Free Trade: What Could Go Wrong?

Even optimally implemented as it turns out, a lot can go wrong, and has.

In Newsletter 160 of 2022 Mar 05 I wrote:

There are some things about "free market" economics that I don't like: 1) it leads to massive scale and centralization as enablers of efficiency, 2) ever more urbanization comes as night follows day; 3) it leads to long supply chains which are in my experience brittle and anything but economical were it not for fossil fuels; 4) it leads to specialization, from the individual level to the nation-state level; and 5) externalized costs, in other words costs that aren't reflected in price, like environmental degradation in all its forms, water pollution, air pollution, soil erosion, etc. Be that as it may, that's how the world works, which is why I/we have to at least some extent opted out of "the world," that is a trend in our lives that I don't see ending.

The economic principles I am discussing are available in Thomas Sowell’s book Basic Economics, which I highly recommend. So let’s walk through this step by step in a bit more detail.

Number 1: Scale

Scale is a natural outcome of the application free market economics; as we’ve seen and experienced scale up to and including the global level, perhaps in the future even beyond planetary boundaries, as our moon and Mars are already in our sights. Of course what we are after is reduced cost via the obvious “economies of scale,” not to mention taking full advantage of lower labor costs elsewhere. Except as Kirkpatrick Sale points out in his encyclopedic tome Human Scale, it might actually not be so obvious.

It is an article of faith in the industrial world that bigger plants are more successful than smaller ones because the cost per unit goes down as the total number of units goes up. Obviously there is some truth to the idea, and some sizes are more efficient than others. But it is not true, as all business people and most economists believe, that bigger is continually or progressively better, or that Worldwide Widget Conglomerate will be the most successful of all.

At some point as it turns out, economies of scale are generally achieved in modest-sized individual plants, according to Sale. The reason that larger scales are no more economical than the modest-sized individual plants is that diseconomies of scale show up sooner rather than later, in the forms of added bureaucracy, transportation and labor costs, etc., not to mention the dehumanizing effects of the larger plants themselves. And no doubt at the global scale we have achieved, more and larger “externalized costs” are easily identified, and even more easily ignored, as those costs have in large part been offshored to less affluent countries. But we will get to externalized costs a bit later in the conversation.

Number 2: Urbanization

Scale results in centralization of production, which leads inexorably to ever-increasing levels of urbanization, and abandonment of rural landscapes and towns. Admittedly, some level of urbanization is necessary, and even improves lives of inhabitants, but can it be that there is an end to the benefits at some scale, and indeed higher economic, environmental and social costs of urbanization?

Cities of these sizes are unsustainable without extremely large quantities of such things as food and electricity, and in some cases like Los Angeles even water, via extremely long supply chains. And, large concentrations of humans, not unlike animals in a Concentrated Animal Feeding Operation (CAFO), generate huge amounts of wastes of every description. Perhaps we should be thankful, Shanghai’s population was 28.2 million a decade ago. Still, I expect the the benefit-to-cost ratio versus population curve flattens out somewhere in the six figure population range, and is in steep decline in the seven and eight figure population range, forming an upside-down U shape if you will.

Number 3: Long, Brittle Supply Chains

Long supply chains will be the last topic for today. We saw in the first year of Covid the inevitable result of the combination of scale (centralization) and the resulting long supply chains; perhaps the best example of this was the meat supply in general. The biggest companies in the $218.1 billion U.S. meat industry are:

Tyson Foods, $42.2 B

JBS USA $34.9 B

Cargill $20 B

Sysco $17 B

Smithfield Foods $16.6 B

In other words those five companies make up 60% of the meat supply. Shut down Tyson alone and you’ve instantly lost nearly 20% of the supply. Of course we saw processing and supply chain disruptions during 2020, and consequently meat rationing was seen in the stores. And let’s not forget the culling of animals that took place because no one else could handle the processing volume that was taken off line. Not to mention the fact that the processing plants themselves were Covid outbreak “hot spots.” Centralization to this extent does not make for an industry resilient to shock; centralization comes prepackaged with long supply chains, and as for me and my family, we will not rely on such a brittle system for something so important to our very survival as food.

In my next post I will comment on items 4 and 5 on my “don’t like” list of the second and third order effects of “free trade,” Specialization and Externalized Costs.

Free Trade: What Could Go Wrong, Part 2