Localism and free trade

Will asks a few good questions about markets and economies of scale, to which Kevin Carson (among others) provides some very good answers from his own unique, mutualist perspective.

Will asks, “are localism and a free market economy reconcilable?”

This is a good question.  When I began blogging at the League I was on a big localist kick, and walked down the localist/protectionist path about as far as I could before I bumped up against too many inconsistencies in that philosophy to ignore.  Nevertheless, I remain convinced that local politics and strong communities are essential to a prosperous, healthy society, and that decentralization – though not a perfect solution for every problem – remains the best way to avoid amassing too much power into specific regions, entities, or industries.  To my mind, free markets are the best way to ensure this, though the sad fact is that rarely are markets truly free, and so we continually find ourselves in semi-free market situations, with large corporate interests and “too-big-to-fail” players reaping far more benefits from the state than they should.

Nevertheless, I do think localism and free trade are reconcilable, even if we can never feasibly return to the counterfactual Carson imagines – to a world without state-subsidized roads and rail (and so on and so forth).  Government, whether we like it or not, will remain involved in our infrastructure and I doubt that the state has any plans to further disentangle itself from the web of protectionist policies now in place.  The special interests have a pretty tight hold over those policies – whether we’re talking about agribusiness or tire manufacturers or Goldman Sachs.

The German model of artificially preserved local communities is certainly one approach to maintaining the character and charm of German places.  It lines up nicely with some Front Porch ideas and with the Red Tory arguments laid out by anti-liberal, anti-capitalist Phillip Blond.  But there are other ways to ensure local character is preserved.  The Swiss have adopted competitive federalism, which pits Swiss “cantons” against one another (a canton being like a very small state, probably more akin to a US county) by letting each canton determine its own tax policies and state-provided services.  Most taxes in Switzerland are collected at the local level, and most spending policy is determined from the bottom up rather than in our system which is increasingly top-down.  This brings real competition between local governments into the picture.  Local governments compete for citizens and businesses.

And here’s the thing – I’m not against local governments working with businesses to create better towns or a better “sense of place”.  This is where government can and should do the most after all.  So I’m not going to argue against all government involvement.  I would just argue that government should play as non-interventionist a role as possible, by laying some of the ground work to create a competitive and attractive city without unfairly giving advantage to specific players (though yes, this is always difficult).

If governments – local or otherwise – can subsidize private interests or locales by spurring competition and laying the foundation for a competitive market, then more power to them.  If local governments want to keep big box stores out of their dense urban areas and in more drive-intensive spots, I see no reason to argue against that.  There are sensible market-based reasons for this, at least if you view your local community as a brand which needs to compete against other towns for residents, tourists, and businesses.

(Local currencies may have a role to play as well.  Ithaca, NY has “Hours” which are local dollars.  This is an interesting idea which helps keep currency in the local system).

I understand the argument that state-subsidized transportation systems disproportionately advantage large-scale retailers and producers. But the benefits of economies of scale would still exist without an easily-accessible interstate transport network, right?

Of course.  But the scale itself would be different.  It’s very unlikely that many of the big corporations we have today would have emerged in their current form without the rails and interstate highways.  Sure, some very big companies would exist, but I imagine they would have been far more regional.  Whether this is good or bad is harder to pin down.  Certainly Wal*Mart may disrupt our sense of charm but it provides cheap goods for people who can’t afford charm.

I would argue that once transportation costs become prohibitively expensive and micro-manufacturing becomes much cheaper and efficient than it is today, we’ll begin to see something of a return to a more regionally based production economy.  Transportation costs have been extremely low for a very long time, in part due to cheap oil, and in part due to the infrastructure that the state helped establish.  To make shipping great distances worth the expense of shipping those distances, you have to be able to produce on a large scale and ship on a large scale.  Once the cost of shipping out-paces the savings of mass production, you’ll start to see production closer to home fill the demand.  Couple this with better micro-manufacturing technology and you’ll start to see a return to more localized production of goods.

Here’s the equation –

  • if cost of (C)heap foreign labor + cost of (T)ransportation ? cost of local (P)roduction then we’ll see a (R)eturn to local production
  • if C + T ? P then R

So the question is would C + T have ever been less than the cost of local production without state subsidies in the first place?  And at what point will fuel costs render those subsidies meaningless?  Or will green technology and green fuel be cheap enough to make local production still prohibitively expensive?

Labor costs in a globalized system will slowly rise along with transportation costs.  Once labor costs plus transportation costs in China, for instance, are equal to or more expensive than the combined labor costs and transportation in the United States, you’ll see a return to manufacturing in the United States – though at least theoretically it will also continue in China, where workers will have become consumers of these goods as well.  (and so on and so forth)

And maybe big corporations will simply do less shipping and more local production, basically maintaining economies of scale one way or another.  It’s hard to say.

Given the inter-connectedness of subsidies and local communities and the inherent advantages of large-scale producers and retailers in any economic context, I think that the localism versus globalism debate is about what we should subsidize rather than whether we should subsidize, period. I think we can (and should) argue over what local features are worth preserving through active government support. But suggesting that localism represents some return to an idealized free market state of nature strikes me as pretty naive.

Maybe so.  And this simply cuts to the question of implementation.  The government will always have an interest in framing markets, setting up the rules of the game, etc.  The point should be that we keep this involvement as neutral and decentralized as possible.  A return to localism, then, is simply a return to a more decentralized system of subsidies and rules that promote, rather than discourage, competition.  Even though the freeways benefited economies of scale, they did so fairly neutrally.  Big companies may have an advantage over small ones, but they nevertheless have to compete against one another.

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9 thoughts on “Localism and free trade

  1. Great post E.D.
    We should keep in mind also that in the very long term (barring some global disaster) we may see a return to localization as well. As the countries that manufacture for us today continue to rise in their standard of living they will add their demand for goods to our own and their rising living standards will pressure wages to rise as well. Manufacturers will then move out of their countries into other low labor cost countries repeating the process. We’ve seen just this happen in Japan, South Korea and Taiwan where the lowest rungs of manufacturing have moved to continental China and other cheaper locations. It’s like a wave slowly washing along leaving prosperity in it’s’ wake. In theory when standards globally reach a certain point the cheapest labor won’t be cheap enough to merit concentration in one location (or the global demand will outstrip the ability of the cheap labor areas to produce the goods) and then the manufacturing sector will disperse to situate manufacturing centers closer to their markets.

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  2. I share your skepticism re the possibilities of removing subsidies and protection through political action, Erik. The trucking and highway lobby is pretty much the third rail of politics in any Congressional district, and pulling Excalibur out of a rock would be child’s play compared to separating the RIAA/MPAA/Microsoft from their bipartisan political support.

    The good news is that the system of subsidized inputs and protections is unsustainable. Subsidies are unsustainable by reason of the very dynamics generated by the subsidies themselves. It’s Free Market Econ 101 that when you subsidize something, people want more of it. It’s a positive feedback mechanism, like when you leave a candle under the thermostat until your house freezes. When you subsidize inputs to business, you generate demand for more inputs from the subsidized sectors faster than you can appropriate money for them, until the state bankrupts itself (a la James O’Connor’s Fiscal Crisis of the State). And subsidies to transportation and access to cheap foreign energy sources are hitting the wall of Peak Oil.

    Jeff did a study on the effect of oil prices on world shipping last year and came up with something very like your formula: $140/barrel oil was equivalent to raising the tariff from 3% to 11%. What will happen when it’s $400/barrel, as it almost certainly will be?

    Same goes for the international IP law regime, which technological developments are making increasingly unenforceable. The MPAA/RIAA’s increasingly desperate efforts to command the tides to retreat are just pathetic.

    The truth is, most manufacturing TODAY is small-scale (with over half of production shifted from old-style mass production industry to small job-shops), but it still takes place within a corporate legal framework with global markets. Fuel prices will destroy the global markets and compel a shift to serving local markets, and the job-shops will be increasingly motivated to engage in their own networked production and simply cut the Western corporate HQ out of the loop (simply ignoring their trademark). Interestingly, most of the corporate suppliers in China today run a third shift producing identical knockoffs of the trademarked stuff they make for corporate patrons.

    So basically mass production industry and economic centralism is already dead–the corpse just hasn’t yet started to stink.

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    • Possibly Kevin, but what will be the cost per barrel of some artificial liquid hydrocarbon produced using electricity from nuclear plants or some similar technological substitute? I think at our level of technology that the demise of oil won’t necessarily spell the demise of global trade. Heck, we could go the other way and say that the demands of global trade will almost mandate the replacement of fossil fuels with an alternative source once fossil fuels become scarcer.

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  3. North: You mean biomass, algae, coal liquification, etc.? I’ve looked into them and, while there is some disagreement about the specific numbers, it’s pretty clear they all produce much less net energy (i.e. have a much lower EROEI, or cost more in energy to extract a given amount of net energy). I just don’t think there’s any getting around the fact that a model of economic expansion based on extensive addition of cheap inputs is coming to an end, and that future growth will depend on doing more with less.

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    • I respect that position. In my pessimistic moments I share it. In my more balanced or optimistic times though I imagine that once oil actually begins to become scarce (rather than when the eco-warriors say it should become scarce) that with all the ingenuity and technical prowess we posess as a species that an alternative fuel source will pop up.

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  4. “This brings real competition between local governments into the picture. Local governments compete for citizens and businesses.”

    If this is the case, I suspect big-box wins regardless. People love them. I tend not to, but I think that if had a completely democratic process of city planning, most cities would look a lot loke Northern Virginia’s sprawl, rather than something out of a Frederick Law Olmsted book. Drives me crazy… but people my age, with families, seem to want a McMansion and a two-stall garage.

    I would just argue that government should play as non-interventionist a role as possible, by laying some of the ground work to create a competitive and attractive city… If local governments want to keep big box stores out of their dense urban areas and in more drive-intensive spots, I see no reason to argue against that.”

    “I would just argue that government should play as non-interventionist a role as possible, by laying some of the ground work to create a competitive and attractive city…”

    Again, who defines attractive? I guess we could have a laboratory of Democracy and see who wins. But again, I suspect I will lose, hands down.

    Ever been in a McMansion? I agree that they are cold and sterile and whatever. But they are awesome in so, so many ways.

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  5. Local states competing sounds reasonable for evolutionary purposes but how much better they’d be if they compete like trusts with prescribed rules democratically decided and updated democratically on a regular basis. This would help prevent politicians being “captured” by business interests. For example, when as a voter were you last consulted about the principle of allowing “Rob Peter to Pay Paul” tax subsidies to lure out of state businesses to your locality?

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