Afraid his son would steal his throne, Dionysius I, Tyrant of Syracuse, locked the boy away in a tower. Never leaving his prison, the boy learned about the world from his teachers and books. War, rhetoric, politics—he mastered them all. The boy was Leonidas without soldiers, Pericles without words, Themistocles without followers.
Everything changed when Dionysius I died. The boy—now a man—ascended the throne. Yet for all his knowledge he lost battles, forgot speeches, and impoverished his people. Dionysius II even invited Plato to help him rule as a philosopher-king. But all Plato’s wisdom proved worthless. He was lucky to escape Syracuse with his life.
Although Dionysius II knew everything, he also knew nothing. Theory is not reality. Logic is not experience. Knowledge is not skill. Dionysius never realized that his knowledge was ignorance, and his ignorance, knowledge. He died in disgrace.
This lesson remains true today, particularly in the field of economics. For example, although international free trade looks like a good theory, it seldom works in reality. Why? Because underlying the theory are a number of false assumptions. Free trade’s logical foundation is quicksand and no matter how sturdy and elaborate the edifice becomes, the structure is forever fragile.
Killing Archie Bunker
The story of Dionysius brings me a recent article by Andy Kessler in the Wall Street Journal. Kessler argues that “duties and tariffs are a fool’s game” because they prevent America’s multinational corporations from offshoring their “low margin” production to developing countries. This prevents America from getting rich by moving “up the margin chain.”
Kessler notes, for example, when Japanese companies began dominating the dynamic random-access memory market, American producers were forced to specialize in designing higher-margin microprocessors. The reason they could do this is that they offshored their production to places like Taiwan, which freed up American talent for better things. Kessler lauds his paradigm:
We’ll design (high margin), and they’ll manufacture (low margin). We think, they sweat. It’s the “Designed by Apple in California. Assembled in China” label.
Kessler thinks free trade like this enriches America in the same way paralegals enrich lawyers. Just as lawyers delegate menial tasks to paralegals so that they can focus on billing clients, America offshores factories to China so that Americans can focus on designing new products and services. It’s all about margins, profits. If designing is more lucrative than manufacturing, then why shouldn’t America focus on designing? And let’s be honest: who would want to work a grungy blue-collar job like Archie Bunker when he could wear a slick suit to work like Harvey Specter?
Millions of Americans, that’s who.
Not everyone wants to be the next Steve Jobs—and even if everyone did, very few people possess the necessary intellectual and creative talents. Although this will come as a shock to libertarians and “progressives” alike, the truth is that not all men are created equal in their capacities and characteristics. Some are tall, others short. Some are brave, many are cowards. A lucky few are clever, and many more are not. In the end, everyone has different proclivities and personalities, tastes and talents, skills and experience. This observation cuts to the core of the free trade debate, and brings economists to their knees.
Smarter Than the Average Bear
Assume for a moment that America fully embraces free trade, and it works exactly as planned: we offshore all our low-margin production to developing countries, and this indeed frees-up our population to work in lucrative industries like product design, finance, management etc. While this may make America richer (in the short term), it will not necessarily make Americans richer. Why? Not everyone can be an engineer, investment banker, or lawyer—most people just aren’t smart enough, and many more don’t have the personality for it. It’s harsh, but true.
Charles Murray explains in his seminal book The Bell Curve that human intelligence, as measured by IQ, conforms to a normal distribution. That is, most people are of roughly average intelligence (68.2 percent fall within one standard deviation of the mean), while a minority are significantly more or less intelligent than average (15.9 percent are one or more standard deviations above or below the mean respectively). Importantly, half of all Americans are smarter than average—and half are, well, below the average. This has big economic consequences which Kessler ignores.
For example, America’s average IQ is 100, while the average IQ of engineers is about one standard deviation higher. This means that the average engineer is more intelligent than some 85 percent of the general population. Further, the data implies that an “IQ threshold” exists near 105 IQ points, below which the odds of someone becoming an engineer are infinitesimally small. This suggests that 62 percent of Americans are simply not bright enough to be engineers—no matter how hard they try. Biology limits us, whether we accept it or not.
People not only differ in cognitive ability, they also differ in personality. According to the five factor model, people’s personalities are rooted in five basic psychological predilections: openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism. These personality foundations impact everything about us, and have important economic consequences.
Consider the trait “conscientiousness.” Conscientious people tend to be organized and dependable, disciplined: they show up for work on time, stay focused on their task, and rarely call in sick. In short, they’re model employees. For this reason, a conscientious personality is the best single predictor of an individual’s economic success in life (after their IQ score, that is). For our purposes, another important trait is openness: people who are open to new experiences and ideas are more creative on average.
But being open isn’t enough. Productive creativity is driven by people who are predisposed towards openness and conscientiousness—they not only have new ideas, but they are willing to put in the work. This combination is rare, and it partly explains why there are relatively few creative engineers (like Steve Jobs) and disciplined artists (like Michelangelo). In any case, my point here is that different people have different personalities, and that being an engineer or designer isn’t for everyone.
Kessler thinks free trade will enrich America by letting us “move up the margin chain”—offshoring “low-margin” manufacturing jobs to China will free-up Americans to work in “high-margin” design sector. They sweat, we think.
Of course, this makes perfect sense, and I have written copiously about America’s need to expand her technologically sophisticated industries. But unlike Kessler, I don’t think we can, nor do I think we should, expand them at the expense of “low margin” industries. People are not interchangeable parts, they have different intellectual abilities and personality predilections—not every factory worker can be, nor wants to be, an engineer.
In practice, this means manufacturing and design do not draw from the same labor pool, and shrinking one will not substantially grow the other. Kessler’s argument is a dud.
I cannot emphasize this enough: offshoring isn’t just a question of economics, it’s one of politics, morality, and basic human dignity. By trading with China and Mexico, free traders take the bread from their brothers’ mouths and give them nothing in return—“cheap goods” aren’t so cheap when you don’t have a job. They dispossess their fellow Americans for their own profit.
My question for Kessler: what do we do with the millions of Americans who’ve lost their jobs and cannot—through no fault of their own—simply “move up the margin chain” by becoming designers or engineers? Do we, like a new Ancien Régime, let them eat cake? It’s not only about income, it’s also about dignity. Do we engage in political iatrogenics, and merely assuage the symptoms by providing welfare or a universal basic income? Or, do we protect our industries from foreign competition, and guarantee that America remains the land of opportunity for all Americans?
I know where I stand.