The recent uproar over the cross-strait service trade pact was born not only of public anger over the non-transparent way in which it was negotiated, nor simply of the way it went counter to accepted procedure in modern democratic politics: It was also exacerbated by the fears of those in individual sectors of the economy. This was because of the complex nature of the economic impact that the agreement may have, far more complicated than current economic theoretical models would be able to predict.
The government commissioned the Chung-Hua Institution for Economic Research to compile a report using economic model projections for this impact. The science behind the report was full of holes, but, interestingly, that has not meant that the general public, the opposition parties or economists have started thinking harder about the theoretical basis of free trade.
Instead, it has even caused opposition-ruled local governments to give strong support to the free economic pilot zones policy, which is based on the same theoretical foundations as the service trade pact and whose impact may be just as far-reaching.
Fundamentally, this emphasis on free trade is due to the concept having become part of the intellectual hegemony — what the elite defines as legitimate knowledge — in society and in academia in this country, and this has ossified the debate and blinded economists to where theory and reality deviate. It reminds us of the fascinating economic exchanges in the press between former Academia Sinica researcher Chiang Shuo-chieh (蔣碩傑) and former Control Yuan president Wang Tso-jung (王作榮) in 1981. Their debate was about how to deal with contemporary — to them — issues such as the oil crisis, inflation and the slowdown in economic growth, and at the very least showed that economists in Taiwan at the time were engaged in the debate over whether national economic policy should be interventionist or deregulatory.
The intellectual hegemony on free trade comes mainly from comparative advantage theory. As the opportunity costs of producing a given good differ for each country, comparative advantage theory contends that each country should focus on producing goods for which its production costs are relatively low, and then exchange these, via trade, with a second country for another product which that country can produce relatively cheaply, so that each participant in the trade can increase its economic efficiency. Comparative advantage theory is one of the core theories of economics, and has historically proven to be successful many times over in real-world application.
However, times have changed. In addressing the fierce competition in today’s globalized world, it fails to account for the crucial impact of differing technological capabilities on the distribution of benefits within global value chains. Many countries have fallen foul of trade liberalization because of how they have proceeded with deregulation, and how they have forgone their technological autonomy as a result.
Free trade in the world today involves not only goods, but also personnel and finance, and their free movement across national borders, increasing the magnetic pull of large economies. It is especially important for relatively small economies, such as Taiwan’s, to possess technological advantages, as well as economic and trade independence, if they are to resist this magnetic pull. It is not just a case of simply ratcheting up trade liberalization.
Therefore, comparative advantage and free trade are merely starting points from which to approach the needs of complex economies, and they are just a couple of individual economic tools among many. Their effectiveness depends on the specific political and social conditions of a given country, and its stage of economic development.
Unfortunately, free trade is all too often simply a weapon that politicians and bureaucrats routinely brandish against the public. The politicians and the suits spout this type of superficially intellectual academic bunkum because it is in their interests to do so, but such ideas are also responsible for consigning manufacturing in Taiwan to long-term decline in which it has to resort to mass producing low-cost goods, unable to return to an economic policy promoting innovation.
In point of fact, the harm dealt to human society by narrow economic theories is not unrelated to the intellectual hegemonies consolidated by the natural sciences’ narrow intellectual arrogance and formidable technological might in the 20th century.
Now that the world of the natural sciences has already started to seriously question the fallacy of its own intellectual hegemony, we hope that mainstream economists can re-evaluate the limits of applying an instrumental rationalist approach to validating free-market theories.
In his book The Road to Serfdom, Austrian economist and philosopher Friedrich Hayek, a proponent of free trade, wrote of the positive values of capitalism, in reference to the suppression of political freedoms under socialism. Indeed, the rejection of socialism in the Eastern Bloc lent credence to his ideas.
However, if Hayek were to see the wealth disparity and social injustice, as well as the suppression of personal freedoms and individual values, that exist in the world today as a result of the economic policies being used, with the excessive deregulation and liberalization of trade, he might change his view. He might write that the free market, controlled by capitalist monopoly groups, is, in fact, the “road to serfdom.”
Excessive economic liberalization not only veers away from the original spirit of the capitalism of which Hayek wrote, it is also detrimental to one of the highest values of modern democracies, that the citizen is free.
Lin Minn-tsong is a professor of physics at National Taiwan University. Wu Chi-jen is a postdoctoral research fellow at the university’s Center for Public Policy and Law.
Translated by Paul Cooper