Globalisation and the free trade fiction Guyana and the wider world by Dr Clive Thomas Stabroek News December 10, 2000 In the new liberal trade order policies in support of free trade and globalisation are routinely presented as the epitome of modernisation and forward-looking rationality. To be a supporter of trade liberalisation is seen as the hallmark of the New Millennium person. It may surprise readers to learn therefore, that the economic principles on which these policies are based are, as the saying goes, as old as the hills. To those familiar with the history of economic ideas it is ironic to observe, especially in the media, that it is the critics of the rampant, unrestrained pursuit of globalisation who are cast as backward-looking emotional supporters of economic ideas that are long since dead! The truth of the matter is that the theoretical case for free trade rests on some embarrassingly simplistic assumptions. In this article I identify these assumptions for the benefit of readers. Free trade assumptions For free trade to be a rational policy option, it has to be assumed that the world is a perfectly competitive market place. In this world monopolistic distortions created by either buyers or sellers cannot take place, under any circumstances. No one is therefore able to exploit for monopoly purposes, natural or informational advantages, or for that matter engage in the deliberative manipulation of markets to restrict or restrain competition. Second, it has also to be assumed, that all participants in the world market seek only the greatest net benefit for themselves. All persons are reduced to the single-minded pursuit of maximum commercial gain. Further, it is also assumed that the economy always operates at full capacity and full employment. This means that no "dynamic", developmental, or long-term arguments can be advanced for supporting restraints on trade - for even a limited duration. Fourth, financial markets are also assumed to be optimal, rational and always efficient. This means there is no irrational speculation, no insider trading, and no corrupt practices. If this happens then it means that at all times the price of financial assets will embody the correct value of the real assets, for which they are claims. The final assumption is that all persons operating in the economy know the "true model" of the workings of the economy. This assumption ensures that government policies never have "surprises". But, if perchance "surprises" do occur, then the markets will function smoothly to "correct" for these. In these circumstances therefore, Government action is always efficient, because it accords with market expectations and behaviour. As an economist I find it embarrassing, just listing these assumptions. It is difficult to make a scientific claim for a discipline that makes such extraordinary simplified and unrealistic assumptions as the basis for a mathematical model, from which is then constructed the most far reaching policy recommendations. Formal proof The truth of the matter is that if the assumptions listed above are accepted, then it can be demonstrated through a formal, mathematical proof that free trade is best for the world. With such assumptions it can be shown that world welfare will be maximized, if there is free trade. It will be maximized in the sense that no person in the world can be made better off, without making at least one other person worse off. In this way therefore, the price consumers pay for goods and services in the market will be equal to their private and social costs of production. With such assumptions it can be further shown that global production efficiency will also be maximized. It will be maximized in the sense that more output of any one good or service cannot take place without simultaneously reducing the output of at least one other good or service. Finally, with such assumptions exchange efficiency will also be maximized. It will be maximized in the sense that it would then become impossible to make any one person better off worldwide without making at least one other person worse off. It goes without saying that in this situation, global resources will be optimally allocated. In other words the cost of shifting production from one line of activity to another, will equal the loss/gain in consumer satisfaction that occurs in shifting between these lines of activity. Buyers and sellers, producers and consumers all therefore come together in the market place for the mutual benefit of all. Unrealism I do not need to point out the deep unrealism of these assumptions. As you depart from them the theoretical case for free trade becomes a matter of fact and not scientific proof. All that can be argued in the real world situation is that some trade is better than no trade. This, however, is very far removed from the extreme of saying that totally free trade is better than all other levels of trade. We find therefore that it is the hawkers of the blind simple-minded pursuit of free trade and globalization that are the real neanderthals. A modern theory of trade has to take into account the complex modern realities of global production and trade, some of which we have already discussed earlier in this series. Follow the goings-on in Guyana in Guyana Today