It was free trade's fault all along

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I’ve been pretty critical of the Eurozone, but actually I am generally an EU-phile, at least in theory. Yes, even as a free trade experiment! The advantage that it might have had, once upon a time, is to put in practice some of the merits of open borders, while retaining some form of representative accountability and regulatory authority over the whole area — rather than what usually happens with free trade agreements, investor protection with more-or-less naked regulatory and labour arbitrage.

Unfortunately, the introduction of the single currency has destroyed this potential, because it turns out that currency flexibility is key to making it work “as intended”. A combination of an inability for currencies in the Eurozone to adjust plus the greater mobility of capital means that it is labour’s share of income that gets clobbered, as evidenced by the form that austerity has taken within the Eurozone. Not to forget, of course, the naked expression of the goal of implementing “labour market flexibility” and the concern about the “downward stickiness of wages”. So in the end it turned out that the single currency functioned as an attack on the possibility of managed free trade and turned the EU into a means to attack European social democracy itself.

It is with this most recent experience in mind that I read this post by Daniel Davies, which essentially traces the origin of the neverending financial crisis, which is quickly settling into a permanent state, to a deliberate policy to reduce labour’s share of income in developed countries.

(I don’t precisely resent dsquared for getting the attention that I didn’t when I wrote up a more strident version of the same story. Back right at the very beginning, in fact.)

This is exactly why I refer to mainstream economics not as a science but as an ideological position (“economism”) — for which I was recently pilloried in some tweety quarters. I don’t mean to sound smug (well, actually I kind of do, tinged with frustration), but I know that when I am pilloried for it, I have been and am basically right.

As Ian Welsh says, “free trade is elites betraying their own populations”. I am in favour of trade. But democratic states must retain the possibility of regulation and must be able to favour domestic producers when the public interest deems it necessary. Otherwise it is nothing other than a strategy to erode the position of workers in developed countries — in a world in which even Chinese labour might be too expensive.

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This page contains a single entry by Mandos published on November 24, 2013 10:19 AM.

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