- Carl Menger’s Theory of Institutions and Market Processes - April 13, 2021
- Dangerous Monetary Manipulations and Fiscal Follies - April 6, 2021
- Wars and “Following the Science” are Sure Paths to Tyranny - March 30, 2021
How many bureaucrats are there in the world? The global population currently numbers more than 7.5 billion people. Out of that number it is estimated that the global labor force equals almost 3.5 billion, or a half a billion less than half of all the people on the planet. While it varies very greatly from one country to another, a rough estimate of how many government bureaucrats there are is around 15 percent of the global labor force, or around 525 million people, or about 7 percent of everyone living on the planet.
Now, 525 million people is almost equal to everyone living in the United States, Germany, France, and Spain combined. This is the number of government employees in some way responsible for, supporting, or connected with setting, overseeing, and enforcing all of those laws, regulations, and redistributive policies determining how the remaining 6.9 billion people on this earth shall live and work.
Global Knowledge and the Price System
Almost 75 years ago, the Austrian economist and Nobel laureate Friedrich A. Hayek published one of the most notable economics articles of the 20th century, “The Use of Knowledge in Society” (1945). The gist of his argument is that matching the social system of division of labor is an accompanying division of knowledge; this knowledge encompasses many different and textured forms that are only acquired and fully known and appreciated by the multitudes of individuals each in his own corner of what is now a truly global society.
Hayek went on to ask, If all the knowledge of the world is dispersed among all the minds of all the people in the world, how might we somehow make it accessible and useable so all in society may benefit from what others know? Hayek’s answer was the institutions of competitive free markets and prices freely formed by the interactions of supply and demand.
Through the now-global market-price system, 7.5 billion people are able to convey as buyers and sellers, consumers and producers, savers and investors, what they might be interested in demanding and what they may be able and willing to supply. And the price system does this, as Hayek argued, with the minimum information needed for this multitude of market participants to coordinate their actions.
It has almost become a cliché that if you turn over the label on almost any product sold in the United States, it says “Made in China.” In fact, according to U.S. trade statistics, only about 20 percent of America’s imports come from China. This, of course, remains a significant quantity of goods. An essential question is how those working in the export industries of China know what consumers and manufacturers in America might be interested in buying. And, equally, how can all those in the export industries of the United States know what consumers and producers in China might be interested in buying from them?
A World of Minds at Liberty to Decide and Do
It is neither necessary nor possible for billions of people separated from each other in both time and space to directly communicate for mutually beneficial trades and continuous coordination to take place. Humans talk to each other through the prices of the global marketplace.
What this also means is that everyone participating in this international marketplace must have a wide latitude of individual liberty to use their personal knowledge, which they possess and many others do not. Only through a respect for and practice of such freedom can all the knowledge of the world be effectively utilized to improve the circumstances of the individuals possessing it as well as others who simultaneously gain from its effective use on their behalf in the form of goods or services they would like to acquire.
It is an old adage that two heads are better than one to solve a problem or get something done. If this adage is taken to be generally true, then wouldn’t the knowledge in 7.5 billion heads be better than what is known in the mind of one person, or even in that of the 525 million heads of all the bureaucrats in the world?
The Discovery Process of Global Competition
Another distinct contribution of Hayek’s was to highlight that competition is a “discovery procedure.” If we already knew the outcome of some competitive activity, what would be the point of holding the competition to begin with? It is precisely because we cannot be certain of the outcome before the competition is held that we see the benefit from the rivalry.
It is very easy after the fact to say how obvious or inevitable some result was. But in reality, it is only in the competitive process that individuals are incentivized to imagine, create, and try to achieve goals the full details and significance of which could not have been known ahead of time. History is the story of discoveries of many things not even thought of or considered as possible until an idea entered someone’s head and they had the motive and ability to bring it into existence. (See my article “Three Jeers for Government Regulation.”)
Human liberty is ultimately an end in itself. Which one of us does not want to control and direct their own life according to their own purposes, dreams, and desires, and not be compelled to be the tool for the ends of another?
But liberty is also a great means to many of our ends. The freedom of others is a social good because by each having the liberty to decide and act on their own knowledge, the rest of us can be the beneficiaries of what they know and can do that which we could not for ourselves — or at least not as well and as inexpensively as they can for us. We should, at the same time, value an economic system that encourages the competitive discovery process that enables all to benefit from the ideas that someone may come up with that potentially enrich the lives of many if not all of the billions of people in the world.
Liberty, Trade, and Human Progress
This is the economic basis for individual liberty and freedom of trade as a social policy. For 200 years now, greater freedom of trade has improved the standard of living of the great mass of humanity. It has been raising billions of people out of poverty, widening their opportunities for personal betterment, and bringing the world closer together for mutual improvement not just in terms of globally traded goods and services, but also in terms of culture, science, and societal understanding.
It has not been an even or uninterrupted path. The benefits from free international trade and domestic free enterprise first had a great impact in parts of Western Europe and North America, where policies more respectful of individual rights, private property, and open competition first began to be implemented. But as the 19th century progressed and then the 20th century began, free-market liberalism, even if only partially practiced, positively affected more and more people in other areas of not only Europe but the rest of the world.
There were setbacks from two world wars and the Great Depression in the first half of the 20th century; especially during the interwar years of the 1920s and 1930s, trade was restricted, borders were closed, and a return to greater national self-sufficiency was tried with negative effects for all. But in the wake of the Second World War, governments moved back in the direction of freer international trade, both as a publicly stated goal and as imperfect practice.
Nevertheless, the 75 years since the end of the Second World War in 1945 have slowly but surely seen reduced trade barriers, fewer limits on global business and investment, and even a freer movement of people, if all the contradictions and ups and downs of governmental policies are looked at through the wider perspective of the entire period.
Private Free Trade vs. Government-Managed Trade
There is a fundamental difference, however, between the era of generally free enterprise and free trade before the beginning of the First World War in 1914 and the government-managed-trade period following the Second World War in 1945. That earlier period, especially in the 19th century, was one of fairly limited and narrowly focused government.
A British historian once said that before 1914, an Englishman could go through his entire life and practically never come into contact with the government other than seeing the constable walking his beat on the street of some city and possibly being called for the nuisance of jury duty. This was, no doubt, a great exaggeration, but it did capture the spirit of that earlier time, when government was there to protect people’s individual rights and their free, peaceful actions, and not to restrict or violate them.
In the postwar era, the degree of freedom of trade has been directly under the control of governments participating in international organizations and various other multi- and bilateral agreements among and between nations. Trading rules moved in freer directions to the extent to which governments could reach international arrangements to that effect and could overcome domestic special interest groups wishing to be protected from foreign competition so as to have national markets more to themselves.
The world has been more prosperous, therefore, to the extent of this government-agreed-upon and government-permitted freedom of trade, investment, and human movement among the various nations. The problem is that governments and pressure groups in various countries around the globe have increasingly been turning against the spirit and policies of freer trade and greater openness.
It is sometimes called anti-globalization; other times it is referred to as nationalist populism or racial and cultural xenophobia. Often it is just due to the resistance of domestic groups not wanting to face global competition in product and labor markets in their home countries.
Imports Are the Real Gains From Trade
Let us briefly look at a few of the arguments that are once more being raised against freedom of trade, investment, and migration. One that is heard the loudest right now inside the United States is the old charge that an “unfavorable” balance of trade is harmful to a nation’s economic well-being — that when a country is importing more goods than it exports, it is harmed for the benefit of other nations.
Since the time of Adam Smith, it has been understood that the purpose of trade is to obtain from trading partners those things that you either cannot produce yourself, or not as inexpensively, or not in as good a quality as when produced by others. The reason a person (country) produces goods to sell (export) to others is precisely to have the means to buy (import) from others those goods that are better and less expensive than personal (domestic) production could provide.
Thus, the gains from trade between individuals and nations are the imports obtainable from others by selling goods as exports. The more imports that can be gained for our exports, the greater the net gain from trade. Surely, if you are selling apples and buying shoes, wouldn’t you consider yourself to be better off if for a bushel of apples you were now able to obtain two pairs of shoes instead of only one as in the past? But if this were the case, then you would only have to export a half a bushel of apples now to be able to import the one pair of shoes that you want. Your export of apples would decrease relative to your import of shoes. But few of us would consider ourselves now to be worse off.
The Balance-of-Trade Fallacy
Of course, what is usually pointed out is that Americans may be buying and importing, let us say, $1,000 worth of another country’s goods, while the citizens of that other country reciprocally only purchase $800 of U.S. exports. This is said to represent a $200 loss that America has suffered because of its imports being greater than its exports.
But what else can those foreign earners of dollars do with them? If they do not buy more American finished goods and services, they may decide to directly invest in the U.S. economy. Suppose they did so in the amount of $100. Those dollars would be spent on purchasing or renting land in the United States, hiring a construction company to build a factory somewhere in America, and employing American laborers to work in that factory with machines possibly mostly bought from American manufacturers.
Or those foreign holders of earned dollars might indirectly invest in the U.S. economy by leaving, let’s say, $75 on deposit in an American financial institution to earn interest income. This increases the pool of savings to possibly fund investment activities by Americans inside the United States. Finally, they might go to the foreign exchange market and trade the remaining $25 in their possession for euros to buy European goods that they find more attractive to purchase.
But the person who sells them those euros must want $25 for some purpose, that being to either buy American finished goods, or directly invest in the U.S. economy, or indirectly invest through a savings account in an American bank. When this is all added up, the $1,000 spent by Americans on the foreign-made goods comes back to the U.S. in the same amount in one way or another. At the end of the day, the balance of payments always balances.
The Fallacy of Jobs Lost Through Imports
But doesn’t the buying of foreign goods take jobs away from Americans? Don’t the lost sales suffered by American businesses to their foreign rivals mean those U.S. enterprises lose business and let workers go? It may be the case that some American firms find it difficult or impossible to compete against their rivals in other lands who are more cost-efficient and produce better-quality goods. But let’s think this through.
Suppose that a foreign producer can sell something in the United States for $10 compared to the $20 that his American competitor had been charging to purchase a very similar product. The American consumer now pays $10 for something that used to cost him $20 to buy. That consumer now has the desired product, plus $10 left over in his pocket to now purchase something else that previously he could not afford to buy.
That increases the demand for those other goods or services that he hadn’t been able to purchase before. Profits increase in these sectors of the U.S. economy, and enterprises in these parts of the market attempt to expand production to meet the now-greater demand, which invariably means increasing their demand for labor to assist with the increased output.
At the same time, the foreign sellers now earning dollars from their exports to the United States will, as explained earlier, demand American goods up to some dollar amount. This means that exports need to be produced and sold to pay for some or all the imports that have come into the United States from abroad. Export sectors will expand, and more workers will be drawn into this part of the U.S. market.
The upshot is that the composition of the types of jobs, and what workers are producing and where they are employed, may change. But the total number of possible employments is in no way diminished by American consumers purchasing foreign-made goods. If producers in Virginia sell more goods in New Mexico, some workers employed in making the same types of goods in New Mexico may have to move to Oregon or South Carolina to find alternative employments, and they may have to “retool” their labor to match those job opportunities.
But this is part of the process of adjustment to any change in market conditions, the end result of which is that practically all in the society end up being better off through adaptation to the new circumstances of changing supply and demand, whether within the same country or across national borders.
Production Based on What Bureaucrats Know
The hubris of politicians and bureaucrats enters this story when it is presumed that those designing and imposing government policies know how to direct the actions of those billions of citizens of the world; where industries and enterprises are to be located and what types and quantities of goods they will be producing; what types of jobs will be made available, in which locations, and satisfying whose consumer and producer demands; which resources and raw materials will be utilized in making what products with which methods of production; and who will earn what income and in what amount compared to others.
Every such decision by those designing and imposing government policies by necessity preempts the decisions of those billions of people, themselves, as to what to produce, where, with which methods of production, in what quantities, for whose uses, and at what prices and wages.
It does not matter whether these bureaucratic decisions are based on the arrogance of those politically in charge really believing that they know how people should go about these activities better than those people themselves or whether they are motivated by the crasser desire of furthering the material conditions of politically influential special interest groups who are the crony partners of politicians hungry for campaign contributions and votes on election day.
Either way, the economic, social, and cultural life of everyone in society is placed within the straitjacket of what those in government know and consider good or desirable. Innovations and other adaptations to changing circumstances are confined by the restrictions enforced on private enterprises by the bureaucrats in charge; the directions and forms of production are artificially shaped by fiscal penalties and subsidies and by the spider’s web of regulatory restraints.
People’s abilities to discover and pursue ways of improving their own social and material circumstances by improving those of their fellow human beings through free and open trade between nations is hampered if not halted by their respective governments’ actions.
The international meaning of such actions is that they are national in their scope and impact. That is, national economic policies reduce or even sever international ties that have developed as part of the global system of division of labor. And further improvements along these lines are hindered, compared to what might be possible if the system was left to the free, peaceful, and competitive actions and interactions of those 7.5 billion people living in our world.
Freedom to Move as an End and a Means
Nowhere is this more devastating than in the growing barriers to freedom of movement. No doubt this has once again become a highly controversial and emotional topic. If there is any meaning to human liberty as both an end and a means, it is found in the right of individuals to freely and peacefully decide where they wish to live and work.
Concerning freedom as an end in itself, migration highlights the question: do you own yourself, and do you get to direct what you do with your life and where — or are you the property of the state, with the political authorities and their bureaucracies in the various countries of the world determining who may come and go, for what reasons, and for how long? The classical liberals of the 19th century had no doubt that an integral element of human liberty was the freedom to move.
As a means to an end, free migration is another aspect of Hayek’s arguments concerning the division of knowledge and the discovery procedure of competition. Each individual uses his own knowledge in an open and free market society to determine how and for what purposes he shall use his skills, abilities, experiences, and creative ideas in finding that niche in the social system of division of labor that offers the best returns for himself in serving the demands and ends of others through voluntary market exchange and association.
This is no less the case in deciding where to live and work. Market prices provide information and offer incentives for people to locate themselves in the global economy where their best place in the international division of labor suggests they should be.
Migration Always Offers Change
No doubt, the arrival of strangers from other lands introduces different customs, cultures, faiths, and ways of everyday living in already-settled places. But this has been the history of humanity for thousands of years. Humans are migratory creatures, as archeologists, anthropologists, and economic and social historians have been showing in great detail for a long time. Are we to believe that after untold generations over several millennia have generated the current distribution of peoples across the face of the earth, from this day forward it will be more or less frozen in time by governmental decree and by walls built along lines drawn on political maps?
America is the poster child for the idea and ideal of free movement of people. Tens of millions of people came to and settled in the United States. The vast majority of us in America are the descendants of those who “voted with their feet” over the last three centuries or so. And if we go back far enough, this applies no less to Native Americans, whose ancient ancestors crossed the Bering Strait from Siberia to spread out across the North and South American continents.
Those opposing free or freer migration into the United States often argue that too many of those coming from other lands bring with them ideas and beliefs that are alien to the American character and its political and social traditions. The same was said in the 19th century about various waves of different Europeans: they were from undesirable ethnic backgrounds, or practiced the wrong religion, or held subversive political ideas, or brought to America harmful cultural or social traditions and habits that could undermine the youth of the country.
The list is almost endless. But we, modern-day Americans, are the melting-pot product of all those earlier immigrant waves that came to the United States to make a new start, give their children a better chance at life, or escape from various oppressions and persecutions in the “old country” from which they came, and then over a few generations mixed, matched, and intermarried to make today’s “American” — that is, you and me. (See my article “Freedom to Move: Personal Liberty or Government Control,” parts I and II.ar)
More Freedom for Our Smaller World
When the famous French social philosopher Alexis de Tocqueville came to America, it took him over a month to cross the Atlantic Ocean, having left Europe on April 2, 1831, aboard a sailing ship that reached the United States on May 9. Today, it is possible to go halfway around the world by airplane in less than a day.
America’s one major victory in the War of 1812 was the Battle of New Orleans, which was fought on January 8, 1815. The only problem was that when the battle was going on, the war had already been over for two weeks; the peace treaty ending the conflict had been signed in Europe by the United States and Great Britain on December 24, 1814, but news of it had not yet reached this side of the Atlantic. Today, in our modern world of telecommunications and high-speed internet, the news in written, audio, and video forms is transmitted to every corner of the world the moment any notable event happens.
We take for granted the miraculous ability technology has now given us to travel to and communicate with virtually any place on the planet in little or no time. Yet we allow governments and their bureaucracies to use their coercive powers to constrain us from having the full freedom to create, produce, trade, and travel to pursue our mutually beneficial purposes and cooperative plans to peacefully and productively make our lives better.
What the world needs is more personal freedom and economic liberty so we each may be the voluntary means to each other’s ends through the marketplace of ideas, employments, and products as we use our individual knowledge in our shared global society. The 7.5 billion of us should not be handicapped by what those 525 million bureaucrats can know and do.
[Originally Published at AIER]