24 June 2014

Wimbledon shows that open markets are a winner


Wimbledon is, for most people, the world’s tennis tournament. It happens to take place in Britain, but it isn’t really a British event. Almost no one alive can remember a previous occasion when a British men’s singles champion was defending his title. The All England Lawn Tennis and Croquet Club opens its doors to the best players from overseas, who then go on – almost always – to win.

The City of London operates on pretty much the same principle. The British host it, ensure that the rules are impartially enforced, and then invite the world’s top talent. British banks are fractionally more successful than British tennis players, but the City is now every bit as international as Wimbledon.

To free-marketeers, it’s a heartening story. We’d much rather that French entrepreneurs be living in Kensington and paying their taxes to our Exchequer than handing over 75 per cent of their earnings to François Hollande’s wastrel treasury. It’s true that, as with most things, there are losers and winners. Many Londoners complain that they have been priced out of their own city by foreign plutocrats. But there is an upside. Walk along the South Bank from Westminster Bridge to Hungerford Bridge and you will feel, as some mediaeval pilgrim to Jerusalem, that you have reached the centre of the world.

So why isn’t everybody cheering? Why the chorus of complaints in the UK that foreign firms have taken over indigenous ones, that the economy is becoming unbalanced, that we no longer manufacture things, that financial services are creating another bubble?

The answer has to do with how our brains evolved. Free trade is, literally, counter-intuitive.  It contradicts a number of instincts that developed in our species for good reasons. But mental shortcuts that were handy on the savannahs of Pleistocene Africa are often disadvantageous among the skyscrapers of a modern metropolis.

The idea that making things is somehow more real, more valuable, than selling services comes from a useful mental distinction between the tangible and the intangible. Acquisitiveness is a natural human trait, and we struggle with the idea that optimising the allocation of capital (the job that a banker does) is as worthwhile as, say, baking bread. If you think about it, though, the distinction between goods and services is meaningless. The baker’s bread may be a palpable product, but what about, say, the labour of the man who drives his delivery van, or that of the firm that manages his accounts? All have contributed to getting the loaf to your plate. But we rarely do think about it, at least not that way.

The same innate promptings make us worry about “food security”. The instinct to provide against famine, to hoard food, is encoded deep in our DNA: a few hundred years of capitalism and plenty make no genetic dent in millions of years of precarious foraging. How can a banker be as valuable as a farmer? Again, the more you think about it, the odder our worry seems. Is your home town self-sufficient in food? Almost certainly not, but that doesn’t alarm anyone. Why do we fret about production only within lines arbitrarily drawn on maps? Self-sufficiency in food, quite apart from correlating with high levels of poverty, is remarkably insecure. North Korea and Zimbabwe have closed, agrarian economies, trading little and aiming to produce what they need. Singapore and Hong Kong, by contrast, import virtually everything they eat and drink. Where is famine likelier?

Hardest of all is the concept that, even when a country is less efficient than another at producing everything, free trade still benefits it. Suppose, for the sake of argument, that China enjoyed a competitive advantage over Britain in absolutely every field. It would still benefit both countries to open their markets to one another.

This notion is not easy to get your head around. Paul Samuelson called it the only idea in economics that is both surprising and true. However often it is explained – and nearly 200 years have passed since David Ricardo first adumbrated it – people continue to disbelieve it. (It is explained here: any intelligent person with ten minutes to spare will see why, logically, it must always and everywhere be true; but, yet again, most people have never spent ten minutes that way.)

Free traders are in the awkward position of advancing a proposition that just feels wrong. A handful of people will look empirically at the evidence, but the vast majority will go with their hunch, with their intuition.

That’s why the argument for free markets is never definitively won. It looked as though it had been settled in the 1840s with the repeal of the Corn Laws, hugely to Britain’s benefit. It had to be settled all over again at the beginning of the twentieth century, when the Conservative Party divided over Imperial Preference. A version of the same argument was conducted when we ruinously accepted the EEC’s Common External Tariff in 1973.

Protectionism will always have its defenders: trade union shop stewards, church-going ladies convinced that trade is harming Africa, Tory mums fretting about food miles. Generation after generation, free traders struggle to make their case.

Incidentally, there’s a theory that the reason British tennis players do so badly relative to, say, British golfers, is that the vast revenue generated by Wimbledon goes into supporting many of them. They are paid whether they win or lose, taking away the hunger that breeds success.

I have no idea whether this theory is true, though I can’t help noticing that Andy Murray trained abroad, avoiding the whole system. Maybe there’s a lesson there, too, about bailouts, moral hazard and rewarding failure. But that’s another story.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk