Good Foundations

Excellent Biblical reference to use as a segue into the foundations of any subject.  There are several books foundational to Economics that immediately come to mind (Marshall’s Principles, The General Theory, The Road to Serfdom, Human Action, etc.), but Smith’s Wealth of Nations is, I think most would agree, the  chief cornerstone of Economics.

You might say the wise economist builds their house on Smith.

I am confident Adam Smith was no anarchist. He calculates far too much from perspective of the British state to be anything of that kind.

Anarchist project, of building a society of strangers, is house on sand, nay house in air, par excellence.

Essence of the state lies in its moral authority which provides the subjects with sufficient shared moral premises.

Arguments can proceed to conclusions only if the parties share premises. Otherwise, only violence resolves the matter. Thus for existence of a civil society, shared moral premises, handed out by a moral authority, is essential.

Mathematics is a useful tool, but if not coupled with foundational economics, the findings are unstable—like building a house upon sand. A mathematical model may look pretty and still fall apart once the situation changes. We see this all the time, especially with pundits like Michael Pettis and Oren Cass who toss out economic foundations and build towering edifices upon sand, only to have them collapse under scrutiny (see, for example, my post “Accounting Identities and Economic Theories” and Brian Albrecht’s post “Curing International Trade Confusion“).

This is not an argument. The populist backlash against free trade globalism did not pop up out of nowhere. There were a few voices in the wilderness back in the early ’90s, like Ross Perot, Sir James Goldsmith, and Edward Luttwak who made some bold predictions about what was going to happen regarding the accession of GATT, Uruguay, NAFTA, WTO, PNTR. Since there’s now been enough time to assess the results of free trade globalism, it appears their predictions have come true.

In particular, one thing the foundations of economics promised was that there would be net gains from trade. For the USA, that never happened. To be sure, for places like China & perhaps even the ROW as a whole, there were net gains. To be sure, within in the United States, there were some people that benefitted spectacularly from globalism, many more who benefitted modestly in terms of cheaper imported goods. And to be sure, there were many “losers” as a result of free trade globalism. However, we were promised that the gains from trade would be more than enough to compensate the “losers,” if we so desired. Unfortunately, that never happened.

Empirically, in terms of GDP, the predicted win-win supercharging of growth rates due to elimination of trade barriers never happened. If anything, there’s been a statistically significant reduction in U.S. GDP growth rates post-NAFTA/PNTR. This result demands an explanation. To put it another way, economics is faced with the same replication crisis that is plaguing other social sciences. The correct path at this point, then, is to critically examine the “foundations” that have been handed down to us rather than an unquestioning doubling down by continuing to take these “foundations” for granted.