Libertarianism and Globalist Free Trade
Did Ludwig von Mises really support free trade in capital and labor?
Over at libertarianism.org we find the following bit of ideological fustian:
Globalization is the term used to describe the condition that prevails when communication, people, goods, services, and capital move more freely across borders. Often globalization is the result of technological improvement that facilitates communication and transport and economic liberalization that gives people the freedom to make use of them. It is the most important international phenomenon of the early 21st century, touching almost all aspects of life, politics, and business.
Libertarians have traditionally promoted globalization because of its liberating effects on people’s lives. Globalization is an international extension of free markets and open societies. In effect, it is capitalism without borders.
In other words, for the pure and unsullied libertarian, globalism is synonymous with liberty and freedom. If I’m as free to do as I like, why shouldn’t I (or anyone else for that matter) be free to cross every international border that I come upon and invest my capital anywhere in the world I damn please? If individuals are free, then trade must be entirely free as well. This means that freedom of trade must not be confined merely to consumer goods, but must include investment capital and labor. No restrictions can be applied to any economic good or agent that wishes to cross a border. This is what constitutes globalism: free trade in everything—free trade über alles. Or, as libertarianism.org articulates it:
Free trade is an essential component of globalization, which includes not only trade, but the international flow of capital and people and the resulting integration of national economies with each other.
According to libertarian orthodoxy, free trade is not only desirable because it grants freedom to individuals to do as they please with their economic products, labor, and capital, it is also preferable on grounds of economic efficiency. Free trade in consumer goods, capital, and labor will by a kind of logical necessity raise standards for all people in all nations all across the globe:
Despite the political controversy it generates, free trade has become widely accepted by economists as the best trade policy for promoting a nation’s prosperity. It is a genuine libertarian idea that has gained widespread acceptance in theory, if not in practice.
There is at least one problem with all this. It is not clear that libertarian economics, or at least the historical foundations of such an economics, is entirely consistent with the ideological contentions libertarians typically pontificate on behalf of globalist free trade. Probably the most eminent historical economist in the libertarian pantheon is none other than the great Austrian praxeologist, Ludwig von Mises. In Human Action, Mises introduces the concept of “equalization of wages rates,” which he claims would prevail under a regime of perfect globalist free trade:
If we assume that there are no institutional barriers preventing or penalizing the transfer of capital goods, workers, and commodities from one place or area to another and that the workers are indifferent with regard to their dwelling and working places, there prevails a tendency toward a distribution of population over the earth's surface in accordance with the physical productivity of the primary natural factors of production and the immobilization of inconvertible factors of production as effected in the past. There is, if we disregard the cost component, a tendency toward an equalization of wage rates for the same type of work all over the earth. [Human Action, 623]
In other words, free trade in both capital and labor (i.e., the removal of “institutional” barriers preventing free movement of workers and investment capital throughout the globe) will cause the price of labor (for the same type of work) to be (roughly) the same everywhere. This will inevitably cause the wage rates of workers in the Third World to rise and the wage rates of workers in First World to fall. Since there exists a much larger number of laborers in the Third World than in the First World, as wages under a globalists regime “equalize,” the preponderance of low income wage earners worldwide will exert enormous downward pressure on wages of workers in the wealthy nations of the West. In short, the tendency toward an equalization of wage rates under globalist free trade means an impoverishment of the workers in the First World accompanied by a modest improvement in workers in the Third World.
It is curious that von Mises’ polemical defense of free trade takes these institutional barriers against global flows of capital and labor for granted:
Now, it is true that under perfect mobility of capital and labor there would prevail all over the world a tendency toward an equalization of the price paid for labor of the same kind and quality. Yet, even if there were free trade for products, this tendency is absent in our real worId of migration barriers and institutions hindering foreign investment of capital. The marginal productivity of labor is higher in the United States than it is in China because capital invested per head of the working population is greater, and because Chinese workers are prevented from moving to America and competing on the American labor market. There is no need, in dealing with the explanation of this difference, to investigate whether natural resources are or are no more abundant in America than in China and whether or not the Chinese worker is racially inferior to the American worker. However this may be, these facts, namely, the institutional checks upon the mobility of capital and labor, suffice to account for the absence of the equalization tendency. As the abolition of the American tariff could not affect these two facts, it could not impair the standard of living of the American wage earner in an adverse sense.
On the contrary. Given a state of affairs in which the mobility of capital and labor is restricted, the transition to free trade for products must necessarily raise the American standard of life. Those industries in which American costs are higher (American productivity is lower) would shrink and those in which costs are lower (productivity is higher) would expand. [Human Action, 745-746]
This is a fascinating argument on behalf of free trade. Mises is essentially conceding that free trade will “not impatir the standard of living of the American wage earner” provided “institutional checks upon the mobility of capital and labor” remain in place to prevent the “equalization tendency” from taking hold. In other words, Mises’ argument for free trade assumes barriers against immigration and global capital flows. Take those barriers away, and his argument no longer holds. If capital can go anywhere it pleases, it will seek out places in the world where labor costs appreciably less. And in those places where capital has already been invested in factories located at a specific geographic location and where the prevailing wage rates for labor are high, the best solution for corporations is to entice large numbers of penniless laborers from the Third World to flood the local labor market so as to force wage rates down. If that means bringing in hordes of illegal aliens from the Third World, then that is the course chosen by our economic elites, who are usually quick to seize any advantage whereby they can increase their wealth, power and status at the expense of everyone else.
For this reason free trade, when it includes not merely consumer goods, but capital and labor as well, does not necessarily improve the standard of living of a nation’s wage earners. We have the testimony of no less a libertarian authority than Ludwig von Mises that this is so. How then can free trade in labor and capital continue to find support among the vast majority of economists when it is so very obvious that when companies are allowed to move their capital abroad and flood the domestic market with cheap labor from the Third world, this must by an awful necessity reduce the standard of living of the working class?
Greg Nyquist is author of The Psychopathology of the Radical Left and The Faux-Rationality of Ayn Rand.