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"Few minds are as fertile as Roberto Mangabeira Unger's. In this extraordinary book, Unger turns his attention to an area that is in much need of creative thinking and breathes some fresh air on the stale academic debates surrounding free trade."—Dani Rodrik, Harvard University, author of One Economics, Many Recipes
"Unger has written an incisive and compelling critique of free trade. The core of the argument-which seems to me historically incontrovertible—is that a nation's comparative advantage is always constructed by collaboration between public authorities and private interests. The essay hammers this point home with the relentless brilliance for which the author is known. A clear and worthy challenge both to those who are sure the doctrine of free trade is right and those who are confident that is fundamentally flawed."—Charles Sabel, Columbia Law School
"This book aims to provide a critical assessment of the present theoretical and practical consensus in favor of the orthodox conception of free trade and to outline the elements of a realizable alternative. Unger reveals a remarkable breadth of understanding of the field, boring into it with his inimitable and potent vision. This is a book of enormous intellectual and worldly interest."—Sanjay Reddy, Columbia University
"As one would expect from Unger, the book is brilliantly written and his central theses are persuasively and passionately argued. It is readily accessible and will command a wide audience and generate significant and constructive public debate and controversy."—Michael Trebilcock, University of Toronto
"[T]he book . . . is replete with new ideas and challenging propositions. Many of them are well taken, and may some day be incorporated in accepted economic theory."—Mordechai E. Kreinin, World Trade Review
"Unger's book deepens and broadens the debate on free trade and is therefore well worth the attention of academic economists and policymakers."—Amitava Dutt, Economic and Political Weekly
"[Unger's] argument [is] that we can at once deepen democracy, enhance social security, and foster economic innovation and growth. . . . The scale and scope of the proposals are breathtaking, encompassing the entirety of human society, from the individual to global institutions."—Daniel Aldana Cohen, Walrus Magazine
"Overall, the book is an exceptional contribution, providing an original and innovative perspective to the rethinking of globalization and free trade. The simplicity of the approach chosen for the analysis, which discusses technical issues in plain language, the diversity, and the breadth of new ideas so clearly exposed, are undoubtedly the book's primary strength. . . . To sum up, I think the main audience for Unger's book will be academic researchers, students, or policymakers in search of new ideas about the concept of free trade, or anyone interested in the subject of globalization and international trade from a unique perspective."—Natalie Chen, Journal of Regional Science
* * *
Familiar Problems, Disturbing Solutions
I begin by enumerating some familiar problems in the doctrine of free trade conducted on the basis of specialized lines of production within an international division of labor, particularly when such national specializations are motivated by comparative advantage. These problems-and the solutions that have been proposed for them-have not been thought to discredit either the central insight of the doctrine or its programmatic consequence, the beneficence of free trade. Indeed, they do not. They nevertheless pose a challenge that contemporary thinking about trade and free trade has yet adequately to meet. How, why, and with what result the force of this challenge has continued to be evaded is a matter requiring further reflection. Consider a brief, nonexhaustive list of these long-recognized objections and complications. 1. The assumption of a uniquely efficient assignment of productive specializations among countries in an international division of labor: who is to produce what. Even if we assume that comparative advantage is a given rather than a construction (see the next proposition onthis list), it is more realistic to suppose that there are alternative sets of efficient assignments of advantage among economies, just as there are multiple ways any economy can be in equilibrium, each with different consequences for national welfare and growth. The less that advantage is determined by nature, the greater is likely to be the significance of the problem of multiple efficient solutions to the allocation of specialized national roles in world trade. Each such allocation will have distinct results for both welfare and growth.
2. The assumption that advantage is given rather than made. This assumption becomes less tenable as we move away from natural advantage. The most tangible example of made advantage is the development of economies of scale and scope, as well as of concentrations of skill, in a line of business in which a country may have had no natural advantage. However, once the principle is admitted that advantage can be deliberately created by governmental initiative and collective action, it applies to every reason for a country's practical success or failure, including its institutions and practices, social and political as well as economic. Trade theory has had difficulty coming to terms with how the construction of advantage occurs, for the same reason that economics in general has had trouble dealing with how the institutional and psychological assumptions of maximizing behavior in a market economy are established and modified.
3. The assumption that it is tenable to foreclose the two previous sets of concerns by saying that either advantage, when not given by nature, will be generated by market activity itself or that it will be produced by governmental intervention, with all its attendant risks (playing favorites, riding hobbyhorses). In fact, advantage has always been shaped by a combination of private enterprise and public action. As soon as we acknowledge this fact, however, we realize that there is no closed set of possible institutional forms of such a combination. Indeed, there is no single and uncontroversial institutional achievement of worldwide free trade.
The concept of a market economy is institutionally indeterminate. That is to say, it is capable of being realized in different legal and institutional directions, each with dramatic consequences for every aspect of social life, including the class structure of society and the distribution of wealth and power. The idea of a universal regime of free trade is institutionally indeterminate in the same sense and for the same reasons. Which of its institutional realizations prevails has immense importance for the future of humanity. These debates cannot be captured within the categories of longstanding controversies about free trade and protection.
4. The assumption that so long as we correct market imperfections (according to the formula of first, fix them; if not, compensate for them by a domestic initiative; only as a final resort, impose a restraint on trade), we can move from the static efficiency of free trade to its intertemporal efficiency and from its intertemporal efficiency to its beneficial effect on economic growth. In fact, the first link holds only if intertemporal efficiency is defined so narrowly as to deprive it of theoretical or practical interest, and the second link (as the later observations about historical experience confirm) is nonexistent.
Moreover, the language of market imperfections, as applied to the "infant industry" and "monopoly power in trade" arguments for protection, trivializes the central point: not how to reestablish the market or what to do when the market fails, but what kind of market-on the basis of what institutions and practices-to establish in the first place. We cannot reach this point by focusing solely on advantage, whether given or made; on the contrary, the analysis of advantage presupposes that we have already disposed of this issue to our satisfaction. We have not.
5. The assumption that a country's trade policy should not be influenced by the willingness of its trading partners to abolish or to diminish restraints on trade. The traditional view (against which strategic trade theory staged a limited revolt) has been that although real-world departures from this assumption may justify circumstantial resort to reciprocity and retaliation, they do not compromise the case for a trade regime that is as universal and as free as possible.
6. If, however, the whole system of world trade and all the institutions and practices by which it is realized in any given historical circumstance are both particular and contingent, if they are incapable of being inferred by pure analysis from the idea of free trade, if they are the products of shifting conflicts of interest and vision on the world stage, if they therefore deeply bear the imprint of everyone's strategies, and if the strategies of a few preponderant economic powers are likely to be decisive in determining their content, then the assumption that a country's trade policy should be independent of the trade concessions it wins from the countries with which it trades makes little sense. Strategic trade theory failed to go far enough in resisting it.
A puzzle will occur to any reader of this book who has studied the history of debates about free trade and protection. Everything in this short list of ambiguities and flaws in the traditional doctrine of free trade based on comparative or absolute advantage is well known. The interest of the list lies in combining the ideas that constitute the list, in deepening and generalizing them, and in grasping their unrecognized implications. The student of the controversy about free trade, however, will object that the history of this debate has been largely preoccupied with beliefs of an entirely different order. To these beliefs the propositions in the short list bear no self-evident relation.
Traditional objections to free trade can be broadly placed into two categories. In one category are the arguments concerning the special instances in which restraints on trade may be justified because of the failure to solve what today we would describe as a collective-action problem in the development of a regime of universal free trade. If markets are not universally open, it may not, under certain conditions, be in the interest of every trading party to act as if they were; that is, it may not be in its interest to offer its trading partners a unilateral and unreciprocated abolition of restraints on trade. This claim was the nub of Robert Torrens's "terms of trade" argument.
It is an argument that has always invited a twofold response from the defenders of free trade as it is conventionally understood. One response emphasizes how special are the conditions under which restraint may be more advantageous than unreciprocated protection. The other response insists that the actual practice of protection is likely to squander its theoretical benefits by lending itself to the service of powerful interests and fashionable dogmas.
In a second category are the arguments dealing with the perverse distributive effects of free trade in a particular situation, including both distribution among sectors of the economy and distribution among classes of society. In this second category fall Frank Graham's "increasing returns argument" (according to which if manufacturing is subject to increasing returns to scale and agriculture to decreasing returns to scale, a country importing manufactured goods and specializing in agriculture may have reason to impose a tariff on manufactures in order to encourage a shift to the higher-productivity sector, with its increasing returns to scale), Mihail Manoïlescu's related "wage differential argument" (according to which developing countries might be justified in imposing restraints on trade to encourage the movement of labor from low-wage, low-productivity agriculture to high-wage, high-productivity industry), James Bristock Bridgen's so-called Australian argument (according to which restraints on trade might be justified for countries whose factor endowments were such that, although facing diminishing returns in agriculture, they continued to specialize in the world economy as agricultural exporters), and the Stolper-Samuelson theorem (according to which an import tariff may raise the real income of labor and reduce the real income of capital when the import-substituting sector produces a labor-intensive good).
The common element in these arguments of the second category is the claim that, under the special conditions each of them stipulates, free trade may produce a redistribution of gains among sectors of production or among classes of society that is economically inconvenient as well as socially undesirable because it inhibits a national economy from climbing the ladder of productivity more quickly.
Both sets of arguments address circumstances in which, for particular reasons, the case for free trade may fail to persuade. They provide no basis for resisting trade beyond those circumstances or for revising our view of its benefits. They thus reinforce John Stuart Mill's contention that "the protectionist doctrine finds support in some particular cases"-and only in such cases.
The result is to provoke from the defenders of the doctrine of free trade a response that has succeeded in robbing these objections from the competitive assumptions or the distributive effects of freer trade of much of their theoretical and practical force. The response comes in two parts. The first part is to interpret each of the arguments as the description of a low-productivity trap. The way out of the trap, the votaries of free trade say, is not to restrict openness in the global market; it is to radicalize openness-competition, flexibility, and capability through education, training, and benchmarking-in the domestic market. The second part is to suggest that so long as market failure persists, the short-term antidote to its perverse distributive consequences should be a corrective or compensatory transfer of resources. Restraint on trade should be a last resort; it is likely to be the most costly solution, and its costs are likely to be magnified by the foothold it provides for the ravages of favoritism and dogmatism.
<%TOC%>Contents Themes and Scope of this Book....................1
Excerpted from Free Trade Reimagined by ROBERTO MANGABEIRA UNGER
Copyright © 2007 by Princeton University Press. Excerpted by permission.
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Themes and Scope of this Book 1
Chapter 1 7
Troubles: The Enigmas of Free Trade Familiar Problems, Disturbing Solutions 7
The History of Free Trade and Protection: Subversive Lessons 15
The Authority of Free Trade Doctrine: Reasons Amounting to Objections 20
Chapter 2 25
Troubles: The Incompleteness of Comparative Advantage The Doctrine of Comparative Advantage 25
Incompleteness: Indeterminacy Resulting from Failure to Justify Unique Assignments of Comparative Advantage 28
Incompleteness: Confusion Resulting from Uncertainty about the Limits of Our Power Collectively to Shape Comparative Advantage 36
Incompleteness: Embarrassment Resulting from the Assumption that the World Is Divided into Sovereign States 44
Beyond Incompleteness: The Sham Similarity between Postmarginalist Economics and Physics 51
Condemned to Eternal Infancy: Implications of the Method Inaugurated by Marginalism 56
A Note Relating Ideas in this Book to the Dominant Tradition of Thinking about Comparative Advantage 65
Chapter 3 77
In Search of a Point of View 77
Specialization and Discovery:When Competition Inhibits Self-Transformation 78
Politics over Economics:When Restraints on Trade Imply No Surrender to Special Interests or Costly Dogmas 81
Order and Revision:When Free Trade Strengthens the Capacity for Self-Transformation 87
Alternative Free Trade, Alternative Globalizations: The Market Liberated from the Doctrine of the Market 90
The Division of Labor Reimagined and Remade: From the Pin Factory to the Factory of Innovation 95
A Central Conception:Mind against Context 100
Chapter 4 110
Nature of These Theses 110
The Thesis of Relative Advantage 110
The Thesis of Politics over Economics 138
The Thesis of Self-Revision 150
Chapter 5 166
From an Analysis to a Program 166
The World Trade Regime and Its Reconstruction 167
Free Trade Reformed: The Reconciliation of Alternatives 179
Free Trade Reformed: Experimenting with the Form of the Market Economy 185
Free Trade Reformed: Free Movement of Things and Money Chastened, Free Movement of People and Ideas Enhanced 193
Free Trade Reformed: From Wage Slavery to Free Labor 198
The Troubles of Free Trade and the Possibilities of Economics 213
Name Index 223
Subject Index 225