In this blog post, we will examine the pros and cons of free trade and the potential for a self-sufficient national economy through the lens of J. M. Keynes.
Like most Britons, J. M. Keynes grew up respecting the value of free trade. Nineteenth-century advocates of free trade, who championed it as a matter of principle, firmly believed that the international division of labor was the most efficient means of allocating each nation’s resources and capabilities, and that this would enable global economic growth. They were further convinced that free trade could curb privilege and monopolies, foster an enterprising spirit, and even make a substantial contribution to world peace. This belief was not limited to the economic sphere but also served as the ideological orientation guiding the era. Even today, Keynes’s fundamental recognition of the various virtues and advantages of free trade has not changed significantly.
However, over time, Keynes’s perspective on free trade changed considerably. Rather than his earlier stance that economic ties between nations should be maximized as much as possible, he came to feel a deeper affinity for the opposite approach: minimizing them as much as possible. In other words, he moved away from his past view that saw the internationalization of the economy as an ideal and began to regard a nation’s internal self-reliance and self-sufficiency as more fundamental values.
Keynes still believed that the creative products of humanity—such as ideas, knowledge, art, goodwill, and travel—as well as the emotional and cultural elements of life, were by their very nature international. These should be able to flow freely, unbound by borders, and it is when they flow freely that they can flourish most healthily. However, regarding everyday consumer goods, he judged that it was preferable to use domestically produced goods whenever possible. He particularly emphasized that the financial sector must be firmly rooted domestically and should not be excessively exposed to external volatility.
The reason he departed from conventional positions to adopt this new perspective was that he realized the values humanity pursues change with the times, and consequently, ways of thinking must inevitably change as well; furthermore, he recognized that the assessment of free trade itself requires a complex balancing act between economic benefits and non-economic values, rather than being based solely on simple economic logic.
In the 19th century, several historical conditions existed that allowed the benefits of economic internationalism to outweigh other forms of loss across society. First, alongside large-scale immigration, technology and capital from the Old World—primarily Europe—were transferred to the New World. For instance, railroads and locomotives built with British capital and technology transported British immigrant laborers across the United States, and a portion of the economic profits generated thereby flowed back to Britain. Moreover, the culture of thrift and self-restraint that made this entire process possible ultimately served as the foundation for sharing the fruits of this success.
However, it is difficult to view this form of capital transfer and investment as essentially the same phenomenon as a speculator in Chicago holding shares in a German company today. While the former was a process of expanding the productive base and promoting mutual prosperity among nations, the latter is merely an unproductive movement of capital aimed at short-term profits.
Second, in the 19th century, there were significant disparities among nations in terms of levels of industrialization and opportunities for technological acquisition. Under these conditions, the intensification of international division of labor could indeed serve as a highly effective means of increasing the economic benefits of each country. Advanced nations provided technology and capital to less developed nations, while the latter supplied resources or labor, thereby forming a mutually complementary economic structure.
However, Keynes believed that the argument that the economic benefits brought by the international division of labor today are not fundamentally different from those of the past lacks persuasiveness. Of course, there are still significant differences between nations that cannot be ignored, such as the distribution of natural resources, cultural maturity, population density, and national and temperamental characteristics. Therefore, a certain degree of international specialization and trade remains inevitable.
However, in the case of basic consumer goods such as agricultural products and manufactured goods, it can no longer be definitively stated that the economic costs incurred by choosing self-sufficiency outweigh the benefits gained by integrating producers and consumers into a single national, economic, and financial organization. The latest mass production technologies and systems can be applied at nearly the same level in most countries, and the gap in production efficiency between nations is not particularly large.
Furthermore, in modern society, the growth of wealth is not achieved solely through the production and consumption of raw materials or manufactured goods. The center of the national economy is gradually shifting toward sectors where trade is difficult, such as personalized services, comfortable living environments, and cultural infrastructure. Amid these changes, the proportion of raw materials and manufactured goods is relatively decreasing, and consequently, the rise in real costs resulting from self-sufficiency no longer poses as serious a problem as it did in the past.
In short, a self-sufficient national economy has now reached a level where it is no longer a “painful burden to bear,” but rather a form of “luxury” that we can readily afford if we so desire.
J. M. Keynes viewed a self-sufficient national economy not as an ideal state in and of itself, but rather as a prerequisite for the stable and effective realization of other, higher ideals. For instance, regarding the approach to economic issues, he held the position that private judgment and civil autonomy should be prioritized over centralized control whenever possible. At the same time, however, he clearly recognized that a transition to an ideal society was impossible through private freedom alone.
When he envisioned an ideal society, he believed it could only be realized if, while maintaining the current structure of private enterprise, ultra-low interest rates—nearly 0%—were sustained for at least the next generation. But reality is not like that. Today’s international financial markets operate in a way that converges interest rates across nations to a single level, and under this structure, it is difficult to sustain an ultra-low interest rate policy. It was his judgment that the material prosperity provided by economic internationalism could not compare to the new form of prosperity that the ideal society he envisioned would make possible.
Of course, from the perspective of private profitability, it may seem rational to ensure the international mobility of finance so that one can freely invest assets in the country offering the highest interest rates across borders. However, once ownership and management begin to separate across borders, a phenomenon known as “capital flight” occurs, which imposes significant constraints on individual nations’ ability to implement policies appropriate to their own economic circumstances. Furthermore, if this situation persists, structural tensions and social discord—which could ultimately undermine private profitability itself in the long run—may intensify.
Ultimately, in Keynes’ view, if we are to attempt an experimental transition toward a more ideal society in the future, it is paramount to minimize interference from economic changes in the external world. At the same time, it is essential to move away from an attitude of uncritical submission to the criterion of profitability. In this context, it is the state—not private companies—that must be the agent responsible for changing and adjusting the criteria of profitability, and we must move beyond the conventional view of the state’s finance minister as merely a “CEO of a corporation.”
