Key Points
- John Maynard Keynes saw many economic problems with trade liberalization and persistent trade imbalances, especially regarding employment and national economic growth.
- Other famous economists of the 20th century such as Paul Samuelson and Joan Robinson also recognized how unfettered trade liberalization can harm workers in developed countries and how tariffs can boost employment.
- Modern day Keynesians such as Paul Krugman and Joseph Stiglitz often criticize tariffs, but concede that trade imbalances can harm employment and GDP.
- Keynes’ support for the use of broad tariffs to boost employment, government revenue, and national prosperity should be recognized and supported by Keynesians today.
Although most modern-day Keynesian economists advocate for unfettered free trade, John Maynard Keynes himself held a skeptical view of trade liberalization. Keynes believed that free trade could exacerbate domestic unemployment and economic imbalances and argued for the use of tariffs and trade protections to safeguard national industries, preserve employment, and promote the balance of trade. He also believed that free trade was not particularly successful at preventing war, and that some isolationism would serve the cause of peace better. Keynes’ position reflects a much more pragmatic approach compared to the more unwavering support for economic internationalism seen among many of his intellectual successors.
Keynes’ Problem with Free Trade
One of Keynes’ major issues with free trade was the employment assumptions of many advocating for the free trade position. As Keynes states it, “free trade assumes that if you throw men out of work in one direction you re-employ them in another. As soon as that link in the chain is broken the whole of the free trade argument breaks down.”
Another way to put this is that the gains from free trade (in the form of higher income for export sectors) can be dwarfed by losses in employment and income for domestic sectors affected by imbalances.
This effect was further explained in the Stolper–Samuelson theorem of international trade by the American economists Wolfgang Stolper and Nobel Prize Winning Economist Paul Samuelson. This theorem stated that free international trade would provide gains for the relatively abundant sector in an economy (skilled labor or capital) and harm the relatively scarce sector in an economy (unskilled labor). For a country like the United States in the 21st century, this materializes through free trade benefiting capital intensive sectors (such as finance and tech) and harming workers in labor intensive sectors (such as manufacturing). Meanwhile, workers in countries with an abundance of cheap labor (such as China, Southeast Asia, Mexico, etc.) benefit.
Even new Keynesians such as Paul Krugman have begun to admit this point. While clinging to the belief that “Cheap imports may make a nation as a whole richer”, Krugman also now admits that “they [cheap imports] can also hurt significant numbers of workers.” Krugman also adds that “It has also been clear for a long time that trade deficits can be damaging if the economy is persistently depressed, with insufficient demand to produce full employment.”
Keynes’ biggest problem with free trade was the assumption that workers who lose their jobs in manufacturing industries will find better, higher paying jobs in new industries. That widely held economic belief did not allow for the reality that those displaced workers were often not re-employed at all.
Keynes Knew Tariffs Can Boost Domestic Production and Employment
As Great Britain (and the rest of the world) faced major employment and economic issues during the Great Depression, one solution proposed by John Maynard Keynes to boost employment was tariffs.
In a 1931 essay, Keynes argued for “import duties of 15 per cent on all manufactured and semi-manufactured goods without exception, and of 5 percent on all foodstuffs and certain raw materials, whilst other raw materials would be exempt.”
The explicit goal of these tariffs (as is the goal of tariffs today) is to not only increase revenue, but also increase the use of domestically manufactured goods, boosting the country’s production and employment. As Keynes puts it, “In so far as it [tariff policy] leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country.”
Keynes also understood how the modern world economy was much different than the simpler world economy of classical free trade economics. Absolute and comparative advantage were novel ideas in David Ricardo’s world of making cloth and wine in England vs. Portugal, but it is a misleading oversimplification in today’s economy. In today’s world dominated by continuously advancing technology and large-scale manufacturing facilities, Keynes found that, “Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency.”
Moreover, Keynes also saw no major impact of such a tariff policy on prices or inflation. Regarding his tariff proposal, Keynes states, “I am prepared to maintain that the effect of such duties on the cost of living would be insignificant—no greater than the existing fluctuation between one month and another.”
Other respected Keynesian economists of the 20th century agreed with Keynes’ findings on trade. British economist Joan Robinson argued in 1937 that “For any one country an increase in the balance of trade is equivalent to an increase in investment and normally leads (given the level of home investment) to an increase in employment.” And according to Robinson, “The principal devices by which the balance of trade can be increased are (1) exchange depreciation, (2) reductions in wages (which may take the form of increasing hours of work at the same weekly wage), (3) subsidies to exports and (4) restriction of imports by means of tariffs and quotas. To borrow a trope from Mr. D. H. Robertson, there are four suits in the pack, and a trick can be taken by playing a higher card out of any suit.”
The takeaway for the U.S. economy in the 21st century is clear. Given that annual imports are $1 trillion more than exports, and unless we are willing to lower U.S. wages, our best two cards to play to boost investment, production, employment, and income are tariffs/quotas and exchange rate management.
Balance of Trade
The core of Keynes’ problem with free trade is the devastating consequences of trade imbalances that it can bring about (as is the current case in the United States with a $1 trillion annual trade deficit).In a 1933 article entitled ‘National Self-Sufficiency’, Keynes outlines how “economic internationalism embracing the free movement of capital and of loanable funds as well as of traded goods may condemn this country for a generation to come to a much lower degree of material prosperity than could be attained under a different system.”
Most Keynesians today unfortunately reject any criticism of free trade and further claim that trade imbalances are not a concern. Their views are more akin to the Classical Economists of Keynes day who believed in the utopian perfection of global market forces and were threatened by his ideas.
A few New Keynesians, however, such as Joseph Stiglitz still subscribe to Keynes’ ideas on the balance of trade in essence. Regarding many euro countries, Stiglitz argues that “the fact that these countries are importing more than they are exporting contributes to their weak economies” adding that with a better balance of trade, “GDP would increase, and unemployment would decrease.” However Stiglitz, Krugman, and many other modern Keynesians fail to go further and propose the broad tariffs and exchange rate management solutions as Keynes did.
Keynes knew that the balance of trade is a substantial issue for both the world economy and especially for deficit countries. And that the root of the “beggar thy neighbor” problem primarily lies with trade surplus countries. Despite contemporary criticism for unfettered free traders, Keynes advocated strongly for a mechanism in the Bretton Woods negotiations to prevent imbalances from occurring. However, his proposals in that regard failed to be included in the final agreement.
Stiglitz put it this way, “Keynes believed it was surplus countries, far more than those in deficit, that posed a threat to global prosperity; he went so far as to advocate a tax on surplus countries.” Unfortunately Stiglitz has criticized the Keynesian use of tariffs to fix the problem.
Conclusion
Despite the current (albeit slipping) support among many mainstream Keynesian economists for unfettered free trade, John Maynard Keynes himself did not support this view. Keynes realized the dangers of how free trade can create substantial trade imbalances, harm domestic employment, and reduce national growth. Keynes also recognized how broad tariffs could correct this problem through increasing domestic production and employment, while having little to no impact on inflation and prices.
Even though it is not possible (or advisable) to reverse all aspects of globalization, the economic globalization of trade is certainly reversable and would hold substantial benefits for American workers and manufacturing. As John Maynard Keynes said, “I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, science, hospitality, travel these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.”
To read the article as it was published on the Coalition For A Prosperous America webpage, click here.