John Carney

I’m surprised that self-styled free traders are still making this obviously incorrect behavioral public choice theory argument.

Why is it obviously wrong? Because the free traders have more or less controlled trade policy in developed nations for decades. 

Let me explain.

Here’s how the public choice theory goes.

The benefits of tariffs are supposedly concentrated on just a few people while the costs of tariffs are widely dispersed. So the beneficiaries have a large incentive to organize in favor of tariffs, while the losers face collective action problems.

Alternatively, the benefits of free traders are widely dispersed and the costs are concentrated. The result is the same: free traders have a collective action problem, while the “protectionists” have a large incentive to organize in favor of tariffs.

This sounds like standard public choice theory. Large concentrated benefits for the few plus smaller dispersed costs for the many, produces policies advancing the interests of the few.

But then why aren’t tariffs already much higher? Public choice theory says they should be.

Public choice theory actually points in a very different direction than the free traders think.

The ubiquity of so-called free trade policies in highly developed economies implies that either:

1) the costs of free trade are dispersed widely, while the benefits are concentrated;

Or, 2) the policies that get called free trade and are supported by free traders are not actually free trade but are themselves actually protectionism with concentrated benefits and dispersed costs.

In other words, the key insight of public choice theory is that any existing policy in a more or less democratic polity should be expected to have the feature of benefiting a special interest group at a cost to the public.

The first proposition—free trade doesn’t really have dispersed benefits but actually benefits a small, powerful, well-organized interest group—has the benefit of reflecting what we see in the real world where the policies produce growing inequality and wealth accrues to financiers.

To put it plainly, Wall Street or “the City” in London have reaped huge benefits from the rise of free trade policies while the American working class has been devastated.

That’s exactly the pattern public choice theory tells us to expect from a policy with large benefits for a few.

The second proposition also appears to be true. What goes under the name of free trade is, in fact, an industrial policy that is made in protectionist nations. It is made in Beijing and Berlin. In other words, free trade may be an illusion, smoke and mirrors concealing the class interests of disguised protectionists.

The public choice defense of free trade doesn’t make sense. It’s a bit of mythology that free traders sell to the public and perhaps even believe themselves. But the very fact that it takes a populist uprising to challenge their control of policy tells us it is wrong.

To reiterate, if their myth was correct, we would have well-organized special interests dominating trade policy in favor of protectionist policies. Instead, the well-organized special interests—the large corporations, Wall Street, DC policy elites—are all opposed to Trump’s trade policies.