The Persistence of Market Fundamentalism

Perhaps because it is used almost always in criticism, the implication of the term “market fundamentalism” has become pejorative. Few people would say, for instance, that thanks to market fundamentalism we now benefit from … well, anything. But insults accomplish little. “Market obsession” or “market addiction,” for instance, might induce guffaws from the right audience, but all they convey is disdain. “Market fundamentalism,” by contrast, is at heart descriptive rather than a normative judgment. Its power and resonance come from the truth and depth of the analogy, rare outside the religious context yet so obviously present here. Enter “define fundamentalism” into Google and the example it returns is “free-market fundamentalism.” Everyone can make sense of what it means and why it matters.

The essays from Donald Boudreaux (“Feeble Forays Against Free Trade”) and Phil Magness (“The Truth About Tariffs”) are fine examples of this fundamentalism and its two hallmarks: an insistence on strict adherence to dogma with the attendant commitment to explaining away all evidence to the contrary, and a strong allegiance to an ingroup and policing of an outgroup for insufficient purity. As with any fundamentalism, arguments in this vein have their power—but only in arousing fervor among the believers. Rarely do they persuade, how could they? Fundamentalism demands faith in an inaccessible absolute, it brooks no complexity and offers no opportunity to reason.

Boudreaux and Magness are entirely comprehensible if one takes for granted an adherence to late-twentieth-century free-trade orthodoxy and seeks only confirmation that any challenge can be safely ignored. Thus, for Magness, my observation that “the Ricardian theory of comparative advantage enjoys widespread consensus among economists … may be the only accurate claim in [Cass’s] entire argument.” The only one. Boudreaux notes that a prominent early economist could not have rejected comparative advantage, “because comparative advantage is ultimately just arithmetic.” If something is self-evidently right, any evidence suggesting that anyone has questioned it must be wrong. That someone might disagree with Boudreaux on another point is, in his view, “alone sufficient to disqualify [the person] from pronouncing on trade-related matters.” 

The premise of this forum, though, is that someone took the time to consult the sacred texts, and they don’t seem to say what their keepers say they say. Alfred Marshall was the father of modern economics. He wrote its first great textbook, and he gave short shrift to comparative advantage—not merely ignoring it, but making a point of criticizing Ricardo’s followers, who “had taken but little account of the indirect effects of free trade. … In Germany and still more in America, many of its indirect effects were evil.”

Anyone advocating for a reasoned approach to trade policy will acknowledge happily that the arithmetic of comparative advantage works on a blackboard, but recognize that its assumptions are unrealistic and implications for policy limited, because so many other factors and forces are also at play.

Never mind, says Boudreaux. Marshall was planning a second volume in which he would wax poetic about comparative advantage. “Unfortunately, no second volume appeared.” Unfortunate, indeed, when the thing that would totally prove a point was just never actually written. Boudreaux suggests that, rather than focus on Marshall’s seminal work, his real views can be found in someone else’s journal article 50 years later relating to a letter Marshall apparently wrote. 

Magness takes a different tack, arguing that indeed Marshall did publish a second book, Industry and Trade, which “offered a conventional Ricardian account of comparative advantage.” Sure enough, the book does describe the principle that nations “may generally carry on a trade profitable to both, though one of them is absolutely the stronger all round.” But one need only scan a bit further up the same page to read about the limits of standard measures of gains from trade: 

This is however only the prima facie gain; [a nation’s] trade exerts many other influences on her well-being, some good, and some evil. It may, for instance, educate her finer industries and those which make most for leadership: or it may tend to stifle them. It may increase or diminish the steadiness of employment of her working classes; and so on. And there are other issues, to be reckoned with later on. Account will need to be taken, for instance, of exports which she sends out when lending capital to other countries, and for which she receives no corresponding imports at the time. [i.e., a trade imbalance] Again allowance will need to be made for the influences of different kinds of trade in stimulating industrial energy, in ministering to the wants of the needier classes of the population and in affecting the amount and security of their employment.

What’s more, in discussion of the principle of comparative advantage, Marshall observes:

The trade would be profitable: and that is all we are concerned with just now. But even here it is worth while to insist that the best business is not necessarily that which brings in the highest profits immediately: for other business may be doing more to strengthen the basis on which all rests. Thus the lad who carries parcels often earns higher wages than he would while learning a skilled trade: but in the long run it would have paid him better to earn less at first. Similarly, a country may rightly ask whether her foreign trade is such as to promote the education of her industries. The answer varies curiously with circumstances.

So much for “just arithmetic.” These paragraphs mirror almost precisely the basic problem that I described with comparative advantage as a basis for trade policy: “A nation’s capital investments, the capabilities it develops in its firms and workers, the supply chains it fosters, and the types of research and development it pursues all have important implications for the trajectory of its growth, the opportunities available to its citizens, and its power on the global stage. What is made in a country determines what else is made in the country; and what will be made tomorrow.” 

Asking rhetorically, “Could the entire field of economics truly have overlooked such basic flaws in a simplistic model for 200 years?” I answered, “Of course not. The truth is, if anything, stranger: For more than a century after Ricardo introduced the concept of comparative advantage, no one much cared.” 

Notice the basic asymmetry of the debate, which has a structure unfair to the fundamentalists yet of their own choosing. Anyone advocating for a reasoned approach to trade policy will acknowledge happily that the arithmetic of comparative advantage works on a blackboard, but recognize that its assumptions are unrealistic and policy implications limited because so many other factors and forces are also at play in determining the effects of international trade on a nation’s prosperity. In support of this proposition, we can point both to the empirical experience of nations around the world and the writings of leading economists from the pre-fundamentalist period. (Most fundamentalisms, while professing to represent unpolluted and original truths, require extensive and selective reinterpretations of their sacred texts.)

The fundamentalists must hold the ground that no such analysis is warranted, or even permissible. Thus, Nobel laureate Robert Solow will say of welcoming China to the World Trade Organization, “An awful lot of the intellectual power of the economics profession has signed this letter. It’s such a simple proposition it doesn’t really require that. You could not generate a hard exam question out of the material here.” Secretary of the Treasury Larry Summers can add, “On this issue there has been only one answer.” For them, the argument is not about good policy, it is about whether there even is an argument to be had, and who can participate. If that line of defense falters, and discussion of actual policymaking begins, the ideology has nothing to offer. 

Thus, market fundamentalism puts great emphasis on policing who “understands” the truth, which is a prerequisite to commenting on the fundamentalist’s views, conveniently excluding anyone who disagrees. The obsession with understanding appears everywhere, once you know to look. I first encountered it a decade ago, when I wrote an essay for National Review on the failure of free trade with China, to which Ramesh Ponnuru and Michael Strain responded that “he does not understand the model he is criticizing.” This puzzled me. I understood, I just disagreed. Boudreaux emphasizes repeatedly that I do not understand, or misunderstand, or am confused. I also “fail[] to grasp” and “need to learn more economics.” I take some solace that he directs me to his prior critique of a prominent economist, who apparently “does not understand the principle of comparative advantage” either. Magness says I “simply do[] not understand Ricardo or Marshall.”

This is not normal. Participants in debates are usually aware that an issue has two sides. Because fundamentalists are not, they assume that those who disagree simply do not understand. This produces much fine rhetoric, like Magness’s conclusion that, “In reality, [Cass’s] position has more in common with a nineteenth-century miasma theorist in a modern medical school, expressing bewilderment that those around him are unconvinced by antiquated theories attributing disease to bad odors drifting in through the air.” But how well does it match reality?

Magness wrote the line at the invitation of Law & Liberty, which has hosted a month-long forum centered on the work of said miasma theorist. Other contributors to the forum were quite interested in miasma too. So are many of the cutting-edge researchers at the school. It’s not a very apt metaphor. Still, while fundamentalism cannot guide public policy or foster pursuit of the truth, it has always been good for a flame emoji on social media.