The Market Process Is Not an Intoxicated Ass

Writing recently at the Law & Liberty site, Samuel Gregg warned of the hubris that dooms protectionism and industrial policy to failure. This warning inspired Oren Cass to ride to the defense of these interventions. It is, alas, a defense that fails. Most of Cass’s errors are minor and technical, reflecting a non-economist’s forgivable unfamiliarity with some finer points of economic theory. But one error is foundational and fatal. 

Discussing Comparative Advantage Is Not Everyone’s Comparative Advantage

The minor mistakes include Cass’s claim that most economists, when they theorize about trade, disregard, or at least discount, the fact that comparative advantage is (to use his term) “endogenous.” In fact, however, all competent economists know full well that the pattern of comparative advantage changes frequently and is largely the product of legal, political, social, and economic institutions as well as of individuals’ conscious choices regarding their occupations. While economists typically hold the pattern of comparative advantage “fixed” in order to clearly demonstrate its elementary logic, no competent economist believes that comparative advantage is fixed in the real world, needing only to be “discovered.” Nor does any competent economist insist that comparative advantage is exogenously imposed by nature and impervious to human attempts to alter it.

Also contrary to Cass’s suggestion, all competent economists who support free trade understand and account for the significance of scale economies – that is, of opportunities that often arise for producers to lower per-unit costs of production by increasing the scale of their operations. From Adam Smith in 1776 to my late Nobel-laureate colleague James Buchanan in the 1980s and ‘90s, economists have explicitly recognized the large role that economies of scale frequently play in trade, and that trade plays in affecting conditions for economies of scale. 

Low Wages Reflect Low Productivity 

Another of Cass’s technical errors is revealed in this assertion: “A ‘cheap labor’ country is not attractive because the wage is $1 per hour, but rather because the worker is generating far more than the $1 per hour of value that he is able to capture for himself.” 

That is, Cass believes that manufacturers operate in “cheap labor” countries because labor there is commonly exploited. But if this belief were valid, it would be nearly impossible to explain why foreign direct investments flow overwhelmingly to high-wage countries such as the Netherlands and the U.S. Why aren’t global investors sending most of their money chasing after the easy profits allegedly to be had by exploiting workers in countries such as Bangladesh and Cambodia? 

In reality, tasks performed by manufacturing workers in “cheap labor” countries are low-value-added ones. Precisely because workers there have so little capital, including physical and social infrastructure, to work with compared to workers in high-wage countries, workers in “cheap labor” countries are much less productive than are workers in high-wage countries. This fact explains both the low wages of these workers as well as their employment in low value-added jobs.

Manufacturers operate in low-wage countries not because they can exploit workers there, but because those workers – having worse alternatives than those available to workers in the U.S. and other high-wage countries – have a comparative advantage at performing low-value-added manufacturing tasks. It’s mysterious why Cass, along with other ‘economic nationalists,’ wish such manufacturing tasks to be performed by Americans, who have comparative advantages at performing much higher value-added tasks and, as a result, are paid much-higher wages. Because Cass mistakenly believes that low wages in “cheap labor” countries reflect, not low productivity, but exploitation, he’s blind to the fact that, were such jobs ‘returned’ to America, almost all Americans who perform those jobs would take substantial pay cuts. 

The Fatal Conceit Is No Less Fatal By Being Ignored 

Now to Cass’s foundational error, which is this: he completely misses the market’s role at gathering and processing information. This error is revealed when he equates the competitive market to the meanderings of a drunk donkey. In fact, it is no such thing. 

As many economists – from Adam Smith in the 18^th century through Carl Menger in the 19^th and Ludwig von Mises, F.A. Hayek, Armen Alchian, Milton Friedman, Julian Simon, Deirdre McCloskey, and Vernon Smith in the 2o ^th  and 21^st – have revealed, the competitive market price system at every moment marshals and acts in accordance with an amount of dispersed information so detailed, vast, and frequently changing that no government officials could possibly hope to outperform the results of this market process. These economists’ argument is not that the market process works perfectly; of course it doesn’t. The argument instead is that no amount of conscious planning or intervention can hope to match, and much less to surpass, the performance of decentralized and competitive markets over time. 

Cass might disagree with these economists and their arguments. But for this disagreement to obtain any measure of legitimacy requires that he advance a substantive argument to the contrary. Instead, though, he writes in apparent unawareness of this vast scholarly literature. He simply offers two twin assertions: on one hand, market processes are akin to an intoxicated ass, and on the other hand, government officials somehow (by what mysterious means we aren’t told) have uniquely excellent access both to information about the current state of the economy as well as to knowledge about the future. (Cass also ignores public-choice considerations – that is, the bias of government officials to serve special interests at the expense of the general interest – but that’s a tale for another time.) 

Assertions such as those made by Cass are easy to offer. Dreamers, dirigistes, and demagogues have done so since the dawn of the industrial age. These assertions are not, though, a sufficient reason to ignore economic theory and to empower state officials to superintend and to override the results of competitive markets in which individuals, as both consumers and producers, spend their own money – and the results of which have proven, without exception, to be far superior to consciously imposed schemes of politicians and bureaucrats.

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