Free Trade and the Paradox of Consumption

| May 22, 2020 | Economic Development

Re: Yes, We Should Care About Huawei

In a recent post, Rachel Bovard rightly defended the notion that in certain instances national security considerations should supersede free trade considerations. She specifically cited the ban on Huawei in the context of a discussion of a recent Real Clear Markets column by economist John Tamny, who makes a traditional free market case against the ban on Huawei in the US market

I’d like to discuss aspect of this debate that goes beyond the national security considerations outlined by Bovard.  Regarding free trade, the theory is that the savings generated by purchasing the lowest cost import will be offset by sufficient demand elsewhere to offset the collateral damage of displaced workers. The implicit assumption is that this “good” outweighs all other considerations, even though the relative consumption problem that occurs as one person buys the lower-cost good creates a consumption equivalent to Keynes’s “paradox of thrift” – insofar as consumers fail to realize that if they all do it, then many more of them ultimately end up unemployed or underemployed.

As Tamny suggests, maximizing current consumption means purchasing the lowest priced goods at any level of quality. In that way, the volume of consumption can be increased and one’s utility maximized. Relative consumption behavior increases this behavior. One’s sense of values quickly decays when he sees his neighbors increasing their utility at his expense. The neighbor’s foreign-made flat screen TV is so nice and was so cheap that Joe decides he must have one too even though as a union member he well understands his purchase will result in a job loss in the U.S.

Consider a thought experiment:  Imagine a country with one worker and that worker was the sole consumer. The worker would understand that by consuming foreign-made goods produced a worker overseas, he would soon have no income and, consequently, no consumption. In the real world, people want to maximize their welfare, and most do so by maximizing current consumption, which is said to be one of the benefits underlying free trade. Maximizing current consumption means purchasing the lowest-priced goods at any level of quality.

In the short run the increased standard of living offered by low-cost goods swamps the longer-term effects of chronic job losses. But extending this logic nationally, and we can see that the paradox of consumption is the idea that a rational person in a one-person world would never behave in the same way as many rational utility-maximizing individuals behave, even if many understand the possible outcome.

It is, and always has been, the government’s duty to provide for and protect its citizens. Protection of U.S. workers is long overdue and the cost of government neglect, long ignored by the champions of free trade, is huge, especially when one additionally factors in the national security considerations highlighted by Rachel Bovard in the Huawei 5G debate.

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Marshall Auerback

Marshall Auerback is a researcher at Bard College's Levy Economics Institute, a fellow of Economists for Peace and Security, and a writer for the Independent Media Institute.

@Mauerback