A Response to the Mises Institute

Or, the Mises Institute's national loyalty problem

A Response to the Mises Institute

The Mises Institute has once again offered a critique of protectionism in a recent article by Mises apprentice David Brady, Jr.

Brady begins by telling the history of how the Hamiltonian Whigs and Lincolnian Republicans long stood opposed to the Jacksonian Democrats and their policy of laissez-faire capitalism. This is all true. Jackson and the Democrats were not nationalists. They believed strongly in states rights, Ricardian1 free trade, and agrarianism, as opposed to the nationalist views of the Whigs and Republicans, who emphasized national unity, protectionism, and industrialization. The Democrats were to a large degree loyal to specific economic sectors, namely agriculture and importers, while the Whigs and Republicans were characterized by a desire for a harmony of interests between the different components of the national economy. The Whigs and Republicans maintained a belief that both agriculture and industry, North and South, could all work together for their mutual benefit as members of the same nation.

Continuing the historical narrative, Brady interprets Donald Trump’s rise as a rejection, by the American people, of Clintonian and Obamian foreign and trade policy in favor of protectionist Hamiltonian policies. As a Hamiltonian, I find no fault in this analysis.

This widespread rejection of neoliberal economic policies was in large part prompted by the massive deindustrialization this country has experienced in recent decades. On this front the Mises fellow cites some stark numbers displaying America’s economic decline: a growing trade deficit with China, America falling to number two in manufacturing output, with China in first place, and a loss of around seven million manufacturing jobs between 1981 and 2011. “China’s rise, from communist isolationism to its pseudomarket economy under Deng Xiaoping, allowed it to become a force for manufacturing in the world,” Brady writes. That is to say, they achieved this rise by means of protectionism and state investment in native industries. Additionally, according to the Trump administration’s Trade Representative Robert Lighthizer, China has “consolidated leading market share in critical industries like telecommunications equipment, shipbuilding, batteries, and critical minerals”, which translate directly into military and political power2. America’s industrial decline has coincided with China’s rise to great power status.

The Misesian narrative presented to explain the decline is that American manufacturing companies chose to offshore these factories not because of greed, but because the regulations of agencies such as the EPA and OSHA pushed them away by unduly raising the cost of doing business. It’s cheaper to manufacture in China where they’re more tolerant of worksite injuries and deaths, where there is little concern for things like pollution, and where forced labor is commonplace. While laws mandating hard hats and food inspection do cost businesses money, they contribute to making our country pleasant and safe to live and work in. Are regulations really at the root of the trend of manufacturing firms relocating overseas?

It is clear that the people most harmed by offshoring are those who depended on industrialization for their livelihood, namely the workers and managers of the factories. Another group that suffered was the manifold businesses that rose up in and around industrial centers that indirectly benefited from having customers employed in industrial pursuits. This adds up to a large number of Americans. But who does benefit from scattering the various stages of production around the world, thousands of miles apart? Would it not be the middleman, whose living is made by merely buying and selling the real goods made by others, while producing nothing himself?

Hamiltonians, or economic nationalists, have often spoken of the fact that free trade primarily benefits middlemen who add their tax in the form of a markup to the products that pass through their hands3. Placing the consumer at a distance from the producer multiplies the number of these exchangers, raising costs while adding no value to the goods themselves. Examples of this type of middleman are shippers, importers, and significantly, the financier, who derives his profit from interest on loans, not the production of tangible goods.

The author does name financialization as a major cause of America’s deindustrialization. But financialization, as defined by the author, is when the government bails out failing firms, as the US Treasury did in 2008, and this is why we have the “Rust Belt.” A greater confusion of terms is scarcely possible. The common understanding of financialization, given by Wikipedia as “an economic process by which exchange is facilitated through the intermediation of financial instruments,” is good enough. The term “Rust Belt” dates back to the 1980s4, from the earliest dawning of neoliberalism.

Ever since the neoliberal revolution of the 1970s and 80s that deregulated financial markets, the profits of finance capital have taken precedence over the production of real goods, like cars, airplanes, weapons, computers, or machine tools, in the economic policy of our government. These changes coincided with the end of capital control laws, removing the last legal barrier to relocating entire factories overseas to save a few percent on wages. The nail in the coffin for American industry came by 1990 when advances in information and communication technology (ICT) made such translocations the cheapest move for many large firms5.

In support of his argument about financialization, Brady cites an article by Antony P. Mueller on the 2008 financial crisis, which makes a valid criticism of our financial system, arguing “that lower interest rates and government incentives aimed at boosting consumption work as pure poison.” Hamiltonians have also long lamented this practice, and have always held as the remedy a national banking system that loans for growth in the real economy, not simply for large shareholders or derivatives traders6.

So while there is truth in Brady’s claim that “it is likely not free trade alone that saw the complete collapse of US manufacturing jobs,” the fact of the matter is that free trade and financialization are but two components of the same globalist system that serves the interests of international financial speculators and major stockholders instead of the interests of the laborers and entrepreneurs of American industry.

So we see the Mises Institute advocating for a state of things where wealth is only reckoned in dollar values, ignoring the kinds of wealth that make nations strong and secure, namely, a robust home manufacturing market. The Mises Institute appears to believe that natural law dictates the rule of global financial interests and multinational corporations over the manufacturing sector of the economy.

For Hamiltonians, on the other hand, the primary aim of economic policy is to uphold national sovereignty. Having reliable domestic sources of military and medical supplies helps to keep the nation as independent as possible from other countries in the event of war or crisis7. If there is a war, you need to have things like steel, and, as of late, computers, or you will lose.

Another aim of nationalist economic policy is to grow the nation’s wealth. Concentrating production within the nation’s borders contributes to this broad goal because a greater diversity of employments creates a self-nourishing economic zone, with each sector feeding into the others, culminating in a flourishing national economy8.

These aims can be achieved by means of tools like tariffs, which guide the flow of trade to attract more industrial enterprise to within the nation’s borders; another tool is credit from banks that are careful only to loan to undertakings that have a likelihood of generating real goods and services and providing stable employment. Outsourcing does not contribute to these ends. Separating stages of production across oceans, which adds transportation and distribution costs, is not safe and is not economical, unless the only variable you are seeking to maximize is wage arbitrage, as our author’s appears to be.

In sum, for nationalists, the proper subject of economic analysis is the nation. Libertarianism, on the other hand, assumes that only individuals and their choices matter, disregarding the role that institutions and authorities play in shaping what kinds of choices are possible. This leaves libertarian economists with blind spots around questions of cui bono in trade policy.

These blind spots are evident in Brady’s attempt to justify a theoretical condition where free trade did cause all the losses of American industrial capacity: “Entrepreneurs identify factors of production or processes that reduce the discounted marginal value product in order to reap profit.” This they do by finding cheaper labor, or, in economic jargon,

by noticing [that] the discounted marginal value product of labor is significantly less expensive abroad, the entrepreneurs in manufacturing shift their capital abroad. Entrepreneurs can thus reap better profits and lower the price of goods significantly.

Thus we arrive at the rationale for building up our rival, China: it saves some money in the short term for the major stockholders of large multinational firms.

From this individualistic point of view, then, Americans being reduced to working in “services” and in hospitals while the Chinese get all the high-paying manufacturing and engineering jobs is no cause for concern. For, many “nonspecific factors” (labor) “can be performed by any human”, Brady informs us.

Interestingly, this is the same thought process behind open borders. Both policies reduce the value of American labor. Offshoring takes away the jobs, leaving a glut of workers, causing wages to fall9. Mass migration increases the number of workers, heightening competition for the jobs that are left, reducing wages further. This condition is termed by economists “the iron law of wages”. But it’s not inevitable, and we can improve things by 1) closing the border, and, 2) creating more jobs in this country with pro-business protectionist policies aimed at re-shoring industry.

The author includes a paragraph that if fully understood would be read as a horror story. It must be quoted in full:

However, profit attained by one firm is noticed by others. Capital begins to shift toward the factors of production that derives the profit, bidding up their cost. In our scenario with labor, more firms shifting production to this cheap labor will compete over workers. Wages will be bid up, and profits will be eaten up until the only revenue derived is the market rate of interest. Being as prices, including labor, tend to be uniform throughout the economy, eventually the costs of this nonspecific labor would be the same domestically and internationally. Thus, the determining factor will be cost of compliance within a nation. The obvious compliance costs in the United States have already been discussed earlier.

What is described here is the equalization of wages across all nations, which can only be accomplished by raising it in some countries and lowering it in others, by taking advantage of the dynamic described above. Then the only economic variables in the globalists’ managerial scheme would be local laws and regulations, which ideally they will write. Presumably this arrangement is intended to undergird a totalizing international division of labor with a perfectly managed geographical distribution of economic sectors by the global overseers. Thus we see how libertarian policies lead directly to communism10.

Who, in the end, profits from this arrangement, where our industrial capacity is located and manned in China, and its products are shipped back to the US for purchase by those who formerly made them? The goods may be cheaper, but fewer people have the means to buy them without going into debt. The only group that benefits from this arrangement, then, must be the major shareholders in multinational companies and the new middlemen who take advantage of the artificial distance between producer and customer.

The author concludes with an attempt to justify the globalist engineering of our national economy with the conceit of the rational consumer:

However, are Americans being manipulated by cheap and poorly made goods? Certainly not. Any thinker can easily comprehend the cause of voluntary exchange. An exchange will only occur when the two parties involved both value the good that they are receiving more than the good they give up. Thus, there is a double inequality of value to any voluntary exchange. This applies to cross-border trade. Americans value the goods made abroad more than they value the money they give up.

Other factors can impact the “psychic profit” derived from an exchange. If a consumer values goods “Made in the USA,” they may be more inclined to pay a higher monetary price than if they purchased a foreign equivalent. The same is true if they wished for more durable “Made in America” goods as opposed to less-durable goods from abroad. Instead, Americans often demonstrate a preference for these cheaper, possibly less-durable, goods through the act of purchasing them.

The weakness of this argument is its failure to account for the fact that the intervention of the State and the actions of large corporate entities can and do change the market forces that provide the market with its choices of goods. Consider things like roads and bridges, highway patrols, water distribution. These are basic utilities that are often provided by the public sector which shape the environment that private enterprise operates in. The same principle can be applied to international trade, where the government sets a price of entry (tariffs) for foreign firms who want access to our markets, and the private actors adapt to the structure provided by the government. Sometimes large private actors take the role of infrastructure provider, but the dynamic is much the same for the rest of the private sector that now has access to these services. Think of Amazon’s web services which have become one of the easiest and cheapest means of doing business online.

Regarding the idea of “psychic profit”: the value of American-made goods is more than a placebo. Paying money to a fellow American means the money stays in America, while buying a foreign product removes half the transaction from one nation to another. Even if we manage to force our government to give up the fight by adopting free trade, China will not give up on their protectionist policies, and we’ll be stuck purchasing Chinese goods, since all the factories are there and not here. If we’re lucky, soon we’ll all be purchasing Indian goods.

The psychological analysis of the ideal consumer is interesting, but suffers from a certain naivete. It is not clear if every “consumer” has the intelligence needed to accurately “[decide] that the value they derive from the number of uses of the good is greater than what they exchanged it for.” Herein lies the problem with the idolization of “the consumer.” This type of analysis looks at men merely as consumers and not equally as producers11. One would think that Austrians of all people would understand that one can only consume to the extent that one produces. And how can a man produce if his job is in China?

These consumers decide that the good they are purchasing has value despite their durability and would demonstrate their preference for more durable goods if that was what they desired.

But, remember, home-made goods are often no longer an option. The “consumer” didn’t decide that; the member banks of the Federal Reserve did.

In conclusion, it is false framing to claim that protectionists are primarily concerned about the way free trade causes the proliferation of cheap, low-quality goods; they are not primarily concerned about that. For economic nationalists, the worst consequences of free trade are its tendency to unbalance the economy in favor of non-productive social elements, the loss of national geopolitical power, and the ensuing redistribution of wealth from our own people to those of other nations.

  1. The main theory that serves as the baseline for modern globalization dogma is still David Ricardo’s famous doctrine of comparative advantage, which also underlies the arguments made by Brady. Richard Baldwin, The Great Convergence: Information Technology and the New Globalization. (Cambridge, Massachusetts The Belknap Press of Harvard University Press, 2016), 179 et seq.
  2. Robert Lighthizer, “Competition between the United States and the Chinese Communist Party May 17, 2023” p. 1, 11 https://assets.americafirstpolicy.com/assets/uploads/files/robert-lighthizer_china-committee-testimony_may-17_2023.pdf
  3. “Between the original producer and the ultimate consumer of the commodity there come in the middlemen, the dealers and speculators, with their charges, which are nothing more nor less than a direct tax upon the commodities which pass through their hands; and there also come in the storage and transportation agencies, whether by warehouse, rail, boat, horse-power, or human power, whose charges are nothing more or less than a direct tax upon the commodities they transport, because neither these middlemen, nor these transportation agencies, add anything to the physical character of the commodities that pass through their hands. So far as these middlemen, and storage and transportation agencies are absolutely necessary to economically convey commodities from the original producer to the ultimate consumer, their reasonable charges may be considered as a necessary tax upon these commodities, which must be paid by the original producer or ultimate consumer, or by both. But when they unduly multiply themselves and their charges, when they begin to dictate to the original producer such prices for his products on the one hand as deprive him of fair profits, and to the ultimate consumer, on the other, such charges for these same products as extort from him far more than he ought to pay, then it becomes time to prune down these superfluous private taxations upon the necessities of mankind, and to reduce them within the limits that the actual necessities of both original producers and ultimate consumers require.” David Hall Rice, Protective Philosophy, 1890, p. 17-18
  4. See: Origin of the term “Rust Belt”
  5. Baldwin, The Great Convergence p. 142 et seq.
  6. For a modern explanation of problems with the banking system, see: Richard Werner. “Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan. 1997.” https://professorwerner.org/pubs/towards-a-new-monetary-paradigm-a-quantity-theorem-of-disaggregated-credit-with-evidence-from-japan/
    “This additional employment given to money, and the faculty of a bank to lend and circulate a greater sum than the amount of its stock in coin are to all the purposes of trade and industry an absolute increase of capital. Purchases and undertakings, in general, can be carried on by any given sum of bank paper or credit, as effectually as by an equal sum of gold and silver. And thus by contributing to enlarge the mass of industrious and commercial enterprise, banks become nurseries of national wealth: a consequence, as satisfactorily verified by experience, as it is clearly deducible in theory.” Alexander Hamilton, “Final Version of the Second Report on the Further Provision Necessary for Establishing Public Credit (Report on a National Bank), 13 December 1790”, Founders Online, National Archives
  7. “The Secretary of the Treasury … has applied his attention… to the subject of Manufactures; and particularly to the means of promoting such as will tend to render the United States, independent on foreign nations, for military and other essential supplies.” Alexander Hamilton, “Final Version of the Report on the Subject of Manufactures,” Founders Online, National Archives.
    “Greater facility to the Government in obtaining pecuniary aids, especially in sudden emergencies. This is another and an undisputed advantage of public banks: one, which as already remarked, has been realised in signal instances, among ourselves. The reason is obvious: The capitals of a great number of individuals are, by this operation, collected to a point, and placed under one direction. The mass, formed by this union, is in a certain sense magnified by the credit attached to it… There is in the nature of things, as will be more particularly noticed in another place, an intimate connection of interest between the government and the Bank of a Nation.” Alexander Hamilton,, “Final Version of the Second Report on the Further Provision Necessary for Establishing Public Credit,” Founders Online, National Archives.
  8. Henry Charles Carey, The Slave Trade, Domestic and Foreign: Why it Exists, and How it May be Extinguished (Philadelphia: A. Hart, late Carey & Hart, 1853) p. 35-43. And, for a liberal internationalist admission of the same facts, Baldwin, The Great Convergence, p. 187-188
    This harmony of economic interests is only possible within the nation because all participants in the national market are subject to the same laws and have a level playing field regarding access to infrastructure. When competing with foreign businesses, there may be a disadvantage on one side stemming from these sources. For example, if another country’s government is subsidizing its car manufacturing and our government is not, then there is not a level playing field. This is a common scenario and it is why governments often resort to tariffs and non-tariff barriers when domestic producers suffer from untrammeled international competition.
  9. And, if it be argued that the loss of manufacturing jobs is made up for by service sector growth, see, Paul Craig Roberts, “The New Face of Class Warfare
  10. Cf. Carey, The Slave Trade, Domestic and Foreign, 279-281. “Ricardo-Malthusianism tends directly to what is commonly called Communism, and at that point will England arrive, under the system which looks to the consolidation of the land, the aggrandizement of the few, and the destruction of the physical, moral, intellectual, and political powers of the whole body of labourers, abroad and at home.”
  11. “Who this consumer is, that is neither a producer as well, nor directly dependent upon the prosperity of other people who are producers, is hard to say. His name and the mysteriousness of his character would seem to indicate that he is the Devil. But most likely he is an innocent ens logicum, manufactured by the same process of abstraction by which the economists devised their economical man — "a covetous machine, inspired to action only by avarice and the desire of progress." That is, they cut away or stole away (abstracted) the better half of the real being, and persisted in treating the remaining human fragment (if we can call it human) as a living reality. "The consumer" always buys and never sells — has no soul and no patriotism — has no interest but the cheapness of commodities — belongs to none of the classes that make up the industrial state. His sole function in life is to devour the result of other men's labors, but he adds nothing himself to the sum of the utilities that make wealth. … And that their interest lies in the direction of dependence upon the farther producer, instead of the nearer, we have seen reason enough to doubt. "The consumer" must be as short-sighted as he is hard to find, if he thinks it does. It is said that "the interest of the consumer is the interest of society, while that of the producer is the interest of a class." The interest of the mere consumer is in mere cheapness. His interest must be best secured in a condition of business and industry in which prices are the lowest and the producers are underbidding each other for customers. But that condition is found in what are called hard times. Either such times are a golden age, for whose coming we should pray, or the interest of the mere "consumer " and that of society are not identical.” Robert Ellis Thompson, Political economy, with especial reference to the industrial history of nations (Philadelphia: Porter & Coates, 1882), p. 256-257.