Elitism and the Rules-Based Global Trading System

In Globalists, Quinn Slobodian examines the relationship between the Austrian School of economics, influential in the first half of the 20th century, and the rules for the global economy. Members of the School opposed the Havana Charter.

The Austrian School was not monolithic. Its members variously supported pure laissez-faire, government intervention in the marketplace, and support for a social safety net. Slobodian focuses on identifying what he refers to as a "globalist" dimension of the School. He associates this dimension with aristocratic members such as Ludwig von Mises and Friedrich von Hayek.

The gist of this view will sound familiar to students of trade: economic policy must be shielded from the political demands of "special interests." Slobodian teases out the relationship between this line of thinking and concerns among some Austrian School members about democracy and decolonization - that is, concerns that popular demand under majority rule forces nation-states to adopt suboptimal economic policies. A set of rules at the global level could mute those influences and set out a framework for reconstituting benefits associated with pre-war (imperial) globalization.

The idea that an international economic institution can have a tempering effect on domestic policy persists today. An American law professor, reflecting a commonly-held position, hailed the WTO dispute settlement system, "functioning properly," for its ability to insulate trade policy from domestic political influence.

Capital First

Von Hayek created the Mont Pèlerin Society on Lake Geneva in 1947 just as international negotiators were building a new multilateral trading system. By 1948 the United States and more than 50 other countries had successfully negotiated the Havana Charter. Members of the Society objected to the Charter, in part because they felt it provided too much leeway for state planning in an era in which Keynesian economics was prevalent.

Slobodian adds a curious link between the Mont Pèlerin Society and the demise of the Charter in the United States. Von Mises, a founding member of the Society, had worked for the business community, including the National Association of Manufacturers. He had also represented Austria at meetings of the International Chamber of Commerce. Another Mont Pèlerin member had advised both Bristol Meyers Squibb and the ICC. NAM, Bristol Meyers Squibb, and the ICC all opposed the Charter when it was pending before Congress.

As we know, the Charter indeed failed. “History” blames a know-nothing isolationist Congress, and ignores the opposition of the business community. But the failure of the Charter fundamentally altered the relationship between capital and labor in the global trading system.

Paranoia about State Planning Paved the Way for State Planning

Consistent with the views of the Chicago School in the 1930s, von Hayek argued in favor of competition and against monopolies. To him, 19th century laissez-faire was extreme and dangerous. Exploring an alternative that didn't lead to full-fledged collectivism was one of his goals in founding the Society.

Von Mises, who was particularly hostile to labor rights, was not interested in pursuing a middle ground. As one of the fathers of the Chicago School noted, Von Mises was "an extreme example" of "theorists of extreme laisser faire." Milton Friedman, also a founding member of the Society, would eventually champion the revival of true laissez-faire and reject even the government's role in protecting competition.

As we’ve discussed, the Charter established rules promoting fair competition, including protections against the exploitation of labor. The demise of the Charter ensured that the global trading system reflected von Mises' views.

Charter negotiators tried to explain at the time that by promoting free enterprise – true competition, not laissez-faire -- the Charter protected against the rise of socialism and state trading in the global economic system. In other words, the Charter may have tolerated state planning as a domestic policy tool, but it drew the line at state planning as an anticompetitive trade tool.

Without global rules protecting competition, we are now confronted with the rise of an authoritarian regime that relies heavily on state planning, with a trade policy that is fundamentally anticompetitive in orientation. The global trading system's failure to protect competition has allowed the emerging dominance of the very kind of "collectivist" regime that Mont Pèlerin types - and others - opposed.

More ironic still, even as we speak, countries are scrambling to execute industrial policies -- state planning -- to remedy the supply chain concentration problem facilitated by the global trading system itself.

Thus, defeating the Charter created the very set of rules that made state planning dominance possible - and compels others to respond with state planning of their own.

This is not What FDR, Keynes, or Churchill Imagined

Although the Havana Charter had its roots in the Atlantic Charter, which specifically references labor standards and social security, our global trading regime is not the brainchild of FDR, Churchill, or Keynes. It is not the brainchild of the architects of peace. 

It hews much closer to the views of von Mises, one of the more extreme advocates of laissez-faire, and his intellectual heir, Milton Friedman. It reflects the rights of capital but not the rights of labor. It prioritizes economic rules over democracy. That is the thinking that gives rise to a speech like this in South Africa in 1976.

The WTO sees itself as having fulfilled the vision of the Havana Charter. But where are workers’ rights? Where are protections for competition? As explained here, the WTO takes the laissez-faire model we inherited after the demise of the Havana Charter and turbocharges it. 

There is a reason the Cato Institute and Americans for Prosperity are all-in on defending the WTO Appellate Body. It enforces the world view of Milton Friedman.

The Cognitive Dissonance of Liberals

Even as they recognize the pernicious problem of income inequality, many liberals (in the North American sense of the word) defend this regime. 

After a decades-long policy of offshoring manufacturing jobs, American globalization faced a backlash in the states most adversely affected. Workers vote. As it turns out, you can indeed have a system that shields global economic policy from domestic politics - but instead of ending up with disaffected voters pressing for interventionist policies, you end up with disaffected voters rejecting the system itself.

Today, one liberal remedy for addressing the backlash is to support domestic training programs. For those of us who fought the lonely – and unsuccessful -- battle against cuts to Trade Adjustment Assistance in 2015, we wonder where these champions were when we could have used their help. And so perhaps we can be forgiven for having a bit of skepticism about the depth of this newfound concern for the working class. We might even wonder if it’s a strategy for seeming to acknowledge the harm of the trading model while shielding the model itself from real reform. 

We can have all the happy talk we want about domestic worker training programs, but -- especially as we undertake the onshoring of core manufacturing -- the question remains: if the system continues to permit capital to be diverted to anticompetitive jurisdictions that suppress worker (and environmental) rights, what jobs will be left for workers to train for? Made in China 2025 is just that – Made in China. Not Made in Pennsylvania, or Wisconsin, or Michigan.

Ronald Reagan, who very much appreciated Milton Friedman's views, was the President who launched the negotiations leading to the WTO. Domestic training alone cannot reverse the effects of a system so deeply oriented toward rewarding capital, with trickle down benefits, at best, for labor. As the stock market continues to soar while millions are unemployed, it is also useful to remember that this is the system that made the China Shock possible. The problem is not merely insufficient training. The problem is the structure of the system itself.

Clair Wilcox, one of the American diplomats advocating for the Charter, commented on the limits of any multilateral trading system:

“Where the objectives of domestic stability and international freedom come into conflict, the former will be given priority. ”

The Task Ahead

The philosophy that has dominated economics for decades, both domestically and abroad, has left us fragile and weak. This has to change. But, as former Elizabeth Warren advisor Ganesh Sitaraman explains, solving this problem means we must reevaluate both our domestic and international economic policies, to ensure that they work toward the same goal: resilience.

If we are to succeed in restoring resilience not just for the United States, but more broadly, then liberals must come to grips with the fact that the global trading system more closely reflects the values of von Mises than of Keynes.

The “rules-based system” is a system based on rules that elevate capital over labor and diminish the influence of those who most feel the adverse consequences.

Surely liberals can come up with a system that improves upon the vision of an anti-labor aristocrat unnerved by democracy and decolonization. 

As a matter of fact, they can!

August 27, 2020