Degrowth and Free Trade

tl;dr: The protection of domestic social production in free trade agreements works with Degrowth and ensures peace through trade

Since David Ricardo, mainstream economics favors free trade over economic isolationism when it comes to increasing the »wealth of nations«. Although Paul Samuelson’s notable criticism on some aspects of free trade all but left a minor dent in this believe. The potential downsides of free trade, so the consensus goes, can be managed by (i) allowing for innovation and structural change, (ii) by increasing employability and enabling lifelong learning, as well as (iii) by redistributing globalization gains more equally within a country through taxation. In addition, free trade never was just about economic gains; it also was about strengthening peace between countries. Friedrich A. Hayek’s dream of interstate federalism and peace through trade is at the heart of what is the European Union today and has motivated the post-war institutions of the global economy like the IMF, the WorldBank and, later, the WTO.

It is interesting to remember, however, that John Maynard Keynes stated, as early the 1930s, that one day national self-sufficiency might be a luxury people would like to choose over too much internationalization of economic activities. For Keynes, global supply chains and distant production multiplied the potential for alienation of work and growing irresponsibility in the management class through division of labor and manufacturing locations. At the same time, modern technologies would allow a similar level of manufacturing productivity regardless of the locus of production, rendering any initial advantage due to costs or geography meaningless. Instead, Keynes’ reasoning goes, more advanced societies would start to value domestic services over foreign produce, services like education, healthcare, art, culture, and community services. In such a situation, the desire of these advanced societies to uphold an international economic order would seem too costly and with too few benefits.

So there are at least these two competing ideas about the global economy in mainstream economic thought, although Keynes’ views on the future of what we call globalization is not often reflected today. However, any discussion on globalization and de-globalization has to take into account both perspectives: globalization as an engine for prosperity and peace vs. de-globalization as an engine for intra-country wealth beyond global production chains. It gets really interesting, if we take a Degrowth perspective on free trade and what role it might play in a world signified by much less growth and much less addiction to it, with planned contraction maybe happening in some parts of the global economy. With this blog article I am focusing on explicitly on Degrowth as a specific political-economic idea, not just on the wider notion of postgrowth. I seek clarification if Degrowth and free trade might be compatible and if so, what the specific criteria are in order to make both compatible.

Degrowth policies, aiding in a voluntary and deliberately planned contraction of the economy in order to increase social well-being and ecological sustainability, are focusing on several policy levers. The most impactful policy is probably the reduction of working hours that will lead to a decline in production capacity and, given that wages decrease along, a decline in demand. If something like a steady contraction path can be achieved i.e. a reverse-steady-state in the classical economic sense with Hicks-neutrality and all that (not the steady state economy of Herman Daly), this will not lead to inflation nor deflation. The decline in monetary welfare would be compensated by an increase in social welfare, by having free time to spend on community work, supplying services to and receiving services from others in a voluntary exchange in your local environment. Instead of market production from companies we would have something like social production from communities without money – at least without fiat money from the banking sector, but probably with alternative currencies tied to local exchange trading systems. Such a reorganized economy would be much more indifferent about economic growth rates. Another policy is a guaranteed basic income for all that would further separate work from paid work and act as a floor for demand in the classical economy. To have an effect, basic income and reduction of working hours (plus a tighter ceiling for the total amount of working hours allowed) are necessary to achieve the Degrowth idea of contraction. Otherwise, a basic income might actually act as a boon to economic growth.

There are of course more policies, but from what I have described until here, it hopefully has become clear that Degrowth policies are rather different from the classical textbook ideas of economics. But what about free trade now? Can social production at home, in you local community, really be an adequate substitute for market production from producers from abroad? It might well work to substitute local producers, especially when it comes to services, but what about a high-tech product like a smartphone? Germany, a high-tech producer in its own right, does not manufacture smartphones nor develop it. It is doubtful that social production can compensate in an area where there is even no market production. The same holds true for raw materials or certain agricultural produce: they are not evenly distributed across the planet so some form of trade is necessary even in a Degrowth-oriented environment. And if trade is necessary its best and most advantageous form is free trade. Of course, any free trade arrangement then must not hinder social production in the domestic market. If on the contrary there is some form of crowding out of domestic social production by importing market production from abroad, Degrowth policies would be rendered ineffective and probably result in a domestic welfare loss in comparison to other countries.

So the real question when it comes to Degrowth and trade is not about free trade or not – but about free trade allowing for domestic social production. If manufactured goods, raw materials and certain agricultural produce are still part of a free trade arrangement, then peace through trade might still work under Degrowth policies while at the same time fostering and protecting domestic social production in all countries. Incorporating the protection of domestic social production in future free trade agreements appears to be a promising avenue for Degrowth advocates to align their political aim of transforming society from expansion to contraction while at the same time uphold a free trade system and thus global peace through global trade.

Why am I writing this? Because I feel a certain uneasiness when ‘Degrowthers’ are so easily opposing free trade and have no real suggestion what might take its place as guarantor of global peace and prosperity.

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