It is a mistake to think about America's problems with international trade, foreign investment, and techno-industrial competitiveness as purely business issues. Business deals with the creation and distribution of private income and wealth. Its basic unit is the individual or firm. While the macroeconomic base suffices as a foundation for domestic analysis, economic activity that crosses national borders must be analyzed at a higher level. Borders are political demarcations. Anything that crosses them (people, goods, money) becomes a subject of political economy, which is concerned with national power and collective security as well as private wealth. Its unit is the nation-state. Relative capabilities, independence, and survival are vital to a nation's international standing, and those who aspire to statesmanship need to take a wider view of world affairs.
Political economy is, as its name implies, a mix of political and economic theories. Unfortunately, recent debate has focused entirely on the application of economic theories. This is particularly true of those advocates of free trade who claim their program is the result of economic determinism and thus unassailable. Nothing could be more misleading.
Economic theory lays out certain cause-and-effect relationships; for example, if prices go up, consumers will buy less. These relationships are complicated by the large number of contributing factors. Changes in income, in prices of substitute or complementary goods, in tastes, and so forth, can modify the relationship between prices and consumption. Economists' heated debates over the equations used to build models testify to how complex these matters can become.
The point is, these relationships are mechanical. They do not tell us whether people should buy more or less of a given good. They make no distinction between bran flakes and cocaine. Economic theory alone cannot determine national policy because it is value free. Policy must be rooted in political theory which, being based on philosophy, has normative values at its core. In short, in the practice of political economy, it is political theory that sets the goals. Economic theory then is used to manipulate the variables to attain the goals.
What, then, are the political theories and worldviews behind the competing schools of free trade and mercantilism that are involved in today's debates over international economic affairs? The conflict is not new; its roots go back to the eighteenth century. As David Hume wrote in 1754,
Trade was never esteemed an affair of state till the last
century, and there scarcely is any ancient writer on
politics who made mention of it… The great opulence,
grandeur and military achievements of the two maritime
powers [Britain and France] seem first to have instructed
mankind in the importance of an extensive commerce.
Though Hume is less than correct about history (much trade in ancient and medieval times was monopolized by the state, and writers from Thucydides to Machiavelli addressed the relationship of wealth and power), it is true that a new and extensive discussion of trade and
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