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Ethics, Economics and Free Trade

by John B. Cobb, Jr.

John B. Cobb, Jr., Ph.D. is Professor of Theology Emeritus at the Claremont School of Theology, Claremont, California, and Co-Director of the Center for Process Studies there. His many books currently in print include: Reclaiming the Church (1997); with Herman Daly, For the Common Good; Becoming a Thinking Christian (1993); Sustainability (1992); Can Christ Become Good News Again? (1991); ed. with Christopher Ives, The Emptying God: a Buddhist-Jewish-Christian Conversation (1990); with Charles Birch, The Liberation of Life; and with David Griffin, Process Theology: An Introductory Exposition (1977). He is a retired minister in the United Methodist Church. His email address is cobbj@cgu.edu.. The following paper was written in August, 1990.


Issues of profound ethical import are sometimes put before us as technical economic policies. This is true today with respect to the Uruguay Round proposals for revision of the General Agreement on Tariffs and Trade. They are presented as an extension of free trade, a principle that we have been taught to honor from our childhood. But if fully implemented these proposals will profoundly affect hundreds of millions of lives.

What we read about these discussions does suggest that there are ethical issues involved. The obstacles that the new proposals face are depicted as the expression of narrow vision and corrupt self-interest on the part of small groups who are willing to risk the wellbeing of the whole for the sake of retaining the unjust advantages they now enjoy. It is assumed in almost all the published reports that the wellbeing of the whole will be advanced by extending the scope of free trade. Since this is what the Uruguay Round proposals do, they are affirmed as evidently good. Hence it is the moral responsibility of governments to accept these proposals rather than to heed the protests of those special interests who will be harmed by their implementation.

Even if the issue really were as depicted, that is, the wellbeing of the many versus that of the few, there would be reason for ethicists to examine matters with some care. The suffering of a few million people is not to be taken lightly. For example, the wiping out of the European family farmers, the only people who have thus far protested effectively against the proposed agreement, is surely a social change of such a scope that it should not be treated as a minor loss. Nevertheless, if the issue is as depicted, ethicists will be inclined to support the proposals along with finding ways to ease the adjustment of the family farmers into urban life.

But before such a decision is made, ethicists should look further into what is proposed and into its probable effects. For example, the Uruguay Round proposals include the removal of restrictions on investment and services in the Third World. Currently many countries try to ensure that foreign investment work with local capital in ways that help to build up the economy of the country. Many have regulations that assist the enterprises of their own citizens, especially in the service sector (banks, and insurance companies, for example), to compete with multinational corporations. The new proposals forbid all of these practices, thus insuring that the service sector of Third World economies, like the industrial sector, will be owned and managed by foreigners whose only professional interest is corporate profit. Similarly, a Third World country will not be able to protect its natural resources from international market forces. Any country that fails to abide by these agreements will find its markets closed to its exports.

The negative effects of the proposals extend to the areas of health and environment. For example, the United States now prohibits the use of certain poisons in the production of food. It can also refuse to import food produced with those poisons. Under the new rules it could refuse to import such foods only if a small committee in Rome, noted for its very low standards in such matters, declares the food a hazard to health.

Examples such as these give us a clearer picture of what free trade means. It means that governments can no loner steer economic development within their boundaries. Such development is to be determined by the global market. Capital will flow around the world to those places where it can be most profitably invested. Goods will be sold to the highest bidder. All other considerations will be drastically subordinated. Free trade means also that governments cannot set standards for health and the environment above those of the rest of the world. Otherwise local producers must compete with others who are not regulated in these ways.

As the negative consequences of free trade become more evident, ethicists can begin to ask more critical questions. What does "free trade" really mean? What are its positive values? Are these so important as to justify support despite the losses it entails?

"Free trade" is trade between firms that is free from regulation or interference by governments. Generally the term is used when the trade crosses national boundaries. "Free trade" means that goods, services, and capital can flow across national boundaries as easily as they flow within a single country. Today, concretely, it means that transnational corporations can invest freely where they will and for what purposes they will and that governments give up the right to regulate them. "Free trade" is the means whereby the most important decisions about human welfare are shifted from the political sector to the market, and that means to the major players within the market.

The first step in the argument for free trade is, therefore, the argument for the market economy. History has frequently demonstrated that efforts to guide the economy by bureaucratic decisions break down in inefficiency and delay even if they do not become blatantly corrupt. The collapse of the Eastern European economies has confirmed this lesson in a decisive and unforgettable way. It seems that only the market can make the requisite decisions for the efficient use of resources that leads to an adequate supply of the desired goods.

The second step in the argument is that the larger the market the better. This is based on the evidence that a larger market allows for greater specialization, and specialization makes possible greater efficiency in production. This means that the larger the market the more efficiently capital will be invested and the greater the resultant gross product. The global market toward which the Uruguay Round proposals move us will assure the most rapid possible growth in Gross World Product.

This argument is valid as far as it goes. If the proper goal of policy is to increase total production, then the extension of markets free from governmental interference should be consistently supported. But ethicists must ask whether this goal of increasing the gross product should override all other goals. Among the goals overridden, as illustrated above, are those of the social ideal of the family farm, the desire of Third World peoples to participate in the control of their own destiny, and the right of people to set standards for their own health and environment. Should all of these goals be subordinated to that of increasing gross product?

The ethical argument for a positive answer is that, speaking globally, there is still a woeful shortage of goods, even of necessities. There are hundreds of millions of people living in abject poverty. The global population continues to grow rapidly. Unless gross product grows more rapidly than population, there will not be enough to meet human needs in the future. Those of us whose basic needs and more are comfortably met have no right to place secondary considerations above these primary ones.

But there is a strong counter argument as well. When market forces are not directed by political concern for the poor, they increase the gap between the rich and the poor. Indeed, the poor often become poorer and more numerous. In a global market without political control, the rich nations grow richer and the poor, poorer. The same is true within each nation. What is advocated as free trade involves the removal of political influence from the market. It will not improve the lot of the poor.

Defenders of free trade or the expansion of market size may acknowledge that the market tends to increase the gap between rich and poor. But they argue that it is not the case that the poor become poorer in absolute terms. Instead, even if they benefit less from the increased production than do the rich, they still benefit. As the pie enlarges, even if their share is smaller as a percentage of the whole, it is still larger in absolute terms.

An example will help to clarify the relative strengths of these arguments for and against free trade. Consider what is happening in the United States and Mexico. As trade becomes freer between the two nations, more and more U.S. companies relocate across the Rio Grande where wages are much lower and there are fewer governmental regulations in the interest of health and environment. They then sell their products in the U.S. market, pricing them lower than domestic producers.

This movement of capital out of the United States has a negative effect on wages here. On the other hand, the wages paid to Mexican workers, while very low by our standards are fairly good by theirs, and U. S. capital does employ persons who might otherwise have no job at all. In the long run free trade between the United States and Mexico will tend to equalize wages in the two countries. It can be argued that this is a movement toward global justice.

How is that to be evaluated ethically? Obviously, this involves enormous hardship for U.S. workers. But is this suffering compensated by the gains of Mexican labor? If Mexican labor could be expected to rise toward First World standards, then ethicists might judge that they should support this development and seek to ameliorate the hardship of the labor force in this country.

Let us assume that increasing U.S. investment in Mexico will benefit Mexican labor. The question is, how much? The answer to this question is discouraging. Mexican labor is so abundant, that the movement of more factories south of the border is unlikely to raise Mexican wages above subsistence. This is especially true in a time when technology is continuously reducing the amount of labor required in production. If, in spite of these factors, Mexican wages did begin to rise significantly, the market forces that moved capital to Mexico would move it elsewhere. Thus the rapid decline in the standard of living of U.S. workers will not be compensated by a significant rise in the standard of living of Mexican workers.

Of course, the situation for investors is different. As they are free to seek more profitable investments elsewhere, and as labor costs and governmental restrictions decline at home, their income will rise. In this way the gap between the rich and the poor will grow wider.

Is the increase of Gross World Product the ethical end of policy even though it is accompanied by widening gaps between the rich and the poor? Will it in the end allow for the employment of more people and thus the reduction of utter destitution? Since bureaucratic management of the economy has demonstrated its incapacity, is there really any alternative to pressing forward to a free global market?

This last question is the most poignant and the most urgent for persons who are ethically sensitive. If there is no defensible alternative to a single global market, then ethicists must support this goal while seeking to ameliorate the consequences. Since such amelioration can hardly occur unless there is a political body that has authority throughout the market, those who are ethically concerned will devote their energies to generating stronger international institutions. Since the ethical reason for wanting such governmental authorities is that they may be ameliorate the suffering of the victims of the market, these institutions must be responsive to those who suffer and to those who are concerned for them. Some way must be devised for the expression of these human interests in the selection of the leaders of global organizations. Overall, the move must be toward world government.

If we accept the globalization of the economy, then we must work for globalization of political authority as well. Otherwise we abandon all possibility of ethical influence on those decisions that will be most determinative of human wellbeing. But a question arises here. If we develop a world government for the sake of those who suffer from market forces, would be any way of preventing such authority from coming under the control of precisely those economic interests it would be instituted to monitor? This control of political decisions by economic interests is already a serious problem at the national level. The global level is so remote from ordinary citizens that competition for influence with multinational corporations is unlikely to succeed.

If it is ethically unacceptable to have the world controlled by transnational corporations alone, and if we cannot trust global political authority to represent the interests of ordinary citizens, ethicists are under pressure to devise alternative images of a desirable future. This can be done by focusing on the second of the two steps given above as the argument for free trade. There it was argued that the larger the market the better. The argument is based on the assumption that the greater the increase of gross product the better. But it has already been shown that that argument is weak. The increase of gross product is commonly not associated with improvement in the welfare of the poor. And it is not clear that the increase of the wealth of the rich justifies the many negative consequences already noted as accompanying the extension of the market.

There is another important objection against working primarily for the increase of total production. There is a close connection between growth of this kind and resource exhaustion on the one side and pollution on the other. In general, the more rapid the growth, the faster the exhaustion of resources and the greater the pollution. The qualification "in general" is needed, since there can be carefully directed growth that does not have these effects. But it is just this kind of careful directing of growth by governmental regulations that is excluded by the extension of the free market. The growth engendered by global free trade will be the kind that exhausts resources and pollutes the environment.

The implication of what has been said is that growth of gross product is not necessarily improvement of human welfare. This can be stated more strongly. Per capita gross product is not even a measure of economic welfare. Even the most orthodox economists agree, although both they and government officials often neglect this point in their public communications. Recognizing the difference between gross product and economic welfare, some have developed measures of economic welfare and applied them to the economy of the United States. The results have shown, with some consistency, that welfare has not grown proportionately to per capita GNP in recent decades. Indeed, it seems apparent that growth of GNP can be accompanied by declining economic welfare, especially when the welfare considered is sustainable welfare. (My own participation in the development of such a measure, primarily worked out by Clifford Cobb, can be found in the appendix of For the Common Good, by Herman Daly and myself.) Ethicists should work for policies that enhance human welfare in general and for an economy that enhances economic welfare.

If increase in gross product is not the ethical goal, then there is no ethical reason to increase the size of markets. It is clear that some groups, especially those who live from the investment of capital, will gain by increasing the size of markets and that labor now living above the global subsistence level will lose. All will suffer through the decline in health and environmental protection, the exhaustion of resources, and the pollution of the environment. The ability of people to participate in making the decisions that shape their lives will decline. Ethical considerations, far from supporting free trade, as is still generally supposed, count strongly against it.

The alternative to free trade is a system of relatively self-sufficient markets in relatively small regions. In each of these regions the community can organize to express its concern for all its members through political and social institutions. There would be a market economy rather than central planning, but the community would establish rules, applied equally to all the players in the market, designed to support the public good in health, environmental wellbeing, and the conditions of labor. Those who played by these rules would not be forced to compete with other producers who played by less demanding rules in other markets. Of course, the market would need to be large enough to insure competition in as many types of business as possible. Where that is not possible, business would be closely regulated or even owned by the community. The ability of ordinary people to participate in important decisions at this level is incomparably greater than their ability to participate in global government.

In a world like this there could be trade that is in fact much freer than what is now called free trade. Today free trade means the freedom of multinationals from governmental interference. The effect on people everywhere is to make them dependent for their very existence on a trade whose terms are set by others. They are not free not to trade and hence must trade on whatever terms are imposed on them. In the scenario here proposed, each community would be free to trade or not to trade as it chose. It could survive without trade. Therefore, it would trade only when the terms of trade were advantageous to it.

Since there are many issues that cannot be dealt with at the local level, these relatively self-sufficient communities would organize themselves into communities of communities, and these into communities of communities of communities up to the global level. No local community should be free to export its pollution to others or to exclude minority groups from participation in its own life. Communities of communities would require considerable power in order to enforce such rules. More power is needed at the global level, for example, to enforce decisions of the World Court and of the United Nations. The goal is not a return to political isolationism. But the ideal is that free people would participate in shaping the conditions within which free markets operate, and that they freely determine when trade is advantageous to them. Political institutions should retain power over economic ones even if they choose to give free reign to market forces within the community. In such a world, communities could measure their economic wellbeing by whether the basic needs of all citizens are met rather than by the growth of their product. That is a far more ethical approach.

I have approached the topic of ethics and economics above by an example rather than in a more abstract and theoretical way. I have done this because I believe that ethics loses significance when it is not engaged with the urgent issues of the day. However, no example of ethical engagement with economics touches on all the important topics that are properly involved in their interaction. I will conclude with a few more abstract comments.

1. Although there are features of economic theory that are "purely" scientific and value neutral, they are embedded in a wider context that is loaded with value judgments. The one that has played the largest role in the discussion above is that increased production is inherently desirable. A second, also involved in the discussion above, is that economics as economics does not judge some forms of production and consumption preferable to others. It does not matter for economics as now understood whether what is produced meets the desires of the rich for luxuries or the needs of the poor for survival. Economists believe that their "value neutrality" requires them to take this position, but it has the effect of encouraging market operations that increase inequality, and of discouraging public policies aimed at meeting basic needs. Similarly, it does not matter whether what is produced is in fact good for the consumer. Economists call for "consumer sovereignty." The relative value of tobacco and spinach is decided by market prices, not by their respective contributions to health. Ethicists are likely to bring other considerations to bear.

2. Consumption of goods and services is treated as the primary good to the exclusion of the positive values of community life. The application of the theory that is guided by this value system has the consistent effect of destroying the community it does not value. This is manifest in what has happened to rural America in the past four decades. It is also manifest in the numerous factory closings that have removed the economic base of hundreds of urban communities and broken the back of the American labor movement. The argument against free trade above is made in the name of community against undifferentiated consumption of goods and services as the sole end of economic activity.

3. The application of market principles to society requires the rapid mobility of both capital and labor. This makes the maintenance of stable communities impossible. The absence of stable communities makes it difficult to transmit adult values to youth who are then chiefly formed by an ever changing youth culture. The educational system that is supposed to provide the "human capital" needed by the market inevitably deteriorates despite increasing expenditures on schools. Without a strong influence of stable community on youth and without community support of schools, many youth graduate from high school without basic skills and without habits of disciplined work. In this way the economy undercuts itself.

4. The view of rationality in economics is unethical. Rationality is identified with self-interest. Concern for fairness and for upbuilding community is not viewed as rational within the system. The result is that the more people are affected by the study of dominant forms of economic theory, the less they are likely to be interested in fairness, in community wellbeing, and even in honesty. Unfortunately, an increasing portion of the business community has been socialized into thinking in economic ways. This also weakens the market, which depends for its healthy functioning on the integrity of the players. As individuals are increasingly persuaded that rationality consists in private self-interest, the firms that employ them suffer as well.

The time is long past when ethicists could take economic theory as a given and deal only with the secondary questions raised by its application. Ameliorating the negative effects of the system that expresses the values built into the theory does not suffice. Ethicists should challenge these values and work with economists in reconstructing the theory itself.


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