Thanksgiving Dinner with Adam Smith

Thanksgiving Dinner with Adam Smith

Men can create wealth from nothing. That was the revelation that Adam Smith made in 1776 when he published one of history's most influential books: An Inquiry into the Nature and Causes of the Wealth of Nations. His book was the stake through the heart of mercantilism, an economic theory that saw the world as having a finite and limited amount of natural resources and therefore a limited amount of wealth. Trade was good for an economy only if one's country was on the winning side of a transaction. Smith proved those assumptions were false. Not only was wealth expandable, but people can create wealth by doing something that they have always done: trade.

But mercantilism and the false assumptions that underlie the theory is making a comeback. In 2015, Bernie Sanders developed a cult following by claiming that every free trade agreement that the United States has ever entered was bad for the country. That is not the first insult that Smith ever took from a socialist, but he must have cried "et tu, Republicans?" when Donald Trump launched history's least articulate assault on free trade agreements. The 2016 presidential campaign was thus a warning that Americans need to blow the dust off The Wealth of Nations and upload it onto their e-readers.

The red flag of 2016 is not that a couple outspoken public figures oppose free trade but that their messages had such broad appeal. Bernie Sanders made a surprisingly strong run at the Democratic nomination because many of his followers shared his view that free trade agreements only benefit fat cat corporations at the proletariat's expense. Donald Trump had essentially the same argument but with a characteristically xenophobic angle: Trump's villains were not the wealthy but foreigners. Launching history's least articulate assault on free trade, he convinced an army of dissatisfied rust belters that China has exploited America's commitment to free trade to siphon away its prosperity. The election results proved that a large segment of the American population have come to think that the only things standing between them and a manufacturing boom are NAFTA and the TPP.

It could be that American voters are onto something. It could also be that they just don't get it. Perhaps Adam Smith is taking a beating not because his argument is weaker than Trump's but because The Wealth of Nations is slumber-inducing. So before we discard centuries of economic convention, let's set aside The Wealth of Nations and illustrate the magic of free trade with something that is a little easier to digest: Thanksgiving dinner.

When you and your family sat down Thanksgiving afternoon to test the integrity of your waistbands, you probably heaped your plate with at least a little of everything: turkey, mashed potatoes, gravy, cranberry sauce, yams and the like. Even if you preferred turkey over all of the other menu items, you didn't eat turkey exclusively because you also like variety.

But imagine if, instead of a carefully personalized custom plate of food, your host has served you a heaping plate of cranberry sauce and nothing else. Meanwhile your disappointed fellow diners have found themselves staring at plates with only one item each: Grandma has nothing but yams, Cousin Eddie has only mashed potatoes, Aunt Wilma is hogging your precious turkey, and Uncle Frank is frowning over the gravy boat.

Something isn't right. No one is as satisfied as they could be. You all could go into the kitchen and cook yourselves what you are missing, but that would seem like a waste of energy since there is enough food for everyone. An economist at the table would call this a arrangement inefficient because resources are not being employed where they are most valued.

Enter the magic of trade.

Without even consulting The Wealth of Nations, you would quickly discern that everyone at your dinner table would be better off if you traded food between yourselves: a little bit of turkey for a few spoonfuls of cranberry sauce, a few drips of gravy for mashed potatoes, etc. Your trades would leave everyone better off because you all will have achieved the variety that your plates were lacking. In a way, you created wealth from nothing, because everyone ended up valuing their respective plates of food more highly than before trading took place. Indeed, you and your fellow diners created wealth with every individual transaction: both Cousin Eddie and Aunt Wilma were wealthier after they traded mashed potatoes and turkey.

The same wealth-creating principal that allowed you to better expand your waistline at Thanksgiving dinner applies to international trade. Countries invariably have what economists call "comparative advantages" over one another. The United States can produce corn abundantly and cheaply while Saudi Arabia can do the same for oil. Germany has a strong supply of highly-skilled laborers while China has a strong supply of low-skilled workers. As your family did with their imbalanced Thanksgiving portions, countries can benefit from their respective comparative advantages and create wealth for their citizens by allowing free trade. Free trade allows countries to produce what they are best at. Any trade that does not happen because of artificial trade barriers is a missed opportunity to create wealth.

Yet countries have a frustrating propensity for adopting wealth-killing trade barriers based on some form of an us-versus-them mentality. Adam Smith himself wrote The Wealth of Nations in response to mercantilism, an economic philosophy that viewed international trade as a zero-sum game. Mercantilists viewed the world as having a finite amount of wealth. A country's prosperity, therefore, depended on its ability to jealously guard its wealth from leaking to others. Eighteenth-century England feared trading with France—and vice versa—because buying French products would entail sending precious gold into the French economy. England tried to keep its wealth within the jurisdiction of the crown by, among other things, forbidding its colonies from trading with anyone else, a strategy that backfired spectacularly when Americans decided that they did not appreciate their place in England's captive economy and started the American Revolution.

Adam Smith proved that international trade was not a zero-sum game and history has proven him correct, although it took a long, slow, fight to cure the world of its protectionist tendencies. Interestingly, in the United States it was labor, not industry, activists who led the charge against high tariffs in the early twentieth century. In 1912, Teddy Roosevelt's Progressive Party platform called for the prohibition of child labor, safe working conditions, and a federal minimum wage. It also called for a reduction in tariffs because progressives of the day—unlike Bernie Sanders—recognized that high tariffs benefited big businesses at the expense of the working class; they enabled large trusts to charge inflated prices by insulating them from foreign competition. Modern progressives' distaste for free trade, therefore, represents a strange reversal.

Pro-labor progressives were not the only ones to see the benefits of free trade; peace advocates saw it too. American cowboy turned British parliamentarian Norman Angell published a small book in 1909 in which he opposed a British arms race with Germany. History had reached a point, he argued, at which warfare was futile because countries were too economically interdependent. Times had changed since the age of the Romans, when an empire became great by conquering and pillaging its neighbors. Robbery between modern industrialized nations was not profitable because they were simply too interdependent. If a modern industrial state attacked a trade partner it would effectively be waging a war against its own economy. Germany would commit economic suicide if it tried to destroy England, Angell reasoned, because the Germans needed to buy and sell from the English. Of course, Germany paid little heed to Angell and largely proved his point by committing economic suicide not once but twice in World War I and World War II.

The hard efforts of free trade proponents like Roosevelt and Angell paid off. The increase of free trade in the twentieth century coincided with a worldwide economic explosion. In those one hundred years, the world population nearly quadrupled, but the world economy increased about nineteen-fold. People became about five times more productive even as they tended to work shorter hours. Mankind became staggeringly productive; we produced more goods and services in the twentieth century than we had over the entire course of previous recorded history.  Although Angell's dream of a world where countries are too economically-interdependent to fight has not been totally realized, free trade seems to have helped otherwise antagonistic countries—like the United States and China—put aside their differences for the sake of mutual prosperity. Thomas Friedman famously pointed out in a 1999 book that no two countries with a McDonald's had ever gone to war with one another.

Of course, not everyone is a winner when trade is free and Donald Trump and Bernie Sanders were quick to capitalize on the frustrations of those who saw themselves as losers. The great challenge of selling free trade is that its benefits are sizable but subtle while its costs are narrow but dramatic. The closure of an American factory grabs one's attention more than the broad poverty-easing impact of lower food prices.

Free trade proponents suffer from another handicap: free trade has been the norm for long enough that the world takes its benefits for granted. That could be about to change. Donald Trump's election could mark the end of free trade's golden age. What lies on the other side of that golden age is worrisome. International trade is already in decline. For the first time since World War II, the United States' economy grew in 2015 but its trade with other countries decreased, leading one New York Times journalist to declare the end of "the Walmart Era."  And if one believes Norman Angell's hypothesis that economic interdependence renders war futile, then this trend is concerning. Ali Wyne, writing for the Carnegie Council for Ethics in International Affairs, observed that the economic ties between China and the United States are weakening as China begins to consume more of what it produces and depend less on the United States for high-skilled labor. The world could became a scarier place if the ideologically-opposed superpowers no longer need one another. As Wyne put it: "[A]s China's economic dependence on the United States declines, both its aversion to a military confrontation and its concern about posing more systemic challenges to liberal world order are likely to diminish."

All is not lost, but if the world is going to resist the rising tide of protectionist impulses, people cannot let the Trumps and Sanders of the world convince them international trade is a zero-sum game. Mercantilism's proper place is in our history books. Blue collar workers might have reason to complain about inequality, but trade policy is not the proper battlefield for a fight between the working class and corporate executives.

Trade is a means of creating wealth from nothing. Let's not hoard the mashed potatoes.

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For a different perspective read an article from The Nation: "Why Do White Working-Class People Vote Against Their Interests? They Don't" available at https://www.thenation.com/article/why-do-white-working-class-people-vote-against-their-interests-they-dont/. Thanks to Jonathan Erde for sharing on Facebook.  


Further reading:

You can read Politifact's summary of Donald Trump's campaign position on tariffs
and economists' reaction to it, at http://www.politifact.com/truth-o-meter/article/2016/jun/21/donald-trump-has-floated-big-tariffs-what-could-im/.

Ali Wyne's article, “The Strategic Importance of U.S.-China Trade Ties" is available at http://www.carnegiecouncil.org/publications/ethics_online/0106.

Norman Angell's 1909 pamphlet, Europe’s Optical Illusion is available at https://archive.org/details/europesopticalil00ange. His more lengthy and famous work, The Great Illusion was published on year later.

The Progressive Party's 1912 platform is available at http://www.pbs.org/wgbh/americanexperience/features/primary-resources/tr-progressive/. In fairness to the source, I will point out that the Progressives were only proponents of free trade to a point. In principle, they favored tariffs that would "equalize" competition between the United States and other countries. They simply felt that the tariffs in 1912 were too high.

Adam Smith's The Wealth of Nations is in the public domain and available at http://www.bartleby.com/10/, but it is not easy reading.

Binyamin Appelbaum's New York Times article, "A Little-Noticed Fact About Trade: It's No Longer Rising," sheds light on the downward trend of international trade.

Some of the astounding statistics on the economic explosion that took place in the twentieth century is taken from a chapter of a report published by the International Monetary Fund, which can be found at https://www.imf.org/external/pubs/ft/weo/2000/01/pdf/chapter5.pdf.