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A Cautionary Tale

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A Cautionary Tale

Alan Beattie’s sobering history of government-directed economics October 9, 2009

False Economy: A Surprising Economic History of the World, by Alan Beattie (Riverhead Hardcover, 336 pp., $26.95)

If the overwhelming complexity of the global economy leads you to conclude that we’re at the mercy of uncontrollable and impersonal forces, rest easier. According to Alan Beattie, trade editor at the Financial Times, you are laboring under a “false economy of thought.” His new book, False Economy, sets out a series of case studies demonstrating that many contemporary political-economic phenomena are in fact the result of conscious choices made over time by governments and individuals. Past decisions, wise and unwise, altered the economic fates of countries. The choices we make now will affect what happens next.

Arguing that choices matter doesn’t get us very far, though. Beattie too often elides the importance of how decisions get made, and by whom. On the one hand, small, interested parties can exploit state power to manipulate or distort the market on their behalf, primarily by restricting trade. These are conscious choices about the economy, but the benefits redound to politically powerful industries and elites who can exploit government protection. On the other hand, when individuals are free to make decisions in the marketplace, and the government serves as a guarantor of this freedom, then the “right” decisions for a positive economic future tend to be made.

The effect of political forces on the global economy is most obviously seen today in trade policy, particularly agricultural trade. Beattie explains, for instance, that Peru grows most of the world’s asparagus today because of a 1991 trade deal that discouraged its farmers from growing coca for cocaine. Peru’s asparagus industry enjoyed lower global tariffs, plus direct financial assistance from the U.S. government. Efforts by American farmers in Michigan, California, and Washington to open the market to competition have since failed because, Beattie writes, they “punch below their weight when it comes to extracting favors from Congress.”

Once an industry starts receiving subsidies or government protection, Beattie observes, “it is hard to take them back.” Small lobbies with specific goals can focus their energies on getting what they want, even if those in the general population are the losers. The failure of the Doha round of trade talks in 2008 exemplifies this problem. Though the proposed reforms would only marginally affect farmers, they’re still willing to fight hard to preserve the advantages they have accrued. Consumers would pay less for food without the ridiculous architecture of subsidies and tariffs. But because they are widely dispersed and unorganized, they cannot come together effectively to realize their potential as a powerful interest group to resist the farm lobbies.

When trade is free, says Beattie, mutually beneficial exchanges can “take resources from places of plenty to places of scarcity.” His best example concerns Egypt and grain. Today, the country imports about half of its wheat, while in ancient times it served as the breadbasket of Greek and Roman civilizations. Back then, the infrastructure of global trade of course did not exist. But now, because the market for grain is not geographically limited, it makes no sense for relatively arid Egypt to grow so much of a crop that requires substantial amounts of water. So, writes Beattie, what Egypt is really doing is “importing millions of tons of the water” used to grow wheat.

This “virtual water” trade epitomizes the types of innovations that have created today’s global economy: it “happens on its own, without intelligent, or at least manifest, design.” But again, interested parties can, with the help of their governments, “block and distort that process.” As such, not nearly as much “water” (in the form of water-intensive crops), along with labor and land, is as efficiently allocated in the world economy as it could be.

If the state is not unduly influenced by advantage seekers, it can be a defender of the free market. Take the story of the Boston meat wholesaler Gustavus F. Swift, the innovator who figured out in the late 1870s how to transport beef profitably from Chicago to the east coast in refrigerated railcars. With more sellers in the market, increased competition meant lower prices (and greater variety) for consumers. Unsurprisingly, butchers in New York didn’t like this prospect. They demanded laws that would require cattle to be inspected in the state in which the beef would be eaten within a day of slaughter, which would have made distribution from Chicago unworkable. The Supreme Court, however, found the proposed laws unconstitutional, thus supporting Swift’s initiative. If the New York butchers had a “choice,” certainly they would have used the power of the state to support their monopoly. What truly matters is that the state not make decisions, but rather ensure that the decisions made in the market are respected. The right choice for government is to be “prepared to support the system, or at least not get in its way.”

The state’s inclination to get in the way has quite a pedigree. In The Wealth of Nations, Adam Smith cautioned that “people of the same trade seldom meet together” without ending up with a “conspiracy against the public.” As the eminent historian Jerry Muller explains in The Mind and the Market, Smith saw that while the free market provided the best outcomes for society as a whole, any individual producer would try to get a better outcome for himself by circumventing the market and avoiding competition. As Beattie wryly notes, it’s not government that picks winners, but “losers that somehow manage to pick government.”

This observation is inconsistent with Beattie’s declaration that “countries have choices, and those choices have substantially determined whether they succeeded or failed.” People make choices. Economies evolve; they do not require an intelligent designer. The true surprise of False Economy is that the examples Beattie provides of countries—really, governments—making conscious choices about the direction or nature of the economy constitute a sad collection of stifled growth, misallocated resources, and missed opportunities. With the United States government currently embarked on a new and unprecedented project of consciously “transforming” the economic future of our country, False Economy is a timely cautionary tale.

