Freeman

ARTICLE

The Forgotten Consumer

Both opponents and proponents of free trade ignore its effect on the consumer.

MARCH 01, 1993 by ERIC BANFIELD

Eric-Charles Banfield is owner of Banfield Analytical Services in Westmont, Ill.

Frequently, both sides in an argument are wrong. When looking at free trade and free-market issues, both opponents and proponents invariably focus only on the producer side—how many jobs will directly be created or lost—and both sides completely ignore the effect on the consumer and his role in economic growth. With a poor understanding of the market process, both sides make false arguments.

Last year former U.S. trade representative Carla Hills debated Senator Don Riegle about the potential effects on jobs of the North American Free Trade Agreement (NAFTA). In committee testimony and on business news shows, Senator Riegle said Americans in several industries would lose jobs to Mexico (and Canada), and that only bankers and other financial-sector employees would gain. Ms. Hills countered that U.S. firms in many sectors would be able to sell more goods and services in Mexico and Canada, and that means more jobs for Americans.

Framed that way, the issue seemed one of netting out the “gainers” and “losers,” all in terms of “how many jobs.” The debate degenerated into a “sector analysis,” with Hills and Riegle sounding like stockbrokers arguing over which industries to invest in. Worse, Hills fell into Riegle’s trap: Neither debater ever used the word “consumer,” the real reason for free trade.

The misguided “jobs” focus hits close to home, too. Wal-Mart founder Sam Walton’s death led many to eulogize his great business achievements. But many in small U.S. towns and even some urban areas reacted critically, saying the emergence of Wal-Mart stores, with their low prices and good selections, drove their local but expensive mom-and-pop stores to ruin. The issue to them was “jobs.” Again, no one mentioned the consumer.

In both cases, debaters (and the media airing their views) made the same mistake: looking at free trade and free markets as primarily a jobs issue, and completely ignoring the consumer issue: That trade means competition and lower prices for consumers, and that helps economies. In economic terms, they focused on the possible loss in “producer surplus” and ignored the certain gain in “consumer surplus.”

 

If Not for Jobs, Then Why Free Trade?

Freer trade creates tremendous economic benefits. A bottom-up process, it diffuses its effects across all markets and at all stages of production. Lower tariffs and increased competition reduce prices to consumers, enabling more people to enjoy the benefits of goods and services at prices lower than they were willing to pay before, and in greater quantity. That increased consumer surplus means either:

(1) more money available in people’s budgets to buy an additional quantity of goods and services, adding to demand and growth; or

(2) more money to save, adding to investment and capital formation; or

(3) higher-quality goods at the same price and in the same quantity.

Those direct, primary benefits, valuable in their own right, should be sufficient to make the case for free trade, regardless of jobs.

If jobs are still at issue, then the free-trade case is yet stronger. Those three consumer benefits mean:

(1) greater demand for goods and services from producers and suppliers, which creates jobs;

(2) more credit and capital for new ventures, which creates jobs; and

(3) a higher standard of living, which certainly can’t hurt jobs.

Yet both opponents and proponents obscure the solid demand-side case for free trade by emphasizing employment, a secondary consideration.

 

Creative Destruction

In the perpetual motion of economic change, jobs are constantly destroyed and created. A freer level of trade, especially if brought about suddenly, will no doubt destroy some jobs in some sectors, but will create jobs in probably every sector of the economy.

Politically, that’s the trap. As Frederic Bastiat said in 1848, “there’s what you see and what you don’t see.” Observers will be able to see fairly clearly which jobs are destroyed by competition from cheaper suppliers. They’ll find it much harder to identify, on the other hand, which jobs have been created by the diffuse benefits that accrue to consumers.

An auto or textile plant can lay off workers, and cameras can capture that on the evening news. But who will notice that increased consumer demand and capital availability will cause thousands of small businesses to start? Politicians won’t be able to point to a new job and say “free trade created that job,” but they can point to a layoff at a textile plant and say “free trade destroyed that job.” That’s why “jobilism” is such a common campaign tactic.

 

Try Some Real Populism

But if people want to use populism to bolster their case for or against free trade, why appeal to employment? Better to appeal to consumers: Everyone is a consumer. Everyone will save money from lower tariffs and increased competition. What could be more “popular” than that?

But even alleged supporters of free markets fail to make the proper appeal to consumers, letting the opponents set the parameters for the discussion. That could cost them the debate. Unfortunately, if they fail to make the proper ease for free trade, it is consumers who will face the greatest cost, quite literally.

ASSOCIATED ISSUE

March 1993

ABOUT

ERIC BANFIELD

Mr. Banfield is owner of Banfield Analytical Services in Westmont, Illinois. As an adjunct policy analyst for the Heartland Institute, he has testified before the National Association of Insurance Commissioners, The Illinois General Assembly, and a U.S. Republican Hearing on health-care reform.

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