President Donald Trump’s decision to impose tariffs on solar panels and washing machines made abroad got me thinking about the free market, capitalism, and free trade. Over the next two posts, I’ll explore the economic and moral case for the free market, consider its destructive effects, and examine President Trump’s tariff plan.
Free Markets Are a Good Thing
Let’s start with a basic premise — the Shire supports free markets and capitalism. The market allows free people to use their skills and ingenuity to sell products and services that other free people are willing to pay for. The profit generated by those sales enables people to live and purchase those things their families need to survive. Allowing people to exchange goods and services is an important freedom.
A market-driven system also ensures that there will be an abundance of the goods and services that people need. A simple illustration makes the point. If, for example, people want to buy more hammers than are available at the local store, the shop-owner will raise his prices. This will have two important effects. First, it will spur manufacturers to make more hammers, because the shop-owner will be willing and able to pay more for the hammers due to the higher prices that she is able to charge. Second, the high prices will ensure that hammers go to those who need hammers the most — they will pay the most for them.
When countries allow the free market to operate across borders, free trade is beneficial to both countries. Three ideologically distinct administrations — the Bush, Obama, and even the Trump Administration (at least according to his Trade Representative website) unanimously agree that trade is good for America. A few (of many) facts bear this out:
- Exports support millions of jobs — 11.3 million in 2013
- Jobs in the export sector pay 17% higher wages than other jobs
- Americans purchasing power is 29% higher because of trade
- An estimated 25 percent of all manufacturing jobs are supported by exports
- Trade leads to faster economic growth and a rise in income
Bottom line — free trade between countries is good for American business, workers and consumers.
Beyond the economic benefits of free markets, Michael Novak argues brilliantly in The Spirit of Democratic Capitalism (a Shire Favorite Book) for the moral case. He contends that capitalism fosters “an ethos of association, teamwork, and collaboration, oriented towards goals, voluntarily entered into.” Furthermore, he notes that the capitalist system causes people to meet and trade with folks outside of their immediate circle. Not only do people meet the outsider, they learn to “build decent and even affective relations” with their business colleagues. This is necessary because, without a level of trust and communication, a free exchange of products cannot occur. A free market system, therefore, has the effect of creating the social goods of cooperation and peacefulness.
But, Markets Cause Destruction
However, as the economist Joseph Schumpeter pointed out, the free market economy is an agent of “creative destruction.” When one firm prospers through innovation or
efficiency, another loses sales. While those outside the business world jealously eye the profits made by the winners, they miss the hardship felt by the losers. Business failures, plant closures, restructures and layoffs are routine and painful aspects of the market economy. This is not just an unfortunate side effect of capitalism — it is at the very core of how it works.
What should society do? We want the benefits of efficiency, innovation, abundance, and peaceful co-existence that a market economy offers. But we also want people who follow the rules and work hard to have a level of certainty and security. This is not altruism – if people believe they are a small step away from chaos and disruption (perhaps through no fault of their own), they will not support the market economy regardless of the benefits it offers to society. Worse yet, displaced people may commit crimes to survive or retaliate against those who are successful.
The right balance is to let the effects of the market (including trade between nations) play out with minimal government interference. That way, society and consumers get the benefits of more, ever-improving goods at lower prices. But, the government should help people who are hurt by the destructive effects of the market. Safety net programs like Unemployment benefits, Medicaid, food stamps, and job retraining programs can help people who get hurt by the rigors of capitalism. Additionally, churches, non-profits and community organizations should step in to help families and individuals who need help after the devastation of a job loss. A good society provides assistance to people when they need it.
In my next post, we’ll focus specifically on trade and examine President Trump’s decision to place tariffs on imported washing machines and solar panels. Spoiler alert — I think he’s landed in the wrong place.