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Why Mises Opposed a Global Government for Managing Trade | Mises Wire

Posted by M. C. on August 13, 2019

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

https://mises.org/wire/why-mises-opposed-global-government-managing-trade

A recent episode of the Human Action Podcast dealt with Mises’ Omnipotent Government, written between 1939 and 1943 and first published in 1944.

Besides its treatment of German national socialism, Mises’ Omnipotent Government also contains an analysis of the various suggestions for “world government” toward the end of the second World War. This article is a short commentary on Mises’ analysis of proposed international economic frameworks, their shortcomings and their subsequent outcomes.1

A Type of World Government

After maintaining the distinction that he makes earlier in Omnipotent Government between the terms “socialism” and “interventionism,” Mises correctly foresees what later became the most important post-war technique of international economic planning. Namely, international agreements between sovereign states:

The more realistic suggestions for world planning do not imply the establishment of a world state with a world parliament. They propose international agreements and regulations concerning production, foreign trade, currency and credit, and finally foreign loans and investments.

After the second World War, these international agreements took the form of “three pillars”:

  • the Final Act of the Bretton Woods Conference, entering into force in 1945, which gave birth to the World Bank and the International Monetary Fund;
  • the General Agreement on Tariffs and Trade (later becoming the WTO Agreements) of 1947;
  • the Havana Charter for the International Trade Organization of 1948, which failed to enter into force after the United States refused to ratify it.

After the failure of the Havana Charter, the issue of international investment protection was the subject of several thousands of state-to-state bilateral and multilateral investment treaties (BITs and MITs), which specify the substantive rights of foreign investors and applicable dispute resolution mechanisms. A good example of such a treaty is Chapter 11, titled ‘Investment’ of NAFTA, which may be soon replaced by Chapter 14 of the USMCA.

Other important international agreements include the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations and other, “soft,” law such as the World Bank’s Guidelines on the Treatment of Foreign Direct Investment and the FATF Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation.

International Government Planning is Government Planning all the Same

Regardless of its form, Mises points out that the concept of planning, whether national or international, remains antithetical to the concept of free enterprise. This is well understood by our readers. Moreover, while planning cannot decrease the price of one good without increasing the prices of others, it can be used to increase prices by creating monopolies:

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

This is a foreseeable scenario in the context of international agreements dealing with environmental issues. An example of what lies in store can be found in what has been called the “Renewable Energy Explosion” in Spain. After expanding subsidies for the production of renewable energy from 2004 to 2007, Spain was forced to eliminate these incentives in the wake of the financial crisis, leading to a substantial increase in energy costs and severe losses to previously subsidized enterprises.

Mises also identifies the no true Scotsman fallacy, which is invariably used to justify further planning after the initial plan fails:

[…] some of these schemes worked only for a short time and then collapsed, while many did not work at all. But this, according to the planners, was due to faults in technical execution. It is the essence of all their projects for postwar economic planning that they will so improve the methods applied as to make them succeed in the future.

Do Free Trade Agreements Promote Free Trade?

Mises was very skeptical of the outcomes of post-war foreign trade agreements, arguing that ‘the ultimate goal of every nation’s foreign-trade policy today is to prevent all imports’, and that “an international body for foreign-trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism.”

It might be safe to say that Mises was too pessimistic on this subject. Arrangements between developed and developing nations after the second World War have substantially increased cross-border trade and and reduced protectionism. The trend was further strengthened in the 1990s after the collapse of the Soviet Union and the adoption by erstwhile Soviet Republics of more liberal approaches to foreign trade.

It is not clear, however, that this expansion can be attributed to the conclusion of international trade and investment agreements, and the question remains the subject of much debate.2 In any case, Mises correctly identifies the state’s ability to circumvent restrictions on protectionist policies by taking recourse to other forms of interventionism:

If pressure or violence is applied in order to force Atlantis to change its import regulations so that greater quantities of cloth can be imported, it will take recourse to other methods of interventionism. Under a regime of government interference with business a government has innumerable means at hand to penalize imports. They may be less easy to handle but they can be made no less efficacious than tariffs, quotas, or the total prohibition of imports.

International investor-state tribunals, constituted on the basis of international investment agreements, have successfully dealt with these forms of intervention since the 1990s, particularly by applying international law concepts of indirect expropriation and fair and equitable treatment.

These decisions, may, however, be regarded as unexpected developments, and have caused a significant backlash by states against the very concept of investor-state dispute settlement. For instance, in January 2019, 22 member states of the European Union undertook to terminate all intra-EU bilateral agreements providing for investor-state arbitration.

These decisions have also lead to the adoption by states of new treaties containing wider exceptions for economic regulation. India, for instance, announced in 2016 that it was terminating 58 of its 83 bilateral investment treaties, after publishing a new, more stringent draft treaty for future negotiations. In a striking illustration of the “planning mentality,” the draft treaty provides, inter alia, that:

Investors and their Investments shall strive, through their management policies and practices, to contribute to the development objectives of the Host State.

The Gold Standard, the Cantillon Effect, and “World Money”

It is interesting to note that just a few decades after the end of the belle époque, the “undesirability” of stable foreign exchange rates seems to have evolved into gospel truth for the governments of the 1940s. After observing that ‘the Keynesian school passionately advocates instability of foreign exchange rates’, Mises finds that “stability of foreign exchange rates was in [governments’] eyes a mischief, not a blessing.”

While the various excuses that lead to the abandonment of the gold standard are familiar to our readers, it may be noted that in the international context, protectionism provides another excuse for states:

The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports.

Mises notes that any return to the gold standard would not require elaborate international agreements or international planning. All that would be required is “the abandonment of an easy money policy and of the endeavors to combat imports by devaluation.” Evidently, it is not necessary that the state re-establish the gold parity that previously existed:3

[…] every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.

Finally, Mises dismisses the idea of an international fiat currency, issued by an international monetary authority acting as the lender of last resort. After dealing with what is commonly known today as the “Cantillon effect,” Mises explains that nations could never agree upon the basis of distribution of this new form of central bank money:

The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent […]

Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution.

Could these observations give us some clues regarding the future prospects of the IMF’s SDR scheme?

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