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The myth of totally free trade

July 29, 2003

The families of Raymond and Rajiv went on a yacht trip. A storm overturned their vessel, but the two families somehow managed to save themselves by swimming ashore to an isolated island far away from civilisation.

For weeks they had very little to eat -- just some wild berries and coconuts. But as the weeks became months, they managed to become rudimentary cultivators.

Rajiv and Raymond cultivated separate patches of land. As the years passed, Rajiv turned out to be a better farmer than Raymond. His patch was greener and bountiful.

Raymond saw that to improve his family's fortunes he would have to do something more. He started experimenting with farm tools and biofertilisers that he could sell to Rajiv for a good exchange price. Soon enough he found that Rajiv was willing to part with more food for purchasing his tools.

Before long he was earning more by selling tools and fertiliser than by cultivating his farm himself.

Raymond was on the verge of giving up farming altogether when a mysterious pest attack destroyed three-quarters of their collective crop. Rajiv, who had been watching his friend's growing wealth with some envy, suddenly found that he could charge almost anything for food, since Raymond had almost nothing growing on his patch.

At one point before the next harvest, Raymond sold nearly everything he had to buy food. Angry that he was being cheated, Raymond vowed that he would never ever give up farming completely since it reduced his bargaining power. If he had only grown a bit more food, Rajiv would have been more reasonable with him.

The next season was tough, as Rajiv's patch needed improved tools. He also had to fight off the pests, for which Raymond appeared to have found some antidote. The latter had now begun to grow more food on his land with his new tools and biofertilisers. Rajiv sought Raymond's expertise and new tools, but baulked when the latter demanded 80 per cent of his crop in return. It was now Rajiv's turn to feel cheated.

As Rajiv and Raymond went into heated discussions, their wives -- who had been watching the friendship go sour -- decided to intervene. Radha and Liz pointed out that while specialisation -- Rajiv in farming and Raymond in farm support services -- would help both maximise their wealth in the long term, there were practical short-term considerations one had to keep in mind.

There would be times when the balance of power would swing one way or the other; but would the friends always have the wisdom to take a long-term view of their interdependence? Can they avoid taking short-term advantage of the situation? Liz pointed out that if Rajiv hadn't charged so much for his food then there would have been no need for Raymond to resume farming.

Rajiv's wife understood human nature, and observed that even if the two friends entered a long-term agreement on their mutual obligations, who could guarantee that their children would honour that agreement?

So they decided that the best way out was compromise. They would remain substantially interdependent, but each of them would also maintain some basic independence: thus Raymond would cultivate a small portion of his land even though he wasn't a great farmer; Rajiv would start making his own fertiliser and tools, even if they were not half as good as Raymond's.

This way, the friends felt, they would be more likely to remain friends and trade partners, since one would have less incentive to exploit the other when the going got tough.

There can be other endings to this fable, but the lesson is fairly simple. There is always a huge gap between what economists think is economically efficient and what is politically and socially sensible.

For every human being who just wants his products at the lowest possible price -- and hence would benefit from completely free trade and unrestricted globalisation -- there are others who would be willing to pay more for various reasons -- political independence (Japanese and European farm policies), their favourite causes (azo dyes, child labour, etc), preserving local jobs, or whatever.

Ever since the collapse of Communism, the Western world has been smug in its belief in the superiority of capitalism, free trade and globalisation.

But you only have to scratch the surface to realise that this commitment is wavering, because civil society is not fully convinced that economic efficiency should rank above other concerns.

Ask the Americans, who are now trying to raise political barriers to Indian software because it threatens high wage jobs back home.

My own conclusion is this: the world would be a better place if it allowed diverse economic systems of thought to experiment and survive. There may be no 'one-best-way' to reorder the world.

Globalisation and unfettered free trade do not have all the answers in a free society.

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