Adam Smith: 21st century man? (1994) | THINK TANK

Adam Smith: 21st century man? (1994) | THINK TANK

Ben Wattenberg: Once again, a big fight over
international trade is brewing in America. On one side advocating free trade are the
intellectual heirs of the Scottish philosopher Adam Smith. On the other side are those who believe that
Smith-style free trade threatens American jobs and industry. Joining us to sort through the conflict and
the consensus are Robert Lawrence, professor of economics at Harvard University and author
of “Can America Compete?”; Jagdish Bhagwati, professor of economics at Columbia University
and author of “The World Trading System at Risk”; James Fallows, a longtime analyst
of East Asian economic strategies and author of the recently published “Looking at the
Sun: The Rise of the New East Asian Economic and Political System”; and Thea Lee, an
international trade economist at the Economic Policy Institute. The question before this house: Is Adam Smith
a 21st-century man? This week on “Think Tank.” To most Americans, 1776 means America’s
birthday. But besides a new nation, something else was
born that year, a new notion of how the world works, the idea that individuals are better
than the government at determining what is in their economic interest. Now, later on we will talk about the huge
new trade treaty, the General Agreement on Tariffs and Trade, or GATT. But first let’s take a look at the father
of free market economics, that Scottish philosopher Adam Smith. His book, “An Inquiry into the Nature and
Causes of the Wealth of Nations,” published in 1776, remains the cornerstone of modern
economic thinking. In it, Smith declared that it is not from
the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but
from their regard to their own interests. By intending principally to make themselves
better off, Smith said, merchants, workers, and factory owners unintentionally make us
all better off. Smith argues that free trade between countries
benefits consumers. He illustrated his point using the homely
example of a household. It is the maxim of every prudent master of
a family never to attempt to make at home what it will cost him more to make than to
buy. In other words, why make your own clothes
when you can pick them up at a department store more cheaply? Smith continued, “What is prudence in the
conduct of every private family can scarcely be folly in that of a great kingdom.” Again, why should the United States make steel
at home if it can buy steel cheaper from Korea? Now, Adam Smith surely would be pleased that
much of the world is now following his advice. Trade is rapidly expanding as countries open
their markets to foreign goods. American shoppers can buy ties from Taiwan,
shirts from Brazil, and cookware from France, typically at bargain prices. But free trade is not without its critics,
as the recent battle over NAFTA, the North American Free Trade Agreement, showed. Some say that a measure of a nation’s success
is not what it can buy, but what it can produce and sell. Others say free trade may be fine in theory,
but we live in an imperfect world. To them, Adam Smith was a brilliant thinker,
but his time has passed. Panel, ladies and gentlemen, my own view of
the debates that we had about NAFTA was that it was terrible. It was a great opportunity to try to explain
a complex idea to the American people, and instead we heard things about sucking sounds
and OMAs and dumping and voluntary restraints and 200,000 jobs lost or 200,000 jobs gained. And what I would like to try to do in the
first few moments of our discussion here today is to take the figure of Adam Smith, the father
of this idea, and, using that vehicle, try to explain what it is we should have been
talking about. And Professor Lawrence, I wonder if you could
take a stab at that. Robert Lawrence: Well, I think that the central
insight of Adam Smith was that there are benefits to allowing individuals to specialize, that
each person should do what they do relatively well. And I think, as that citation indicated, he
argued that this was also true of nations. And that is the fundamental idea of why free
trade is good, because by specializing, it allows us to increase our income. It increases our well-being and welfare. I mean, think about it with a viewpoint by
comparison to technology. Imagine if someone invented a machine that
would run on water instead of gas. Well, we’d all agree this would be a terrific
thing. We could now save on all of those resources
which we use in order to run our engines. We would also acknowledge, however, that for
the oil producers of the world, this might not be a very good thing. But for all of us, this improvement in technology
would allow us to get energy more cheaply. And Adam Smith’s insight was the same proposition
would hold for a nation. If you can buy things more cheaply from the
rest of the world, you can raise your incomes. You can raise your well-being. So my own sense of dissatisfaction with the
NAFTA debate is that it didn’t concentrate enough on how we raise people’s living standard
as opposed to the question of how many jobs we may create or lose. James Fallows: I wonder if I could just go
on from that. I think that Robert has very eloquently summed
up what is the main derived lesson from Adam Smith’s teachings today. And I think the question, what the debate
about these teachings now really concerns, is whether something that is generally good
is always good, whether something that is largely good is absolutely in every single
case good. Ben Wattenberg: So you are not anti–Adam
Smith? James Fallows: No, of course not. I think that there is a whole side issue here
of whether the real Adam Smith has any relationship to the figure who is used as a symbol now
on neckties of people who are, in many cases, absolute free marketeers. Let me use this illustration. We all would agree that personal liberty is
a good thing. In most cases, it is a wonderful thing, and
yet we don’t feel that it is absolutely a good thing. Societies need some curbs on personal liberties
at some point in order to cohere as societies. And I think the argument about free trade
is whether there is any point where there are other political or strategic or other
benefits that you advance by curtailing free trade at certain points. And what has struck me in the last eight years
I’ve been working in East Asia is the very shrewd mixture of sort of operating principles
derived from Adam Smith and the strategic intervention by the government for non-Smithian
purposes. So it’s sort of the missing third member
in the choice. Robert Lawrence: The central insight is that
it’s not just that different countries have different kinds of capital or different kinds
of labor that will determine what they specialize in, but it may actually be if they have different
kinds of rules, different kinds of regulation, and different kinds of government policy. James Fallows: Or ambitions. Robert Lawrence: Those will also change the
patterns of specialization. Thea Lee: The point, Robert, is that, as a
nation, we go through a political process to decide what kind of labor regulations,
what kind of environmental standards we want, and we regulate our domestic producers. Every time we import a good that doesn’t
meet those standards, we are undermining and putting at a disadvantage our domestic producers. And so for us it’s one thing for countries
to have different labor regulations; it’s another thing for them to have automatic access
to every other country’s market in the world. I don’t think that necessarily follows. Jagdish Bhagwati: I think you’re wrong on
that, Thea, because certainly other countries have their own views about what in fact labor
standards ought to be or environmental standards ought to be, and these are legitimate differences
of opinion, not the self-indulgent pursuit of diversity. Like in Mexico, people may be interested in
cleaner water rather than cleaner air because they have a lot of problems with dysentery. So it seems to me that that translates simply
into what you will face in terms of international trade. And virtually everything, all kinds of diversity,
will in fact play into that. Now the only thing you could say is that if
different countries play the game of trying to attract capital, for example, by the lowering
the standards below what they would like to do, simply with a view to playing this game
of race to the bottom, as it’s called, different jurisdictions changing their environment regulations
or labor regulations with a view to competing for scarce capital, then that could lead to
everybody becoming worse off, our standards possibly getting as low as their standards. But when you look at the empirical evidence
on this, I mean, this is a theoretical possibility, but there really isn’t anything very much
— James Fallows: I think there’s something
that we’re all saying that’s similar to what Smith dealt with and is different from
the way these issues are normally discussed in the press and in politics, which is that
there is, both potentially and in the real world, a tension between purely economic efficiency,
of getting the most for consumers around the world, a worldwide efficiency, and certain
political values that different nations and different organizations may have. The French may want to keep their pasture,
even at the cost of higher-priced food. The US may want certain labor standards, even
at a cost of more expensive shirts. And so what this whole debate is about is
something Smith recognized, which is the tension between economic efficiency and certain political
goals. The way he showed was his advocacy for a big
British navy and the sailcloth industry and other sort of national defense measures. So that’s the tension. Ben Wattenberg: The late Herman Kahn once
said that the best thing for poor countries are rich countries. Is that a Smithian notion? Robert Lawrence: There’s a central idea
there that I think is worth emphasizing because a lot of people believe that what international
competition is about is a zero-sum game, that somehow we’re better off if other countries
are poor. But in fact, what trade is really about is
making both sides better off. Poor countries will be made better off if
there are a lot of rich countries to buy what they produce, and in fact rich countries will
be even better off if those poor countries get richer. So another central idea is we can all be better
off together, rather than the political view, which is that it makes sense to be top dog,
that countries should dominate. Thea Lee: But Robert, I think the question
is: Is unregulated free trade the best way for the poor countries to get richer and the
rich countries to stay rich? Or are there institutions that we can build
into our trading system that would help harmonize the poor countries upward, to help raise their
standards so that they don’t get into this race to the bottom? I think that in some ways you’re wrong,
Jagdish, that there is no evidence whatsoever that countries do compete on the basis of
cutting standards, of cutting environmental regulations and busting labor unions. I think they do do that. I think they get into a competition for foreign
investment that they can’t really avoid. And that’s the reason that I think it would
be appropriate and good for everybody to have some basic international rules. That doesn’t mean that all countries will
end up with the same labor standards and the same environmental rules. That doesn’t make sense, but some basic
minimums that help protect countries from getting into that kind of destructive competition. Jagdish Bhagwati: I think countries do bust
unions and so on, including our own if you remember the air controller strike, and so
on. Thea Lee: Right, sure, and that’s partly
due to trade competition. Jagdish Bhagwati: But they do that because
of their own social and economic views about whether having unions do some specific kinds
of things. There is very little evidence, if any, of
their doing it with a view to attracting foreign investment and playing this game — is all
I’ve been saying. Thea Lee: In Malaysia, the prime minister
of Malaysia has said we can’t afford to have labor unions because the electronics
industry, the foreign companies are saying they won’t come here if we have labor unions. Ben Wattenberg: Let me ask a question. Can nations undermine one another using trade
policy? James Fallows: Yes, yes. And this, again, may be the central axis of
the argument, at least from my point of view, the combination of politics and economics. Let’s go back to your Herman Kahn question
of whether the best thing for poor countries is rich countries. If you rephrase that slightly and say the
best thing for small countries is big countries, or the best thing for weak countries is strong
countries, it becomes a much more dicey proposition. Because the world’s history includes both
this mutually beneficial trade and people pushing each other around. I think in much of the outside world, those
two things are seen as being connected, that economic strength entitles people to push
others around. And so in much of the formerly colonialized
world, they think that trade has in fact in many ways made them worse off by making them
weak and thus subject to being politically pushed around. Ben Wattenberg: The debate over free trade
is not just a theoretical discussion. It has real-world consequences for American
workers and consumers. Boosted by an ongoing international free trade
treaty known as GATT, world trade expanded twelvefold, from $300 billion in 1970 to more
than $3.6 trillion in real dollars annually. And the portion of American jobs and commerce
dependent on trade more than doubled, rising from about 5 percent in 1970 to nearly 12
percent today. After seven and a half years of arcane and
sometimes bitter touch-and-go negotiations, the latest bout of free trade talks, known
as the Uruguay Round, were completed in Marrakesh, Morocco, on April 15, 1994. At the signing ceremony, Vice President Albert
Gore reaffirmed America’s support for GATT. Albert Gore (on videotape): We have led the
effort to tear barriers and reject protectionism, and we will continue to do so. Ben Wattenberg: The new free trade treaty
was signed by US Trade Representative Mickey Kantor. In all, officials from 109 nations initialed
the treaty, including delegates from Japan and Europe. Later this year, Congress will vote on whether
to ratify GATT. The vote will have profound effects on how
much consumers will pay at the stores, which workers will keep their current jobs, and
which companies will face stiffer competition from abroad. And there will likely be one more big political
fight. Jim Fallows, is this GATT going to be good
for America, assuming it passes? James Fallows: Before answering that, yes,
it will be on balance good for America. Ben Wattenberg: Jim, if you were a senator
or a congressman, you would vote for it? James Fallows: Yes, if I were a congressman,
I would vote for it. But let me say something about Vice President
Gore’s comments. I’m a great admirer of Vice President Gore,
but what he says is not really true. It’s not historically true of the United
States, which was a very protectionist country until World War II, and it’s not even true
of the modern United States because it’s like saying we have always supported peace. Yes, peace is a goal. International harmony is a goal. But free trade and lower tariff is not the
only part of American economic policy. It’s always been in exchange for what? In exchange for what other values, political
and other? So it’s again with respect to the vice president,
this gets us back into the simple sort of all-or-nothing debate, which hamstrings us
on this kind of issue. But yeah, it’s good on the whole. Robert Lawrence: I think the vice president
was essentially correct. I think if you look at the postwar period,
of course everybody agrees that we were protectionist prior to that, but I think if you look at
the postwar period — in fact, if you look at the 1980s — it’s really been remarkable
the degree to which America has been moving to open its markets. We don’t have even the quotas we used to
have on automobiles and steel. So I think in fact we are a pretty open market,
and I’d return to the whole achievement that I think is represented by this Uruguay
Round, which I think is immense. Jagdish Bhagwati: I think Robert is basically
right that the trend since the war has been to bring down tariffs and trade barriers,
and we have provided leadership on that. I think what Jim is referring I think are
two things, which I think are compatible with that. One is that it’s always an uphill battle,
and there are other objectives. And occasionally you’ll get a lot of noise. And two, we are not unilateral free traders. We never have been, ever. Britain in the 19th century was the only country
that believed in unilaterally going for free trade. It really believed in Adam Smith. Ben Wattenberg: Jim? James Fallows: Yes. Compared to most other countries, Robert,
we certainly have been more free trade. And my point is the one that Jagdish was making. There have been other parts that we’ve been
balancing and not unilaterally doing it. Ben Wattenberg: Jim, a few years ago — I
don’t want to mischaracterize your position, and tell me if I am — but you and a number
of others were saying that because we had this free trading mentality and those vigorous,
muscular, brilliant, hardworking, diligent Japanese had a different view in the back
of their minds. They were going to be the power of the 21st
century, and poor United States was going to look like England. And it was going to get worse and worse and
worse and worse. Fast-forward. That’s not what has happened. I mean, what you read now in the papers, America
is not only number one; there is no number two. Japan is in deep trouble, Europe is in really
deep trouble. And with this terrible system, we have ended
up the number one political, geopolitical, economic, cultural, scientific, and educational
power in the world. I mean, are we not doing something right? I mean, you say trade is a big issue and all
these terrible things are happening, and here we end up. James Fallows: It’s my turn to say what
I said. I mean, as you know, nobody who has read my
work over the years thinks I think America is falling apart or has no merit in the world. I think that the great advantage of this society
is one you and I agree on deeply, which is its absorptive capacity to be able to bring
in people from around the world. The point I was making I think had two parts,
both of which I defend. One is that the US basically misunderstands
what has been going on in the East Asian economies. Their goals are not ones well explained by
Adam Smith. They’re basically political goals, to build
up national strength, to offset national weakness of the colonial era and the post–World War
II era. And second, that there is tremendous dynamism
in East Asia as a whole. The last decade it’s been the largest, fastest-growing
market. It will be that for the next decade. Ben Wattenberg: Are we going to get hurt if
they get richer? James Fallows: No, but — Ben Wattenberg: Or even if they get richer
faster than we get richer? James Fallows: No, of course not. But again, what we’re arguing about is the
tension between strictly economic definitions of human ambition and politics, geostrategy,
etc. From a strictly economic point of view, trade
always makes — almost always makes everybody better off, including us. But it’s not the only thing involved. The United States is not strictly a trading
entity. It’s also a military power. It’s also a diplomatic power. It’s also a society where people have to
live within certain borders. So that is the point. There are certain political effects that can
hurt the US. Thea Lee: I think there’s another point
also. Ben Wattenberg: Tell us whether you favor
this GATT. Thea Lee: I think there are a lot of problems
with the GATT, and if I were going to negotiate it, I would certainly do it differently. Ben Wattenberg: And if you had to vote on
it? Thea Lee: I think I would vote it down and
let them come back to the table with a better agreement that did include international labor
and environmental standards. I’d put a higher priority on that perhaps
than Robert does. I think that’s very important. I think all trade agreements should start
moving towards that as we move towards an integrated economy. Ben Wattenberg: Isn’t that how opponents
— I mean people kept saying, oh, I’m for NAFTA, but I’m not for this NAFTA. Thea Lee: Well, that’s right. Ben Wattenberg: As if there was a “this
NAFTA” out there. I mean they negotiated that, what, for three
years or four years. Thea Lee: I think that’s exactly right,
though. We have trade negotiators in this country
who go into a closed room with a bunch of trade lawyers and a bunch of business people,
and they come out with trade agreements that are very lopsided, that serve corporations
very well and have very little in it for working people, the environment, family farmers. Ben Wattenberg: Thea, a trade war that harms
a nation, say, the United States, should, as I understand it, do two things. It should increase unemployment, and it should
lower median wages. That’s the punishment for a trade war. Now, you all have maintained that there has
been a trade war and that we’ve been losing it, or as you said, until recently. And in point of fact, unemployment is going
down, and real median wages during the 1980s — and I know there’s an argument about
it — but they have gone up. Thea Lee: They have not gone up. Ben Wattenberg: Well, you know, that’s why
I said there’s been an argument about it. Jagdish Bhagwati: Ben, can I get speak to
Thea? None of the free traders that I know, including,
I’m sure, Robert and myself, are perfectly happy with the agreement either. It’s not the end of the game. Ben Wattenberg: So you’re not for this GATT
either. I mean you are for this GATT, but you would
like to — Jagdish Bhagwati: No, because in the course
of reaching the agreement, the administration did several things which I’m not very happy
with. On the other hand, that’s the politics of
getting it through the Congress. And so this is not the endgame. A whole lot of things which Thea is worried
about, like environment, labor, are going to be discussed in the next round or the next
set of negotiations. Ben Wattenberg: Robert. Robert Lawrence: Let’s just understand what
this is. This has been a negotiation where we have
15 different major issues that were dealt with. And these were determined by the United States
in terms of what our priorities were and what other nations’ priorities were, actually
in the mid-1980s. And it has taken till today for us to come
to an agreement. So let us agree that those were our priorities. They still are very important. We now have found some new ones, and this
certainly doesn’t mean we are going to stop negotiating. But the idea that we should continuously be
changing what we’re negotiating about is simply unrealistic and not viable. Thea Lee: But we’re not completely changing
it. The US Congress told the president in the
1980s that they wanted a social clause in GATT. They wanted him to work towards that. That was one of the goals that was given up
on fairly easily. Ben Wattenberg: I want to come back to that
phrase “social clause.” That really intrigues me. That’s sort of a neat phrase. A social clause, my right-wing friends would
say, oh, she’s talking about world government. Thea Lee: We have world government in areas
like — Ben Wattenberg: Do you want more of it? Thea Lee: Well, I want more of it in different
areas than we have right now. Right now we have rules, and what the GATT,
this round of GATT, represents is rules that are very favorable to multinational corporations
the investment rules, the subsidies, the intellectual property rights protections for copyrights,
and so on, are world government. We have given over the right to make decisions
on those areas to this new international bureaucracy. Ben Wattenberg: Let me go around the room
and ask for a brief comment from each of you. Let’s begin with you, Thea. And let’s be brief. What do we agree on, and what do we disagree
on? Thea Lee: I think we agree that trade can
be a great thing between nations, that there are things that we can get from each other. What we disagree on is: What are the proper
boundaries to the trade that takes place? What is the proper set of rules that should
govern international trade? Should it protect labor and the environment
and family farmers, or should it protect multinational corporations? James Fallows: Similarly, I think we agree
that Adam Smith had the right blueprint for making bread. What we disagree about is whether man lives
by bread alone — that is, whether economic welfare — how that ranks with other instruments,
other goals in the modern world. Robert Lawrence: I think that we definitely
recognize that free trade is the source of tremendous wealth, but we’re also human
beings who live in societies with organizations and rules. And I think that tension is something we continuously
have to straddle. Jagdish Bhagwati: I think the virtue of free
trade is well recognized, I think not just in theory, but also empirically. I think the disagreement arises over whether
free trade is compatible with the pursuit of other objectives. I would say that many people would say that
you really — that these things are compatible. Economic power translates into political power. So many things go together rather than conflict. I would disagree with Jim and Thea on that
issue. Ben Wattenberg: Well, thank you, James Fallows,
Thea Lee, Robert Lawrence, and Jagdish Bhagwati. And thank you. As you know, this is a new program, and we
appreciate your comments. Please write to the address on the screen. For “Think Tank,” I’m Ben Wattenberg. Announcer: This has been a production of BJW
Inc., in association with New River Media, which are solely responsible for its content.

1 Comment

  1. Fenristhegreat says:

    These 'think tank' episodesĀ are really good AEI. I've watched a number of them now and its surprising how relevant they remain. Thanks.

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