Thursday, June 29, 2006

Trade As The Engine of Peace

Trade is the engine of peace, not ‘democracy’ or ‘capitalism’. These last two are not incompatible with peace; but they do not automatically cause it. History shows how necessary it is for democratic and capitalist countries to go to war on occasion.

Governments, democratic and otherwise, have the powers and the instruments of war – the first duty, said Smith, of all governments was to protect its citizenry from the depredations of neighbours (some living next door; others across national boundaries).

Hence, I am always wary of enthusiasts lauding the merits of democracy or capitalism for the merits that rightly belong to trade and markets. Clarity in these matters carries credibility, which foggy thinking does not.

Carl J Scram (USA Today 26 June) writes a punchy article along these themes which is broadly correct except in his ascription of the engine for peace being a virtue of democracy and what he calls ‘Smith’s entrepreneurial capitalism’, or the USA, a country with many virtues, of which the US Constitution is one of them.

“Capitalism spreads freedom even as democracy falters”

“How would Presidents George Washington, John Quincy Adams or Thomas Jefferson handle Iraq? Afghanistan? The war on terror? The search for global peace?
One overlooked "founder" offers enduring answers: Adam Smith. Smith published the Wealth of Nations in 1776, the same year the Continental Congress declared American independence. By the time of the Constitutional Convention 11 years later, his ideas had been incorporated into the thinking of the new nation's leaders.

Smith's great revelation was that political freedom would most likely emerge and persist under conditions of economic freedom, what we now call capitalism. Our democratic system as defined in our Constitution incorporated respect for this economic system.

Like Smith's invisible hand in the market, the Framers saw an invisible hand in our politics. They believed that, if allowed to work freely, these hands together would shape America into the land where invention, creativity and entrepreneurial activity would flourish. “
In the two centuries since then, Smith's proposition has served to advance all of civilization. America has become the hope of the oppressed, the "mother of exiles" and the cradle of modern commerce.

Instead, in the 1980s, we returned to our origins and bet on individual entrepreneurs rather than on government bureaucrats. The result has been today's extraordinary economic engine — Smith's entrepreneurial capitalism at work.

If, with our assistance, Adam Smith's entrepreneurial capitalism were to become ubiquitous, the cross-border investment in the success of our brothers and sisters around the world, and theirs in us, would cause people everywhere to see the futility of ancient struggles, whether based on plunder, conquest or theocratic fervor.
In the insight of our invisible founder is the secret for achieving a future of global peace

[Carl J. Schramm is president and CEO of the Ewing Marion Kauffman Foundation, which focuses on advancing entrepreneurial success.]

Note that the ‘invisible hand’ is now metamorphosed into an ‘invisible founder’! OK, it’s only a literary allusion, playing on a worn-out metaphor, and journalism is like that, so I'll leave it.

Markets involve a behaviour known as bargaining (‘Give me that which I want and I will give you this that you want’, Smith, WN I.ii.) It is the voluntary process of bargaining that peaceful relationships are built upon and warlike tendencies are diminished. The economic systems of either partner are less relevant than the action required to realise their traded solutions.

Of course, most large and deep markets today are found in countries with capitalist forms of ownership and democratic forms of accountability. But slide from one to the other as if they are the same. Markets predated capitalism by millennia. Smith, himself, never knew anything about capitalism, an economic system of the century after he had died in 1790 (and its forms changed mightily since the 1870s; even the 1970s).

Markets operate best in conditions of Liberty, said Smith (Lectures in Jurisprudence, 1762-3, Liberty Fund, Indiana).

The six minimal criteria of Liberty are:

1 An independent judiciary holding office for life (and good behaviour)
2 Laws made exclusively by the Legislature, not the Judiciary or the Executive
3 Habeas Corpus to ensure timely due process
4 Juries of the defendant’s peers to hear all the evidence and decide on the verdict
5 The Legislature to have powers of impeachment over the Executive
6 Regular and frequent elections to the Legislature. (Adam Smith's Lost Legacy, 2005)

By modern standards these are modest criteria, but they do not operate in the vast majority of members states of the UN and are continually exposed as a failing at the core of the UN. Even in long-established democracies, including the USA and the UK, they require the most suspicious and searching vigilance to preserve through democratic accountability.

Western foreign policy should be directed at extending markets in all countries, and domestic policy should be directed at extending markets within the capitalist democracies, where the dead hand of state management has a grip on what markets can do better.

To the extent that Carl Schramm means this, I agree with him (and so would Adam Smith).


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