Free-trade theory is simply liberal market theory, in the traditional sense, extrapolated internationally. And it is axiomatic that markets and trade, both domestic and international, represent the source of all economic wealth and provide the foundation for everybody's livelihood. "Trickle Down" is a dismissive and dangerously misleading characterization of what is in fact a powerful democratizing force. The economic gain, or "profit", that results from rational trade provides both the incentive for hiring workers and the financial raw material for capital re-investment. It thus constitutes the driving force for economic growth, innovation, and job creation. Furthermore, by increasing the abundance and diversity of available goods and services, and by driving down their prices, trade increases everybody's standard of living, even when nominal wages appear "stagnant". The aggregate mass of employee compensation, plus the money applied to necessary re-investment, greatly exceeds the money allowed to "trickle up" towards the self-indulgence of capitalists. Thus the bête noire of traditional leftist outrage remains a bit of a red herring, as it always has been.
That being said, however, something has indeed gone wrong with free trade, and wrong with capitalism itself. The "populists" of both parties, currently hammering away at many of the same nails, are reflecting too much common experience to be lightly dismissed. Keith summarizes the issue as stagnant wages and lost jobs, capturing its essence well enough I suppose, even though there are more dimensions to it, and he ticks off several cogent ideas for addressing it. However, like most of us with our debating hats on, he is approaching the problem from the perspective of the macro-economist, who believes the right mix of macro policy tweaks can always be found to fix any problem. Even when economic logic is sound, macro-tinkering generally fails because of unintended consequences and bad timing. It's my judgment that the economic dysfunction we're experiencing currently has deeper roots anyway, and cannot be addressed so simply.
The fundamental problem, in my view, lies with money itself, and the manner in which the world's central banks, who create it, are using it to control financial markets. Led by the American Fed, central banks, no longer bound by a gold standard or any other basis for the money they create, have learned reflexively to pour liquidity onto every crisis and to use perpetually accommodative monetary policy to sustain financial asset values that are already too high and supposed to go on rising steadily. This chronically sloppy policy is characterized by zero or near-zero short-term interest rates, and it's one of the few policy options that tends anymore to enjoy universal support across our warring political factions. Maybe that in itself should be viewed as a red flag. It's its impact, however, while largely hidden, is devastating because it:
- Makes capital cheap relative to labor, causing unemployment and downward pressure on wages
- Leads to over-leveraging in the economy, since debt is cheap
- Incentivizes managers to favor stock buy-backs and uneconomic mergers over productive capital investment
- Leads to financial instability as markets cut loose from their moorings in the real economy
- Devalues hard work and entrepreneurship relative to the easy-money pursuits of financial engineering
- Aggravates wealth disparities in society as easy wealth compounds easily
- Increases political pressure for bigger and more intrusive government as the deus-ex-machina necessary to fix all of the above, exposing us all to a horrible Catch-22 dynamic.
I guess we'll just have to wait and see what happens.