Economics Belongs Within Geopolitics

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Yellen addressed a gathering of female economists and entrepreneurs in Beijing telling them, “while the U.S. has differences with the Chinese government, these are not disagreements with the Chinese people.” While this is a common throwaway phrase, in this case it denoted the desire to separate private commerce from geopolitics. It is the literal meaning of “free trade” — free from higher considerations. In this model, the movement of factors of production (capital, labor, technology) across borders, or the location of factories, research labs, and infrastructure across the globe would be of no interest to any national community because economic decisions would be made on the basis of profits derived from efficiency and material progress on a global scale. Any considerations about where computer chips and warships are built, or where mines and ports are located, stemming from concerns over national capabilities and the balance of power, yield suboptimal outcomes in economic theory. It is a world where economists assume not just world peace, but a single global polity (or believe they can attain it).

In contrast, Beijing sees competition for what it is, the pursuit of victory. Its state media argues that China has the upper hand in trade relations. “It is the largest trading partner of most countries worldwide, with an irreplaceable position in the global industrial chain, supply chain, value chain, and regional and global influence. Any severe sanction against China will significantly backfire. It will be a lose-lose situation from any point of view.” The fear of “disaster” Yellen exhibited. State media argued after Yellen’s visit that the U.S. needs China’s help because “some of the problems facing the US economy are actually related to Washington’s economic suppression of Beijing, which has hit the US economy like a boomerang. Now, deepening US economic problems, such as inflation and the federal debt burden, has made it increasingly hard for the US to continue its antagonistic China policy. Without China’s support and cooperation, these economic difficulties in the US will be further aggravated. This may explain why there have been positive signs of increased communication between senior economic officials from both countries.”

I have discussed at length elsewhere the sophistries of classical liberalism that Yellen draws upon. Despite its record of failure, its hold has been strong in tense situations as an appeal to hope. In the late 1930s as Nazi Germany loomed over Europe, a Federation of British Industries memo stated, “Captains of industry had long recommended that meetings of businessmen… might perhaps be a suitable means of bringing about a return to common sense.” This kind of private diplomacy was seen as an alternative to the confrontational policies of 1914. A 1936 memo from a London banking house quoted in The Appeasers by Martin Gilbert and Richard Gott, speaks of “Nazi moderates” — Germans with whom the bankers thought it possible to “come to an understanding and co-operate.” In 1935, the British Foreign Office created the Economic Section, which became the vehicle for the state-sponsored commercial appeasement of Germany. The aim was not only to liberalize trade, but to stimulate the German economy. England would become valuable to Hitler as a market for his exports, even enduring a trade deficit to improve relations. What was lacking was any appreciation of how Hitler would use the gains from trade to advance his ambitions.

Winston Churchill realized the rising economic strength of Germany was being converted into military power. He warned of Germany’s growing capabilities, “with her factories equipped to the very latest point of science by British and American money.” Churchill understood that it was folly to increase the resources available to a regime whose foreign policies presented a danger to his own country.

Churchill and Neville Chamberlain (whose name is a synonym for appeasement) were both members of the Conservative party, but they sprang from different traditions. Chamberlain was, in the words of Kenneth W. Thompson, “the archetype of bourgeois conservatism… [which] is derived from a decaying liberalism under whose colors the businessman in the nineteenth century achieved his now precarious eminence.” He had served as Chancellor of the Exchequer, the British equivalent of Treasury Secretary. By contrast, Churchill was heir to a long aristocratic tradition of state-centered power politics and unending rivalry among nations and empires. Thompson’s conclusion in Winston Churchill’s World View is that his “Tory tradition, having suffered less disillusionment and dismay over the abrupt and violent reappearance of barbarism and violence, was better able to meet the threat by organizing resources of power against predatory foes.”

In the real world, failure to think about the strategic consequences of economic activity is what produces suboptimal outcomes for national prosperity and security. Who has control over productive assets and critical resources matters. This is obvious. Yet, during my years in academe and government I often saw reality pushed off the stage by “popular” ideas and special interest lobbying. Trade policy was a prime offender in this regard and created the dire situation from which we need to extricate ourselves.