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Adam Smith: 21st Century Man?

Think Tank Transcripts: International Trade

ANNOUNCER: 'Think Tank' has been made possible by Amgen, unlockingthe secrets of life through cellular and molecular biology. At Amgen,we produce medicines that improve people's lives today and bring hopefor tomorrow.

Additional funding is provided by the John M. Olin Foundation, theWilliam H. Donner Foundation, the Randolph Foundation, and the JMFoundation.

MR. WATTENBERG: Once again, a big fight over international tradeis brewing in America. On one side advocating free trade are theintellectual heirs of the Scottish philosopher Adam Smith. On theother side are those who believe that Smith style free tradethreatens American jobs and industry.

Joining us to sort through the conflict and the consensus areRobert Lawrence, professor of economics at Harvard University andauthor of 'Can America Compete?'; Jagdish Bhagwati, professor ofeconomics at Columbia University and author of 'The World TradingSystem at Risk'; James Fallows, a long time analyst of East Asianeconomic strategies and author of the recently published, 'Looking atthe Sun: The Rise of the New East Asian Economic and PoliticalSystem'; and Thea Lee, an international trade economist at theEconomic Policy Institute.

The question before this house is, Adam Smith a 21st century man?This week on 'Think Tank.'

To most Americans, 1776 means America's birthday. But besides anew nation, something else was born that year, a new notion of howthe world works, the idea that individuals are better than thegovernment at determining what is in their economic interest.

Now, later on we will talk about the huge new trade treaty, theGeneral Agreement on Tariffs and Trade, or GATT. But first let's takea look at the father of free market economics, that Scottishphilosopher Adam Smith. His book, 'An Inquiry into the Nature andCauses of the Wealth of Nations,' published in 1776, remains thecornerstone of modern economic thinking. In it Smith declared that itis not from the benevolence of the butcher, the brewer or the bakerthat we expect our dinner, but from their regard to their owninterests. By intending principally to make themselves better off,Smith said, merchants, workers and factory owners unintentionallymake us all better off.

Smith argues that free trade between countries benefits consumers.He illustrated his point using the homely example of a household. Itis the maxim of every prudent master of a family never to attempt tomake at home what it will cost him more to make than to buy. In otherwords, why make your own clothes when you can pick them up at adepartment store more cheaply?

Smith continued, 'What is prudence in the conduct of every privatefamily can scarcely be folly in that of a great kingdom.' Again, whyshould the United States make steel at home if it can buy steelcheaper from Korea?

Now, Adam Smith surely would be pleased that much of the world isnow following his advice. Trade is rapidly expanding as countriesopen their markets to foreign goods. American shoppers can buy tiesfrom Taiwan, shirts from Brazil and cookware from France, typicallyat bargain prices.

But free trade is not without its critics, as the recent battleover NAFTA, the North American Free Trade Agreement, showed. Some saythat a measure of a nation's success is not what it can buy, but whatit can produce and sell. Others say free trade may be fine in theory,but we live in an imperfect world. To them Adam Smith was a brilliantthinker, but his time has passed.

Panel, ladies and gentlemen, my own view of the debates that wehad about NAFTA was that it was terrible. It was a great opportunityto try to explain a complex idea to the American people, and insteadwe heard things about sucking sounds and OMA's and dumping andvoluntary restraints and 200,000 jobs lost or 200,000 jobs gained.

And what I would like to try to do in the first few moments of ourdiscussion here today is to take the figure of Adam Smith, the fatherof this idea, and using that vehicle, try to explain what it is weshould have been talking about.

And Professor Lawrence, I wonder if you could take a stab at that.

MR. LAWRENCE: Well, I think that the central insight of Adam Smithwas that there are benefits to allowing individuals to specialize,that each person should do what they do relatively well. And I think,as that citation indicated, he argued that this was also true ofnations. And that is the fundamental idea of why free trade is good,because by specializing, it allows us to increase our income. Itincreases our well being and welfare.

I mean think about it with a viewpoint by comparison totechnology. Imagine if someone invented a machine that would run onwater instead of gas. Well, we'd all agree this would be a terrificthing. We could now save on all of those resources which we use inorder to run our engines. We would also acknowledge, however, thatfor the oil producers of the world, this might not be a very goodthing. But for all of us, this improvement in technology would allowus to get energy more cheaply.

And Adam Smith's insight was, the same proposition would hold fora nation. If you can buy things more cheaply from the rest of theworld, you can raise your incomes, you can raise your well being.

So my own sense of dissatisfaction with the NAFTA debate is thatit didn't concentrate enough on how we raise people's living standardas opposed to the question of how many jobs we may create or lose.

MR. FALLOWS: I wonder if I could just go on from that. I thinkthat Robert has very eloquently summed up what is the main derivedlesson from Adam Smith's teachings today. And I think the question,what the debate about these teachings now really concerns is whethersomething that is generally good is always good, whether somethingthat is largely good is absolutely in every single case good.

MR. WATTENBERG: So you are not anti Adam Smith?

MR. FALLOWS: No, of course not. I think that there is a whole sideissue here of whether the real Adam Smith has any relationship to thefigure who is used as a symbol now on neckties of people who are, inmany cases, absolute free marketeers.

Let me use this illustration. We all would agree that personalliberty is a good thing. In most cases, it is a wonderful thing, andyet we don't feel that it is absolutely a good thing. Societies needsome curbs on personal liberties at some point in order to cohere associeties. And I think the argument about free trade is whether thereis any point where there are other political or strategic or otherbenefits that you advance by curtailing free trade at certain points.

And what has struck me in the last eight years I've been workingin East Asia is the very shrewd mixture of sort of operatingprinciples derived from Adam Smith and the strategic intervention bythe government for non Smithian purposes. So it's sort of the missingthird member in the choice.

MR. LAWRENCE: The central insight is that it's not just thatdifferent countries have different kinds of capital or differentkinds of labor that will determine what they specialize in, but itmay actually be if they have different kinds of rules, differentkinds of regulation and different kinds of government policy.

MR. FALLOWS: Or ambitions.

MR. LAWRENCE: Those will also change the patterns ofspecialization. MS. LEE: The point, Robert, is that, as a nation, wego through a political process to decide what kind of laborregulations, what kind of environmental standards we want, and weregulate our domestic producers.

Every time we import a good that doesn't meet those standards, weare undermining and putting at a disadvantage our domestic producers.And so for us it's one thing for countries to have different laborregulations; it's another thing for them to have automatic access toevery other country's market in the world. I don't think thatnecessarily follows. MR. BHAGWATI: I think you're wrong on that,Thea, because certainly other countries have their own views aboutwhat in fact labor standards ought to be or environmental standardsought to be, and these are legitimate differences of opinion, not theself indulgent pursuit of diversity. Like in Mexico, people may beinterested in cleaner water rather than cleaner air because they havea lot of problems with dysentery.

So it seems to me that that translates simply into what you willface in terms of international trade. And virtually everything, allkinds of diversity, will in fact play into that.

Now the only thing you could say is that if different countriesplay the game of trying to attract capital, for example, by thelowering the standards below what they would like to do, simply witha view to playing this game of race to the bottom, as it called,different jurisdictions changing their environment regulations orlabor regulations with a view to competing for scarce capital, thenthat could lead to everybody becoming worse off, our standardspossibly getting as low as their standards.

But when you look at the empirical evidence on this, I mean thisis a theoretical possibility, but there really isn't anything verymuch

MR. FALLOWS: I think there's something that we're all sayingthat's similar to what Smith dealt with and is different from the waythese issues are normally discussed in the press and in politics,which is that there is, both potentially and in the real world, atension between purely economic efficiency, of getting the most forconsumers around the world, a worldwide efficiency, and certainpolitical values that different nations and different organizationsmay have.

The French may want to keep their pasture, even at the cost ofhigher priced food. The U.S. may want certain labor standards, evenat a cost of more expensive shirts. And so what this whole debate isabout is something Smith recognized, which is the tension betweeneconomic efficiency and certain political goals. The way he showedwas his advocacy for a big British navy and the sailcloth industryand other sort of national defense measures. So that's the tension.

MR. WATTENBERG: The late Herman Kahn once said that the best thingfor poor countries are rich countries. Is that a Smithian notion?

MR. LAWRENCE: There's a central idea there that I think is worthemphasizing because a lot of people believe that what internationalcompetition is about is a zero sum game, that somehow we're betteroff if other countries are poor.

But in fact, what trade is really about is making both sidesbetter off. Poor countries will be made better off if there are a lotof rich countries to buy what they produce, and in fact richcountries will be even better off if those poor countries get richer.So another central idea is, we can all be better off together, ratherthan the political view, which is that it makes sense to be top dog,that countries should dominate.

MS. LEE: But Robert, I think the question is, is unregulated freetrade the best way for the poor countries to get richer and the richcountries to stay rich? Or are there institutions that we can buildinto our trading system that would help harmonize the poor countriesupward, to help raise their standards so that they don't get intothis race to the bottom.

I think that in some ways you're wrong, Jagdish, that there is noevidence whatsoever that countries do compete on the basis of cuttingstandards, of cutting environmental regulations and busting laborunions. I think they do do that. I think they get into a competitionfor foreign investment that they can't really avoid. And that's thereason that I think it would be appropriate and good for everybody tohave some basic international rules.

That doesn't mean that all countries will end up with the samelabor standards and the same environmental rules that doesn't makesense, but some basic minimums that help protect countries fromgetting into that kind of destructive competition. MR. BHAGWATI: Ithink countries do bust unions, and so on, including our own if youremember the air controller strike, and so on.

MS. LEE: Right, sure, and that's partly due to trade competition.

MR. BHAGWATI: But they do that because of their own social andeconomic views about whether having unions do some specific kinds ofthings. There is very little evidence, if any, of their doing it witha view to attracting foreign investment and playing this game is allI've been saying.

MS. LEE: In Malaysia, the prime minister of Malaysia has said, wecan't afford to have labor unions because the electronics industry,the foreign companies are saying they won't come here if we havelabor unions.

MR. WATTENBERG: Let me ask a question. Can nations undermine oneanother using trade policy?

MR. FALLOWS: Yes, yes. And this, again, may be the central axis ofthe argument, at least from my point of view, the combination ofpolitics and economics.

Let's go back to your Herman Kahn question of whether the bestthing for poor countries is rich countries. If you rephrase thatslightly and say the best thing for small countries is big countries,or the best thing for weak countries is strong countries, it becomesa much more dicey proposition because the world's history includesboth this mutually beneficial trade and people pushing each otheraround.

I think in much of the outside world, those two things are seen asbeing connected, that economic strength entitles people to pushothers around, and so in much of the formerly colonialized world,they think that trade has in fact in many ways made them worse off bymaking them weak and thus subject to being politically pushed around.

MR. WATTENBERG: The debate over free trade is not just atheoretical discussion. It has real world consequences for Americanworkers and consumers. Boosted by an ongoing international free tradetreaty known as GATT, world trade expanded 12 fold, from $300 billionin 1970 to more than $3.6 trillion in real dollars annually. And theportion of American jobs and commerce dependent on trade more thandoubled, rising from about 5 percent in 1970 to nearly 12 percenttoday.

After seven and a half years of arcane and sometimes bitter touchand go negotiations, the latest bout of free trade talks, known asthe Uruguay Round, were completed in Marrakesh, Morocco, on April 15,1994. At the signing ceremony, Vice President Albert Gore reaffirmedAmerica's support for GATT.

VICE PRESIDENT GORE (on videotape): We have led the effort to tearbarriers and reject protectionism, and we will continue to do so.

MR. WATTENBERG: The new free trade treaty was signed by U.S. TradeRepresentative Mickey Kantor. In all, officials from 109 nationsinitialed the treaty, including delegates from Japan and Europe.

Later this year, Congress will vote on whether to ratify GATT. Thevote will have profound effects on how much consumers will pay at thestores, which workers will keep their current jobs, and whichcompanies will face stiffer competition from abroad. And there willlikely be one more big political fight.

Jim Fallows, is this GATT going to be good for America, assumingit passes?

MR. FALLOWS: Before answering that yes, it will be on balance goodfor America.

MR. WATTENBERG: Jim, if you were a senator or a congressman, youwould vote for it?

MR. FALLOWS: Yes, if I were a congressman, I would vote for it.But let me say something about Vice President Gore's comments. I'm agreat admirer of Vice President Gore, but what he says is not reallytrue. It's not historically true of the United States, which was avery protectionist country until World War II, and it's not even trueof the modern United States because it's like saying we have alwayssupported peace.

Yes, peace is a goal, international harmony is a goal, but freetrade and lower tariff is not the only part of American economicpolicy. It's always been in exchange for what? In exchange for whatother values, political and other? So it's again with respect to thevice president, this gets us back into the simple sort of all ornothing debate, which hamstrings us on this kind of issue. But yeah,it's good on the whole.

MR. LAWRENCE: I think the vice president was essentially correct.I think if you look at the postwar period of course everybody agreesthat we were protectionist prior to that, but I think if you look atthe postwar period, in fact, if you look at the 1980s, it's reallybeen remarkable the degree to which America has been moving to openits markets.

We don't have even the quotas we used to have on automobiles andsteel. So I think in fact we are a pretty open market, and I'd returnto the whole achievement that I think is represented by this UruguayRound, which I think is immense.

MR. BHAGWATI: I think Robert is basically right that the trendsince the war has been to bring down tariffs and trade barriers, andwe have provided leadership on that. I think what Jim is referring Ithink are two things, which I think are compatible with that.

One is that it's always an uphill battle and there are otherobjectives and occasionally you'll get a lot of noise.

And two, we are not unilateral free traders. We never have been,ever. Britain in the 19th century was the only country that believedin unilaterally going for free trade. It really believed in AdamSmith.

MR. WATTENBERG: Jim? MR. FALLOWS: Yes. Compared to most othercountries, Robert, we certainly have been more free trade. And mypoint is the one that Jagdish was making. There have been other partsthat we've been balancing and not unilaterally doing it.

MR. WATTENBERG: Jim, a few years ago I don't want tomischaracterize your position, and tell me if I am, but you and anumber of others were saying that because we had this free tradingmentality and those vigorous, muscular, brilliant, hardworking,diligent Japanese had a different view in the back of their minds,they were going to be the power of the 21st century and poor UnitedStates was going to look like England and it was going to get worseand worse and worse and worse.

Fast forward that's not what has happened. I mean what you readnow in the papers, America is not only number one, there is number notwo. Japan is in deep trouble, Europe is in really deep trouble. Andwith this terrible system, we have ended up the number one political,geopolitical, economic, cultural, scientific, and educational powerin the world.

I mean, are we not doing something right? I mean, you say trade isa big issue and all these terrible things are happening, and here weend up

MR. FALLOWS: It's my turn to say what I said. I mean, as you know,nobody who has read my work over the years thinks I think America isfalling apart or has no merit in the world. I think that the greatadvantage of this society is one you and I agree on deeply, which isits absorptive capacity to be able to bring in people from around theworld.

The point I was making I think had two parts, both of which Idefend. One is that the U.S. basically misunderstands what has beengoing on in the East Asian economies. Their goals are not ones wellexplained by Adam Smith. They're basically political goals, to buildup national strength, to offset national weakness of the colonial eraand the post World War II era.

And second, that there is tremendous dynamism in East Asia as awhole. The last decade it's been the largest, fastest growing market.It will be that for the next decade.

MR. WATTENBERG: Are we going to get hurt if they get richer?

MR. FALLOWS: No, but

MR. WATTENBERG: Or even if they get richer faster than we getricher?

MR. FALLOWS: No, of course not, but again, what we're arguingabout is the tension between strictly economic definitions of humanambition and politics, geo strategy, et cetera. From a strictlyeconomic point of view, trade always makes almost always makeseverybody better off, including us.

But it's not the only thing involved. The United States is notstrictly a trading entity. It's also a military power, it's also adiplomatic power, it's also a society where people have to livewithin certain borders.

So that is the point. There are certain political effects that canhurt the U.S.

MS. LEE: I think there's another point also.

MR. WATTENBERG: Tell us whether you favor this GATT.

MS. LEE: I think there are a lot of problems with the GATT, and ifI were going to negotiate it, I would certainly do it differently.

MR. WATTENBERG: And if you had to vote on it?

MS. LEE: I think I would vote it down and let them come back tothe table with a better agreement that did include internationallabor and environmental standards. I'd put a higher priority on thatperhaps than Robert does. I think that's very important. I think alltrade agreements should start moving towards that as we move towardsan integrated economy.

MR. WATTENBERG: Isn't that how opponents I mean people keptsaying, oh, I'm for NAFTA, but I'm not for this NAFTA.

MS. LEE: Well, that's right.

MR. WATTENBERG: As if there was a this NAFTA out there I mean theynegotiated that, what, for three years or four years.

MS. LEE: I think that's exactly right, though. We have tradenegotiators in this country who go into a closed room with a bunch oftrade lawyers and a bunch of business people, and they come out withtrade agreements that are very lopsided, that serve corporations verywell and have very little in it for working people, the environment,family farmers.

MR. WATTENBERG: Thea, a trade war that harms a nation, say, theUnited States, should, as I understand it, do two things. It shouldincrease unemployment and it should lower median wages. That's thepunishment for a trade war.

Now, you all have maintained that there has been a trade war andthat we've been losing it, or as you said, until recently. And inpoint of fact, unemployment is going down, and real median wagesduring the 1980s and I know there's an argument about it, but theyhave gone up.

MS. LEE: They have not gone up. MR. WATTENBERG: Well, you know,that's why I said there's been an argument about it.

MR. BHAGWATI: Ben, can I get speak to Thea? None of the freetraders that I know, including, I'm sure, Robert and myself, areperfectly happy with the agreement either. It's not the end of thegame.

MR. WATTENBERG: So you're not for this GATT either. I mean you arefor this GATT, but you would like to

MR. BHAGWATI: No, because in the course of reaching the agreement,the administration did several things which I'm not very happy with.On the other hand, that's the politics of getting it through theCongress. And so this is not the endgame. A whole lot of things whichThea is worried about, like environment, labor, are going to bediscussed in the next round or the next set of negotiations. MR.WATTENBERG: Robert.

MR. LAWRENCE: Let's just understand what this is. This has been anegotiation where we have 15 different major issues that were dealtwith. And these were determined by the United States in terms of whatour priorities were and what other nations' priorities were, actuallyin the mid 1980s. And it has taken till today for us to come to anagreement.

So let us agree that those were our priorities, they still arevery important, we now have found some new ones, and this certainlydoesn't mean we are going to stop negotiating. But the idea that weshould continuously be changing what we're negotiating about issimply unrealistic and not viable.

MS. LEE: But we're not completely changing it. The U.S. Congresstold the president in the 1980s that they wanted a social clause inGATT, they wanted him to work towards that. That was one of the goalsthat was given up on fairly easily.

MR. WATTENBERG: I want to come back to that phrase 'socialclause.' That really intrigues me. That's sort of a neat phrase. Asocial clause, my right wing friends would say, oh, she's talkingabout world government.

MS. LEE: We have world government in areas like

MR. WATTENBERG: Do you want more of it?

MS. LEE: Well, I want more of it in different areas than we haveright now. Right now we have rules, and what the GATT, this round ofGATT represents is rules that are very favorable to multinationalcorporations the investment rules, the subsidies, the intellectualproperty rights protections for copyrights, and so on, are worldgovernment. We have given over the right to make decisions on thoseareas to this new international bureaucracy.

MR. WATTENBERG: Let me go around the room and ask for a briefcomment from each of you. Let's begin with you, Thea. And let's bebrief. What do we agree on and what do we disagree on?

MS. LEE: I think we agree that trade can be a great thing betweennations, that there are things that we can get from each other. Whatwe disagree on is, what are the proper boundaries to the trade thattakes place? What is the proper set of rules that should governinternational trade? Should it protect labor and the environment andfamily farmers, or should it protect multinational corporations?

MR. FALLOWS: Similarly, I think we agree that Adam Smith had theright blueprint for making bread. What we disagree about is whetherman lives by bread alone, that is, whether economic welfare how thatranks with other instruments, other goals in the modern world.

MR. LAWRENCE: I think that we definitely recognize that free tradeis the source of tremendous wealth, but we're also human beings wholive in societies with organizations and rules. And I think thattension is something we continuously have to straddle.

MR. BHAGWATI: I think the virtue of free trade is well recognized,I think not just in theory, but also empirically. I think thedisagreement arises over whether free trade is compatible with thepursuit of other objectives. I would say that many people would saythat you really that these things are compatible economic powertranslates into political power. So many things go together ratherthan conflict. I would disagree with Jim and Thea on that issue.

MR. WATTENBERG: Well, thank you, James Fallows, Thea Lee, RobertLawrence, and Jagdish Bhagwati. And thank you.

As you know, this is a new program and we appreciate yourcomments. Please write to the address on the screen.

For 'Think Tank,' I'm Ben Wattenberg.

ANNOUNCER: This has been a production of BJW, Incorporated, inassociation with New River Media, which are solely responsible forits content.

'Think Tank' has been made possible by Amgen, bringing better,healthier lives to people worldwide through biotechnology. Additionalfunding is provided by the John M. Olin Foundation, the William H.Donner Foundation, the Randolph Foundation, and the JM Foundation.

BEN WATTENBERG

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