Free Trade and Alternative History

In recent decades, there has developed a new literary genre, that of the alternative history. In these “histories,” given in the form of a novel, the author imagines what would happen if some important event in history had turned out differently, for example, what if the South had won the Civil War, or Hitler had defeated Russia and England. The author then proceeds to construct an alternative history based on these changed events. Now, I have never read any of these fictitious histories, so I can't comment too much on them. However, I can imagine that they are a pleasant enough diversion and possibly an interesting enough intellectual exercise, and that they do no one any harm.

However, what happens if the fictitious history becomes the “official” history? What happens if the widely accepted history diverges from what really happened? In such a case, The alternative history does a great deal of harm; our view of reality becomes distorted, and the decisions we make will be based on false premises. But could such a thing happen? Is the science of history so imprecise that we could accept the false as factual, and the facts as fables? According to a new book by the Cambridge economist Ha-Joon Chang, that is exactly what has happened in regard to the history of economic development. The book is called Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. The book is written at partially in answer to the most popular account of the “alternative history” as given by Thomas Friedman's The Lexus and the Olive Tree. Mr. Friedman is, of course, a journalist and not an economist, but his version of events reflect the neoliberal and neoconservative economic orthodoxy which guides trade policy at the highest levels of government. According to this history, states developed by following a strict free trade regimen, along with a laissez-faire government policy.

It is somewhat difficult for Dr. Chang to accept the official history since he grew up in South Korea during its transition from a feudal backwater to an industrial nation. The problem is that Korea's path to development contradicts the official history: everything that the “unholy trinity” (as Dr. Chang calls them) of the WTO, the IMF, and the World Bank preaches (and enforces) was violated by Korea in its advance into a modern economy; had Korea followed the advice of these Western worthies, it would still be the backward and poverty-stricken country it was in the 50's. It is hard to accept the official history when one's own history and experience contradicts it. Moreover, in looking at the development in other countries, Dr. Chang finds the same pattern: those who followed the advice of the unholy trinity are condemned to poverty; those who progressed did so by ignoring their advice. And further, the Western powers are hypocritical. The truth is that no great nation got to be great by following free trade. The United States was the most protected economy until the Second World war, with Britain in second place until 1860. It wasn't until these nations achieved a dominant position in manufacturing that they began to preach free trade. Their very dominance gave them a “comparative advantage” that made tariffs unnecessary for their own economies, while brow-beating other countries to drop their own tariffs meant that they would never be able to compete.

The history of free trade is a history of failure. Every country, or nearly (Ireland may be an exception) that followed the free trade line, followed it to disaster. In the so-called “third world,” growth rates were much higher before trade liberalization than after. Indeed, there is a certain irony in Mr. Friedman's selection of the Lexus as his symbol for trade, since if Japan had followed his advice, there would be no Lexus. Japan would not have been able to develop the heavy industries that she did in a free trade regime. Toyota was and is heavily supported by the government. Its first venture into the business, the ill-started Toyopet (“four wheels and an ashtray”) was a failure. It took time, patience, and government protection to build the industrial behemoth that we see today. If Mr. Friedman is going to use this as a symbol, he might have troubled himself himself to learn something of the company's history, and the country which produced it.

But it is one thing to note the lack of historical knowledge on the part of a journalist; it is quite another to note that this historical ignorance is widespread among the economic profession itself. How did this come about? Alas, the recent history of study of economic history is troubling. Graduate students in economics used to be required to take at least one course in economic history. But in 1972, the University of Chicago dropped this requirement, and nearly every other major school followed suit. History, argued the Chicago-school economist George Stigler, had no useful past, and its study was a waste of the students' time. For Prof. Stigler, economics was a set of formal relations, always and everywhere true and the same, and history could not add anything to our knowledge. Yet, economics is a strange discipline to desire its freedom from history. All of its data comes from history, and history provides the only laboratory to test ideas. And when one's ideas are free of any real test, one is free from any real thought. As the situation now stands, economic historians are practically a “rump” group with economics, standing as critics, or rather as Cassandra's: speaking the truth but always ignored. And the economists, lacking any formal training in history, have no way to judge the myths that are presented to them as “history.” I believe that even those who make their living writing “alternative histories” never wanted them to be accepted as real history; it takes the fun out of the whole thing.

Using history, Dr. Chang skewers a whole host of free-trade myths. In their place, he concludes:

• Free trade reduces freedom of choice for poor countries.

• Keeping foreign competition out may be good for them in the long run.

• Investing in a company that is going to lose money for 17 years may be an excellent proposition.

• Some of the world's best firms are owned and run by the state.

• “Borrowing” ideas from more productive foreigners (that is, violating patent laws) is essential for economic development.

• Low inflation and government prudence may be harmful to economic development.

• Corruption exists because there is too much, not too little, market.

• Free markets and democracy are not natural partners.

• Countries are poor not because their people are lazy; their people are lazy because their countries are poor.

We have previously pointed out just how disastrous it was for countries to follow the policies of Hayek and his allies (Hayek's Super-Highway). Indeed, free-trade ideology has been as much a failure as was Marxism. Yet the history of Marxism is well-known; the history of Capitalism is still a great secret. Dr. Chang does us all a great service by revealing the secret.