Read our latest collection: Regaining Our Balance: How to Right the Wrongs of Globalization
The Commons hosts commentary from contributing writers across the political spectrum, advancing American Compass’s mission through discussion that combines intellectual combat and personal civility.
What role should experts play in our politics? Of course, they have their own freedom of speech, and are welcome to hawk their wares in the marketplace of ideas. But when election day arrives, their votes count no more or less than others, and they are far fewer in number. Democracy relies upon non-experts to understand their own interests and the wisdom of crowds to aggregate disparate and even near-random individual judgments into passably correct collective ones. Experts staff the offices of elected leaders and the bureaucracies of the administrative state. But in those places, their role is to execute decisions made by people with less expertise, acting on behalf of a public with none at all.
Our latest Compass Point is by James M. Roberts, long-time research fellow at the Heritage Foundation and co-editor of their Index of Economic Freedom, reflecting on his experience in the conservative establishment and the perils of a political movement running on autopilot.
“Conservatives are fond of warning that a government program, once established, never dies,” he observes wryly. “The same, it turns out, can be said of conservative institutions.”
The rebuttal delivered by Jon Lovitz’s Michael Dukakis, in his debate with Dana Carvey’s George H. W. Bush, is one of Saturday Night Live’s most famous political punchlines: “I can’t believe I’m losing to this guy.” The New York City audience went nuts—neither could they believe Dukakis was losing to Bush. But, of course, the joke here was on Dukakis. That he could not understand why he was losing; and that his only response was to say so; pinpointed the oblivious candidate’s failings.
This sketch popped into my mind while reading Stan Veuger’s reply to my essay, “Searching for Capitalism in the Wreckage of Globalization.” Veuger seems dismayed that anyone would take seriously my own writings, which “struggle with relatively well-known facts about economics and the economy.” He thinks I am prone to conspiracy theories. He suggests I “read a book” or “reach out to someone with advanced training in economics.” His coterie of American Enterprise Institute (AEI) colleagues eats all this up (“just splendid,” “so much slicing and dicing,” “helluva takedown”). Yet he mostly succeeds in illustrating why the “center-right heavyweight economic policy community,” to use the term coined by Michael Strain, AEI’s director of economic policy studies, is losing ground so quickly in the globalization debate.
It is hard, nay impossible, to find a more sophisticated conservative critique of globalization than that articulated by Oren Cass. Perhaps because Cass was once a card-carrying member of the economic establishment himself, he has an exceptionally clear sense of some of the problematic assumptions that have underpinned that establishment’s high level of support for globalization over the past three decades.
Many, including the current administration, would agree with much of Cass’s diagnosis. There is now a broad consensus that globalization has had a devastating impact on American manufacturing communities, that it has primarily benefited the owners of capital instead of American workers, and that the United States needs new economic policy tools to address the challenge of China’s rise.
On March 3, 2018, The Economist declared that the free world had “made the wrong bet” in trying to make China “a responsible stakeholder in the rules based, liberal global order.” Last week, major hedge fund manager and long-time globalization champion Larry Fink declared that “globalization is over.”
When the former high priests of globalization admit it’s not working, the time has come not only to ask why they’ve changed their minds, but also why they were so wrong for so long. Oren Cass’s exposé of the abuses of classical economic theory offers a valuable starting point. But the problems lie even deeper and extend much further.
In his essay, Oren Cass correctly argues that a well-functioning capitalist system requires a “bounded market” within a nation-state that imposes interdependence on labor, capital, and consumers. Frictionless capital mobility across borders, in contrast, decouples the interests of investors from their country and their workers.
Global capital flows have become massive in volume, unrelated to the size of the real economies of the world. Large capital inflows and outflows seem intuitively beneficial to a country, but the reality is that they can cause surges and imbalances of production, consumption, exchange rates, and inflation. They also cause income inequality, deindustrialization, and economic distortions that gave rise to the U.S.–China economic rivalry.
Analyzing the effects of any long-run macroeconomic trend is admittedly a difficult affair. After all, typically more than one big trend is happening at a time, which means that isolating the impact of any particular force requires careful and thoughtful empirical analysis. It is somewhat troubling then, that “Where’s the Growth?” doesn’t appear to draw any clear causation between the alleged malign forces of globalization and the declines in productivity and economic dynamism.
Put more straightforwardly, it is true that American productivity growth and economic dynamism has been on the decline for decades. But these are much broader trends that reams of empirical work have connected to self-imposed housing scarcity, demographic headwinds, an overbearing regulatory environment, a general societal decadence, and the slow process of new ideas getting harder to find. Given what we know about these other factors, do we have strong evidence to suggest that globalization played a large (if any) role in the Great Stagnation?
Oren Cass is right to note that modern economists largely misunderstand Adam Smith. But the misunderstanding runs deeper and traces even further back than editorializing in 20th-century textbooks. For more than two centuries, scholars have ignored the relationship between Smith’s political philosophy and economic analysis. It began with Smith’s own friend and biographer, Dugald Stewart, who, in an effort to preserve his legacy and make his ideas more politically acceptable, divided Smith’s views on economic freedom and political liberty. Scholars and economists today maintain this artificial divide, characterizing Smith as a conservative on economic issues like free trade and small government, while overlooking his political views on egalitarianism, toleration, anti-imperialism, and religious freedom.
Oren Cass’s essay demonstrates how the advantages of industrial policy, apparent to some of the founders of economics and foundational to the success of the United States, were carefully airbrushed out by advocates of free trade in the 20th century. But he goes too easy on the neoclassical economists. Not only did their defenses of trade and attacks on industrial policy rely on intentional misrepresentations of economic theory, but the actual international trade system never met the bar required by their own theory to be considered beneficial.
Oren Cass takes on the entrenched belief held by the U.S. economics profession that countries should always pursue a policy of free trade. He argues that Smith and Ricardo have been misunderstood for generations because their key assumptions around capital mobility were omitted as the arguments were passed down. The results have been disastrous. I won’t opine about the specific omissions for Smith and Ricardo’s work, but instead focus on a recent episode that interrogated what trade models say about the economic implications of globalization.