Free Trade Delusions versus the Real World

Some observations from Clyde Prestowitz from about 10 years ago on China, but still relevant:

“… China has become the location of choice for global manufacturing. This is usually attributed to its low wages. Chinese factory workers today earn 50 cents to $2 an hour and often work long shifts, getting minimal time off for weekends and holidays. But low wages are not the only factor; after all, wages in places like Vietnam, Myanmar, and Africa are even lower. China’s workers are not just inexpensive but literate, hard working, already reasonably skilled, and eager – nay, desperate – to be trained. There is also a sizable and growing cadre of university-educated technologists and professionals. For example, China is now graduating 330,000 engineers and scientists annually, as compared with 398,622 for the United States. China has also invested extensively in infrastructure and now has a very workable system of airports, harbors, communications, and roads. …

Today, China is already the largest market in the world for steel, mobile phones, cement, aluminum, and electronic components. Within 20 years, it will likely be the largest market in the world for just about everything. If you are a manufacturer, you will pretty much have to succeed in the China market to have a chance of surviving anywhere else. In theory, you can serve the China market by exporting, but there are some good reasons why you might not. Because Chinese labor is inexpensive, production processes that are capital-intensive in the advanced countries can be ‘dumbed down’ and made much less capital-intensive in China. As a manufacturer, you cut both your wage and your investment costs. On top of that, the Chinese government at local, provincial, and national levels will offer substantial investment incentives – such as long tax holidays, capital grants, free land, low utility rates, worker training, and other benefits – to companies willing to put plants and research-and-development facilities in China.

These investment incentives confound free-trade theory. They are, in fact, distortions of the market, and therefore of questionable legitimacy under the rules of the World Trade Organization. This has never been challenged because other countries have investment subsidies, too. (American states offer tax deals to induce companies to invest.) China, however, subsidizes investment strategically to capture new industries at higher levels than anyone else.” .
Clyde Prestowitz, “China as No. 1,” The American Prospect, February 21, 2005
http://prospect.org/article/china-no-1

China’s success is often attributed to low wages and the artificially lower value of the RMB, and the latter is indeed a de facto export subsidy and type of industrial policy. There is also the issue of government coercion that, by and large, keeps the labour force docile and free from independent trade unions that would raise wages and improve working conditions. We must add to this the famous “China syndrome” (the fact that China is such a big potential market, there has been an unprecedented, overriding rush by Western capital to get into the country) as well as the lower safety standards, lax environmental regulations, etc.

But, as Prestowitz notes, there are massive anti-free market government interventions that go far deeper than this, and actually involve a broad kind of neo-mercantilist, nationalist industrial policy.

There is also massive technological and intellectual property rights theft, and this is also often done inside China by forcing foreign corporations to agree to joint venture companies as the condition of access to Chinese markets (see here, here, here).

In short, this is not free trade, but an aggressive, interventionist, beggar-thy-neighbour mercantilist strategy.

Western political leaders are mostly clueless about this and are brainwashed in their neoclassical, pro-free trade theology.

This is just another pressing reason why the mad pro-free trade fanaticism in the West should be abandoned for the nonsense it is.

Defence of Western prosperity can’t be left to the fairy-tale free market, but requires strong and nationalist governments in the West that would implement their own type of industrial policy, sensible protectionist measures, and government policies to promote massive reshoring of manufacturing. This doesn’t mean of course that the West would be blind to Third World development at all. But this can be better done by sensible heterodox development economics and international institutions and sharing of technology in a way that doesn’t simply de-industrialise the developed world and export Western jobs to the Third world.

Deduction, Necessary Truth and the Real World

Consider this categorical syllogism:

Major premise: All bachelors are unmarried.

Minor premise: John is a bachelor

Conclusion: Therefore John is unmarried.

If valid and sound, the conclusion has necessary truth.

But that necessary truth is arguably de dicto necessity: a necessity that is a property of the argument being an analytic a priori system, where “John” is merely a hypothetical person who is a bachelor by definition. It follows that even the conclusion must be understood as analytic a priori.

But once we assert “John is a bachelor” of a real and specific person in the world, suddenly something important happens: the minor premise “John is a bachelor” becomes synthetic a posteriori, and can only be proved a posteriori, or by experience, empirical evidence and inductive arguments. The truth of the minor premise therefore becomes contingent, not necessary. It can never have apodictic truth, because there must always be some small doubt about its truth: for example, if John says he is unmarried, then he might be lying or delusional (e.g., perhaps he is mentally ill). If public records say John is unmarried, they may be in error or fraudulent. If John’s friends say he is unmarried, then they may also be mistaken or taken in by John’s lies, and so on.

There is no way to obtain absolute and apodictic truth in propositions known a posteriori.

The consequence of this is that the deduction above only has necessary truth when it is strictly understood as an analytic a priori argument and where the logical necessity is de dicto necessity.

When asserted of a real person, the minor premise and the argument can never be proved in the sense of being absolutely true, because we cannot have apodictic truth about a synthetic a posteriori proposition (the minor premise).

The belief that the syllogism has necessary and absolute truth about any concrete real world person is an illusion that arises by merely assuming the world conforms exactly to the assumptions and requirements of analytic a priori argument: we are using words to abolish uncertainty and effectively imposing an unempirical argument on the real world that can only be known a posteriori. In short, we are conflating (1) the analytic a priori with (2) the synthetic a posteriori, when they are strictly separate.

It has become fashionable in modern analytic philosophy to admit the existence of a second type of necessity: de re necessity. Here it is conceived that the possession of a property y by a certain thing x is logically necessity for it to be identified as a certain kind or type x (a type of essentialist argument).

For example, water is necessarily H₂O: for a thing to be the substance we call water, it must be by necessity have the property of being physically H₂O.

But one can wonder whether this new view that there are necessary a posteriori truths and metaphysical/ontological necessity has gone too far.

Consider the proposition:

Statement 1: water is necessarily H₂O.

Conceived as an analytic a priori statement, it has necessary truth.

But let us consider this statement:

Statement 2: This specific real world sample of water is necessarily H₂O.

Here we face the skeptical challenge and Hume’s problem of induction: how can you be absolutely certain that what you are looking at is water at all? You may have made some error. It might be something that looks like water but is not physically H₂O. Even a scientific analysis of the substance that seems to show that it is chemically H₂O could in theory be mistaken or fraudulent. Or a more elaborate sceptical challenge would be: how can you be absolutely certain that anything you have seen now or in the past that you call water really is H₂O and not some elaborate trick by Descartes’ demon?

Statement 2 above asserted of a real world thing must simply abolish uncertainty by begging the question and assuming all epistemological problems and challenges can be countered, in much the same way that the original syllogism above when asserted as absolutely and necessarily true of any concrete real world person simply abolishes uncertainty and renders the argument analytic a priori.

One could argue, then, that modern metaphysical (essentialist) necessity remains a property of analytic a priori systems.

A Simple Question for Austrian Apriorists

The Austrian school is famous for its apriorist economic method called praxeology. This, in its Misesian form, takes up the notion of Kantian synthetic a priori knowledge and holds that praxeology can arrive at economic theories that describe reality and in an a priori manner with necessary and apodictic truth, so that empirical evidence cannot refute praxeological theories.

A simple question can demonstrate the absurdity of his approach:

Can you sit in an armchair and use deduction from the action axiom to determine how all prices are actually set in real world capitalist economies and with apodictic truth?

The notion that anyone can do this is just ridiculous, and anyone who claims they can would quickly be shown to be deluded and mistaken.

One can no doubt construct abstract analytic a priori models, but those models must be given an empirical hearing and checked against reality to determine whether they do in fact describe the real world.

The point is that the really interesting and important questions about real world market economies can only be determined by hard empirical research and study, not by mere deduction from a few trivial axioms.

For more on Austrian praxeology and its failings, see here.