems more like Hamilton’s definition of the good life; see here).
• As Friedrich Hayek recognised, we may be free and yet miserable. Liberty does not mean all good things or the absence of all evils (“Constitution of Liberty”, 1960: 18). We cannot achieve a good life or a meaningful life if we lack inner freedom i.e. if we are slaves to our passions.
• The decline of the authority of the church has left people unsure where to look for moral guidance. Attempts to build moral systems based on reason, e.g. Kantian and utilitarian theories, develop universal rules that are meant to apply equally to all. “Yet in situations where the moral decision is victimless it is common today for people to adopt the view that, although it would be wrong for them to do a particular thing, they would not condemn others for acting differently” (140). (Thank God, I say! It seems to me that this is an appropriate application of the golden rule to do unto others as you would have them do unto you.)
• “Through a form or intuition we are able to understand that the inner nature of each of us is identical with the thing-in-itself – the universal substance or subtle essence and that all existence has a unitary nature” (146). “If the universal Self is the subtle essence of each of us, the moral self is the most immediate expression of that universal Self in the phenomenal world. It is the innermost voice of conscience, where all personal interests, social conventions, duties and obligations are left behind” (147).
  

The final point clearly involves an attempt to grasp at moral insights that stem from the things we have in common with other humans and indeed with all living things. Of necessity, however, humans do not all share the same intuitions about such things. In the words of Douglas Rasmussen and Douglas Den Uyl:
“since our humanity is not some amorphous, undifferentiated universal, human flourishing does not have some abstract and universal character. The generic goods that constitute human flourishing only become real, determinate, and valuable when they are given particular form by the choices of flesh-and-blood persons. In reality, the importance and value of these goods is rooted in factors that are unique to each person” (“Norms of Liberty”, 2005: 80).