Free Trade and Technological Unemployment: A Populist Austro-Libertarian Assessment

What do Bernie Sanders and Donald Trump have in common? The answer is that both point out a real problem of the American middle class (that is, the working class). Trump’s solution is protectionism, Bernie’s is massive welfare. Both are terribly wrongheaded economic policies, but the long-derided, despised and ignored working class have genuine reasons to complain, even from a strictest austro-libertarian perspective. It’s essential for libertarians to understand why this is so and why we can offer something much better.

First, let’s talk about free trade. International trade is sometimes described and treated by economists as just another new technology. China is a magical black box that spits consumer goods in exchange for American stuff like crops, corporate stock and US Treasury bonds. Libertarians are quick to stress the importance of the massive T-bond emission, but that’s only part of the problem.

Let’s ignore monetary policy and treat international trade as barter. Could American workers ever be harmed in a transition from protectionism to free trade? Yes. Could ALL American workers, in principle, be harmed at the same time? YES.

“Hey, wait a minute”, I hear you say, “what about Ricardo’s law of comparative advantage?”. Ricardo assumes, among other things, that labor is the only factor of production. To the extent that, realistically, some capital (ie “means of production”) must be involved, the worker has guaranteed and unrestricted access to it. This is crucial because, while changes in the market may force the worker to switch professions, they can’t force him to increase his productivity beyond his consumption level. For instance, an Amish farmer who owns his land has nothing to fear from technological advances in agriculture (including new trade partners). He may have to switch to different crops, but he can cling to his beloved low-productivity methods. In contrast, if he doesn’t own the land, he must provide a competitive productivity level or else he will be fired and replaced.

Incidentally, as Mises points out in Human Action, something like this happened during the transition from Feudalism to Capitalism, and of course, the public blamed technology and laissez-faire capitalism for destroying the good old feudal order.

Let’s remember feudal England at the start of the agrarian and industrial revolutions. You have an aristocrat who owns the land and a bunch of peasants work it in exchange for a nice share of the crops. It makes sense for both, because the landlord needs labor and the peasants need capital (land). Now, new technology arrives, only one peasant is needed and the rest.. well, let’s say they live on “welfare”, that is, they remain idle and they are given a much smaller ration of crops than before (that’s not what happened, I know).

The UBI, In this context, means that the one working peasant also gets his welfare ration in addition to his “wage”. Fine, but he’s still working for everyone else! Now the socialist would blame capitalism and the Luddite would blame technology, but the libertarian will wonder why this aristocrat owns all the land to begin with. How did he came to own it? probably not by libertarian means. Why didn’t peasants protest before? Because they, in a sense, had “a deal” with the aristocrat. They worked the land and they got food in exchange. So, a “populist” austro-libertarian would either find the original act of dispossession of the peasants and try to give them back their land, or he would argue that the pre-industrial “deal” was a de facto contract, and the aristocrat must buy the peasants off if he only needs one worker now. In any case, the end result would be the peasants taking turns to work the land and eating as much as before, maybe more, by the miracle of technology.

And here’s where many austro-libertarians freak out. On one hand, we can see that a workers’ ownership of his means of production (all else being equal) makes a fundamental difference in terms of income stability which is often underplayed in debates about foreign trade and technological unemployment. On the other hand, we know that economies of scale favor the concentration of capital in sizable factories, as opposed to an array of small self-owned factories. These big factories may be owned by someone other than the workers (the usual capitalist mode of production) or collectively owned by the workers themselves. But there are strong and well-known arguments against the efficiency of worker cooperatives compared to single-owner factories, and few successful cases are observed in practice.

Is there an austro-libertarian argument to reconcile the efficiency of capitalism (i.e., an economy based on wage labor) with the income stability of self-owned means of production? YES!

Let’s go back to our Amish farmer. Let’s say he owns the land and he can produce 10 bags of crops per month. Since he owns the land, all of that is profits and he keeps it. As we said before, his income is not threatened by new technology or changes in the labor market.

Now let’s turn him into a wage worker in a modern economy based on wage labor. Let’s assume banks do their job properly, connecting savings with investments in exchange for a small fee we can ignore in this context. The Amish farmer works the land for 6 bags a month (his wage) and he earns another 4 bags as capital gains from his savings account in the bank. Is his income as stable as before? Is it just as safe from the follies of the market? Yes, here’s why.

Let’s say there’s an influx of cheap labor. Now the average wage for a worker in a crop field of similar size is 3 bags instead of 4, while the average productivity of a worker doing this job stays at 10 bags. Then, the Amish farmer must lower his wage to 3 to stay competitive, but the average capital gains for his savings go up from 6 to 7 (that is, 10 bags minus 3 bags). Therefore, his total income stays at 10 bags.

Now let’s say these workers learn to use more efficient tools, so the average productivity of labor, for a similar piece of land, is now 11 instead of 10. The average wage stays at 3, so the average profit is now 8. The Amish farmer hates modern tools, so instead of adopting them to stay competitive, he lowers his wage again, to 2 bags instead of 3. No problem, because his income is still 10 (8 from capital gains, 2 from his wage). What if, because of further advances in technology, the productivity of land goes up to 13 bags per month, while the average wage stays at 3, and so the average profit is now 10? In this case, he has two options. He can live from his capital gains, without having to work and earning an income of 10 just as before, or he can learn to use these new tools at his own pace and become employable again, with a higher income.

Applied to real-life, present-day America (and other first-world nations), this means that, no matter what happens with international trade and automation, the working class is not doomed to depend on “universal basic income” or any other kind of welfare. What they need is jobs and savings. As technology advances, labor becomes more productive, investment in general becomes more profitable and increasingly more of everyone’s income is capital gains. People work less hours a day, take longer vacations and enjoy a higher standard of living.

And there’s the catch. The tax code, the “experts” and every government policy seem designed to discourage saving and promote consumption and indebtment. Private debt is the the main problem of the American middle class and the American economy in general. After each financial bubble, those “in the know” (i.e., politically connected) make big bucks while the rest see their savings evaporate, while those “too big to fail” are bailed out by government. The housing bubble is a prominent example. In fact, according to a recent paper , the growing share of national income deriving from capital income (as opposed to labor income) may well be imputed to the increase in housing prices.

We should indeed expect growing inequality as a product of free-market capitalism, because some people are smarter, work harder, are thriftier, and therefore accumulate wealth at as faster rate than others, but, as we have shown, the “rat race”, i.e., the constant need to stay competitive and updated in order to even subsist is by no means an intrinsic feature of free-market capitalism in any of its forms. On the contrary, the widespread, simultaneous immiseration of the whole working class, its plunge into debt and financial precariousness, must be the product of some macroeconomic shock, which in turn usually boils down to interventionist government policies.

Some obvious candidates are the housing bubble caused by the Fed,  in combination with mass immigration and restrictions in housing construction, the increase in payroll and excise taxes, welfare spending, corporate bailouts, stimulus packages,  military spending and soaring medical bills. Massive military spending is a uniquely American problem. It’s bad enough for America to police the whole world, she also does it for free. Ron Paul pointed out this problem in a clumsy, self-flagellating style and he was booed off the stage. Donald Trump, with his patriotic alpha-male swag, said basically the same and he was cheered by the crowd. Medical bills are also particularly high in America, in good part because of the the AMA cartel and the “bad deals” between Medicare and big pharma. Also mentioned by Trump, credit where it’s due.

Realistically, once all politically viable spending cuts are made, the next step is to slash all taxes accordingly, leaving only a small wealth-based income tax. That is, the more you are worth, the more you pay in income tax. This would be better than the usual, progressive income tax, because if you start poor and suddenly earn a big income, you don’t start paying a high income tax until you get to have some decent savings. It’s better than a wealth tax proper (as proposed by Thomas Piketty and others) because you don’t risk losing your assets if you have no income for a while.

“A new TAX? Some austro-libertarian proposal!” I hear you say.  Well, then, let’s audit the Fed and see who should pay back what they got from the government and who deserves a tax break. It’s not a perfect plan, but it sure beats Trump’s tariffs and Bernie’s “democratic socialism”. There’s a reason why virtually all economists agree that those are awfully bad ideas. The case against socialism has been abundantly made and there’s no need to beat that dead horse here. Protectionism might conceivably bring back some jobs for a while, but at the expense of destroying much of the aggregate American wealth, and it’s useless against automation anyway. Austro-libertarians should take worker concerns seriously, or else we’ll have a chance to see classical Marxism and economic Luddism in all their former glory.