TheMarketForIdeas

Introduction

Since the end of the Second World War, the historical event that marked the zenith of “omnipotent government” (Mises, 2010), the world stage witnessed a boom in the number of independent countries. United Nations membership expanded from 51 original members in 1945, to 193 members in the present. This may lead one to the conclusion that the post-war world is characterized by political disintegration. But such a conclusion is invalidated by both a broader view of history that harks back a few centuries, and by a more nuanced analysis of recent history. The political disintegration trend that seems to characterize the last seventy years has been partly offset by a parallel process that acts in the opposite direction: the growing number of regional trade agreements (RTA).

Up to the present date, the World Trade Organization (WTO), the intergovernmental organization that establishes the framework for the multilateral trading system, has received a number of 625 notifications of RTAs, of which 419 are in force.

RTAs are not mere agreements between sovereign states to slash the barriers constraining the international free circulation of resources between their territories. Liberalization and the counterfactually identifiable advancement of the division of labor that would follow require no more than a minister’s or legislature’s signature. RTAs go beyond liberalization, and provide for supranational (political) institution building and international interventionism. In this sense, RTAs are not simple liberalization agreements, but managed trade agreements that seek the harmonization of regulation and impose policy measures through supranational institutions (Rothbard, 2006; Apăvăloaei, 2014; Apăvăloaei, 2016).

The distinguishing feature of RTAs that we are going to build upon is represented by what may be called political integration, or political centralization, and what other authors have referred to as “positive integration” (Tinbergen, 1965; Pinder, 1968). Our main goal is to de-homogenize political integration from economic integration, a concept that encompasses the purely economic aspects of liberalizing trade and the free movement of capital and labour. Our analysis does not intend to deny the historical existence of political integration, nor the fact that the use of political means has always played a role in determining, i.e. influencing, the degree of economic integration. What we propose here is a more fundamental, i.e. theoretical, analysis, one that starts from the actual originating factors of both economic and political integration. It is due to the voluntary, respectively coercive nature of each one of the two processes that we argue that the first should be understood as being integral to economic science, while the latter represents an integral component of the praxeological theory of politics.

With this guiding objective in mind, we are going to attempt to restore economic integration under the aegis of economic science. We will argue that the essence of economic integration is to be found in the extension and intensification of the division of labour, a process that originates in the voluntary interaction of individuals. Only the entrepreneurs that participate in the market process are, in any relevant measure, capable of taking economic integration to its praxeologically relevant limits.

By taking this praxeologically relevant standard as objective benchmark, we will argue that any attempt of altering the pure market phenomenon of economic integration must be based on arbitrary standards and on the use of political means (Oppenheimer, 1922). The pure economic consequences that follow such attempts can be determined in light of the more general counterfactual approach employed in the study of interventionism, a field of economic science.

In light of this fundamental analysis, we will argue that the two processes – economic and political integration – are actually two distinct phenomena, and that political integration can come only at the expense of economic integration. Political integration will be presented as the product of international political cooperation between policymakers that rule over different jurisdictions. It is only a means toward this end. It implies ceding political prerogatives in favour of supranational institutions in order to enable political action.

Bundling & bungling things up

As emphasized in the introductory section above, regional economic integration is considered to encompass two components: economic integration and political integration. These two are not only presented as forming an inseparable bundle, but most analysts consider political integration as the originating factor of regional economic integration [i].

The reasons for this bundling stems from presumably objective arguments. First, it seems that we have plenty of historical reasons for this. Praxis, or “how we have always being doing this”, is thought to be making a self-evident empirical case for such an approach. Second, we are told that regional economic integration has always had an explicit political scope. Because markets are not perfect, but prone to fail, we need to tackle any inherent market failures that may arise from simple liberalization by designing an optimal economic policy. Consider, it is said, the improvements to the market order if we were to impose, through top-down management, uniform rules and standards, uniform taxes, a single fiduciary currency, while also being able to speak through a single voice on the international stage. We could achieve all this, and bring about competitiveness, while keeping our eye on social-redistributionist problems and avoiding a race to the bottom.

But nobody mentions that neither the self-evident empirical case, nor the explicit political scope are not value-free or necessary arguments for taking economic and political integration as inherently joined at the hip. This bundling together of two distinctly identifiable phenomena attests more to the historicist (there is no economic truth that is independent of concrete historical and institutional settings) and positivist (Nirvana fallacy) biases that characterizes modern economic science. It is just a backdoor through which economists can sneak in their value judgements, while keeping a safe distance from any accusation of transgressing the borders of respectable scientific discourse.

How would a more honest approach on their part sound like? I venture to say, with some speculation on my part, that it would be something along the following lines: From a historical and historicist point of view, we are in the age of the state. Its existence cannot be ignored, nor can its decision to immerse itself in the process of regional economic integration. It has always been a political decision how much to liberalize, how much to harmonize and how much to delegate to a supranational entity; the economic laws come second, they can be moulded. From a positivist point of view, political integration goes hand in hand with economic integration because its proponents think, in accordance with their models and world view, that the market order can be improved upon. Therefore, the positivists would say to themselves: “we know that we know better”.

But let us leave speculation and value judgments aside. In the following we will analyse each of these two processes strictly from a theoretical perspective. We will put aside the historical experience of regional economic integration and any normative policy recommendation pertaining to it, in favour of a praxeological analysis of its two components. The approach will apply purely deductive and causal-realist reasoning in order to identify the most general aspects, i.e. invariable in time and space, of economic and political integration. By pursuing this distinct approach, we will show that economic and political integration are actually two independent phenomena that are at odds with each other. Our line of reasoning does not deny the fact that political integration does influence the specific level of economic integration. What we will try to emphasize is that the two processes are of different nature. The question we are going to address is “From where do economic and political integration originate?” as opposed to the question: “What determines the level of economic integration?”. In the following, we are going to show that economic integration can be analysed only in light of the more general theory of interventionism. Therefore, political insertions in the workings of the free market will have a role in determining the actual level of economic integration, but the fact remains that political and economic integration are two distinct phenomena. The first can trace its origin to voluntary interaction, while the latter is just a specific form of coercive interaction that takes place under the auspices of international political cooperation. While political integration plays a role in determining the extent of economic integration, it cannot explain its essence. Only by taking into account this fundamental difference can we avoid extrapolating from historical practice (how regional economic integration has been developing) and operating with value judgements that are implicit in the neoclassical framework (perfect competition, market failure and the need for a harmonized policy response).

The logic of economic action: when division (of labour) is the essence of (economic) integration

Starting from Machlup’s (1975) approach to economic integration, the non-discrimination of goods and of production factors in terms of their origin and their mobility are necessary but not sufficient elements for defining this phenomenon. The essence of economic integration is the division of labour.

Understanding economic integration in light of the pure market phenomenon of the division of labour offers us three advantages. First, we are presented with the most general description of the phenomena, one that can be applied for any level of aggregation – two or three individuals, or a whole sector, or a number of national economies, or even the global economy. Second, this definition takes into consideration only voluntary interaction between individuals. This allows us to sever any link to political integration, and analyse this phenomenon on the basis of the objective benchmark represented by the unhampered market economy (Hülsmann, 2003; Apăvăloaei, 2015b). Third, it represents a realist benchmark, in the sense that it is not a mental construct or an ideal type, but an actual, empirical social phenomenon.

We have acquainted ourselves with the concept, let us now turn to the logic of things: Can we say anything about the degree/extent of economic integration?

If the division of labour is taken to be the essence of economic integration, mutatis mutandis, any step taken in the direction of the expansion and intensification of the division of labour is a step toward a higher degree of economic integration.

Economic integration is therefore the logical outcome that stems from the Ricardian law of association (Mises, 2008a), more widely known as the law of comparative advantage. Simply put, this law demonstrates that individuals become more productive, if they choose to engage in cooperation, specialization and exchange. As the number of individuals that engage in the division of labour grows, i.e. as the market expands, the level of specialization increases, i.e. the division of labour intensifies. Due to this, a greater abundance and diversity of goods becomes available; the uncertainty level associated with the change in tastes is easier to tackle once the number of potential buyers increases; and exchange-value becomes the prime mover in production decisions (Rothbard, 2009).

By the logic of things, the division of labour makes possible and also brings with it the incentives for more individuals to join it as productive members of society, while opening the way for ever higher levels of specialization. Thus, a self-fuelling phenomenon occurs that moves us in a direction toward an ever deepening economic integration.

But is there an identifiable endpoint to this self reinforcing process? In order to address this question, we must expound the characteristics of comparative advantage: its dynamic character, its entrepreneurial character, and finally, its marginalist character (Topan, 2013).

For the purposes of this article, it is sufficient to explain these three characteristics only in passing.

Comparative advantage has a dynamic character in the sense that it changes/evolves over time. If each one of two individuals specializes in a different economically feasible activity, this does not mean that they will remain engaged in these two activities ad infinitum. A simple change in tastes will make them adapt and find a new activity to specialize in. Therefore, comparative advantage is not a static theory. A praxeologic understanding of it determines us to consider it as dynamic.

The entrepreneurial character means that comparative advantage cannot be determined through theoretical (scientific) reasoning, but only through entrepreneurial (subjective) judgement regarding the anticipated needs of consumers. In a monetized economy, the only one that can move beyond the most primitive stages of production, entrepreneurial judgement is operationalized only through monetary calculation: the profit and loss test ultimately informs the entrepreneur if his specialization decision was in accordance with his comparative advantage. In accordance with this characteristic, the entrepreneur must address questions such as: What combination of heterogeneous factors of production is relevant for each particular entrepreneurial project? In how many separate processes should production be split in order to obtain the highest productivity, and therefore profitability? What is the relevant market that should be taken into consideration when estimating the opportunity cost involved in the make or buy decision?

In trying to answer these questions, the entrepreneur elaborates judgments on how to best allocate his resources, or, simply put, in what kind of production process he should specialize. Therefore, production and its corollary, specialization, are not abstract notions for the entrepreneur, but the praxeologically relevant answers he seeks. These answers are discoverable only in the market, through monetary calculation.

The third characteristic, the marginalist character, refers to the relevant level of detail that must be taken into consideration when entrepreneurs decide what goods and services should be produced. The ultimate reference point for addressing such issues is the consumer. It is for the satisfaction of his subjectively perceived needs that the whole machinery of the capitalist economy is attuned to. Producers differentiate their offer to the extent to which consumers consider that certain characteristics of goods and services address distinct needs. Transposing this in the terms of our theory, it means that we should consider as different products whatever the consumer considers to be different means directed toward addressing different needs. We are not to consider tomatoes, in a reductionist and simplistic way, as an all-encompassing product category if the consumer differentiates between red and yellow varieties.

After making explicit the characteristics of comparative advantage, we can now attempt to answer the question pertaining to the endpoint of the economic integration process. As we already mentioned, economic integration is influenced by a virtuous circle that implies specialization, increase and differentiation of output, which in its turn offers the economic incentives for more specialization. Now, armed with a better understanding of the entrepreneurial and marginal characteristics of comparative advantage, we can infer what is the superior limit to this process. In the most straightforward and synthetic way of putting it, we can say that the division of labour is going to advance up to the point where the entrepreneurial production process and consumer differentiation reach their praxeologically relevant limit.

Rigorous economic analysis, in accordance with the qualitative nature of economic laws, informs us that we cannot determine ex cathedra what product is preferred by the consumer, what is the optimum or maximum level of the division of labour, or when economic integration has finally reached its endpoint. From this we can infer that economic integration is a concept that cannot be attributed a quantifiable definition.

From a theoretical perspective, we understand that economic integration has an endpoint, but that limit is visible only to the eye of the entrepreneur. The same logic that operates through the system of profit and loss, whose tendency is to direct resources in the hands of the most capable entrepreneurs, while eliminating the entrepreneurial projects that prove to be erroneous (Mises, 2008b), is also at work in the case of the division of labour. The same system will tend to ensure that each individual occupies a place in the division of labour in accordance with his comparative advantage. At the same time, the entrepreneurial class will push the extent of economic integration to its highest, praxeologically relevant limit, in accordance with consumer preferences and entrepreneurial (calculated) estimates. Also, profit and loss are going to ensure that entrepreneurial projects are started in the locations (regions) deemed most suitable, while employing the combination of factors (from the region or imported from another) that is considered the most productive and profitable, with the scope of producing the output that has the characteristics deemed important by the consumers of that respective goods.

As repetitio est mater studiorum, let us restate the above reached conclusion: There is no scientific method of determining the optimum level of economic integration or if an individual occupies his adequate place in the division of labour. All we can infer from a theoretical perspective is that: at all times, in an unhampered market, all entrepreneurial projects, from all regions, are going to push specialization, and, therefore, economic integration to their praxeologically relevant limits. In the aggregate, all entrepreneurial projects, from any number of regions, will tend toward the praxeologically relevant level of economic integration. These statements are a priori and independent of any kind of historical setting, statistical measurement, or political opinion.

Why interventionism can only hinder economic integration

Thus far, we have analysed economic integration only from the perspective of purely voluntary cooperation that is coordinated through the market process and monetary calculation. Operating under these assumptions, we have analysed the process in relation to its logical endpoint. How do we use all of this in order to account for state interventionism in the workings of the market? How do we account for the hampered economic order that characterizes our day and age?

Let me start from an uncontroversial statement. An individual can either appropriate a given good after its previous owner gave his consent, or he can appropriate it against that person’s will (Oppenheimer, 1922). We will start from this dichotomy that is based on the objective distinction between voluntary exchange, or the economic means and coercion, or the political means, tertium non datur. Both approaches have specific consequences that can be counterfactually deduced by contrasting them to the unhampered market order sketched above (Hülsmann, 2004; 2006). The first, the one based on the economic means, is in the spirit and in a complementary relationship with the peaceful cooperation based on the division of labour. The second, based on the political means, is in antithesis and leads to moral hazard.

It is because private property owners understand that they cannot prevent the government from using coercion and interfering with their resources, thus arrogating for itself the status of forced co-owner, that they will try to elude any government measure. This forced and non-excludable co-ownership leads to institutionalized moral hazard and therefore to a (counterfactually identifiable) different allocation of resources than the one that would emerge on the unhampered market.

We have already deduced that under the auspices of laissez-faire capitalism, the division of labour is going to enter a self reinforcing process that, if left to its own, will reach the praxeologically relevant level of economic integration, at both intra-regional and inter-regional levels. Taking this as our objective benchmark we can counterfactually deduce that any interference of the political means can only impair the self reinforcing process that is set in by specialization, and can only push economic integration away from its endpoint. The division of labour has no economic relevant meaning if consumer wants are ignored. But the use of the political means entails precisely this: a counterfactually identifiable departure from the sovereignty of the consumer and from calculated entrepreneurial resource allocation decisions.

The resulting moral hazard that follows any interventionist measure is going to lead to fewer resources being allocated to production purposes and to the active search for higher and more profitable degrees of specialization, than in the counterfactual case of our benchmark. Also, new political avenues will become available for entrepreneurs to engage in, therefore affecting the structure of economic integration.

In analysing economic integration, we do not need a special theory that bundles together both economic and political integration. A simpler approach, one that is in accordance with Occam’s razor and with the nature of the phenomenon under study, allows us to analyse economic integration as a purely economic phenomenon: the advancement of the division of labour until it reaches its praxeologically relevant limit. Furthermore, any attempt to alter this natural order involves the use of the political means, and therefore can be understood in light of the more general counterfactual approach employed in the study of interventionism.

While the originating factor of economic integration is voluntary cooperation, political integration, as the name suggests, falls under the scope of political action. The originating factor of this type of interaction is coercion. While the purely economic effects of the use of the political means can be deduced from the counterfactual approach sketched above, the nature of political action itself is different. Starting from the specific methods it employs: expropriation in order to enable one individual living on the efforts of the others, political action, and one of its concrete methods of manifestation, political integration, can make the object of a distinct analysis.

The logic of political action and of political integration

A praxeological analysis of political action analyses the logic behind an aggressor’s (bandit or state) decision to extract resources from his victim, while minimizing the costs of dissent (Apăvăloaei, 2015a).

In accordance with the Oppenheimerian dichotomy that we have employed in the previous section, political action implies the use of the political means. Because only something that was already in someone’s property can be expropriated, we can infer that political action must be analysed from both logically and temporally perspectives in a relation of subsequence to action that is based on the economic means. Ergo, political action is circumscribed by an economic or objective limit: expropriation can take place only as long as, and to the extent that new resources have been brought into existence.

Besides this objective, resource bound limit, political action is confronted with a second constraint. Aggressors must take into consideration the extent to which they can push their expropriation until they are faced with open opposition from their victims. This subjective ideological limit may become manifest at different rates of exploitation, depending on historical circumstances, particularly on the dominant ideas of the period. But the fact remains that this potential opposition is a permanent element that is taken into consideration by the aggressors.

All political action is necessarily faced with these two limits. Any theoretical study of political action cannot abstract from the economic and ideological limits that circumscribe it. For the purpose of our analysis, we must add only one working assumption: that we have a number of sovereign political entities, each ruling over a given territory, while each is engaged in interventionist measures.

We saw that under the auspices of interventionism the state assumes by force the status of co-owner alongside the de jure owners of the resources that fall under the incidence of the policy measure. Under these conditions, moral hazard is going to become manifest, as the owners try to elude the measures imposed on them. At this point, the existence of more than one sovereign political entity comes in, and opens a totally new avenue for the manifestation of moral hazard: international political competition. The de jure owners can now attempt to evade, or at least limit, political expropriation by escaping to the territories that are ruled over by less intrusive political entities. It goes without saying that this is a counterfactual deduced conclusion. Other things being equal, as economists like to say, resources will tend to leave relatively more regulated territories, in favour of those characterized by a higher degree of economic freedom. It follows that more interventionist political entities are going to witness capital and labour “voting with one’s feet”, thus undermining the economic prospects of the more intrusive state. At the same time, that part of the population that did not leave for territories can now put more pressure on policymakers by using other areas as a “yardstick” for their comparison (Vaubel, 2008).

Both the haemorrhaging of resources and the increased social pressure brought about by “yardstick competition” act to constrain political action. International political competition forces policymakers to adopt a more moderate stance, at least in comparison to the counterfactual outcome that would have prevailed if only one political entity ruled over all the territories taken into consideration. In other words, it acts as a de facto third limit to political action. But, unlike the economic and ideological limits that ultimately stem from the nature of political action, the external limit represented by international political competition can be pushed further, i.e. it can be made more flexible.

In the context of international political competition, all political entities have three political options they can choose from when it comes to interacting with each other: they can continue acting unilaterally, they can engage in conflict, or they can opt to cooperate. Due to the scope of our article, we are concerned only with the last of the three options, particularly with a subcategory of it: political integration.

Political integration implies the creation of a new, supranational institution in favour of which the sovereign political entities cede part of their prerogatives. The ensuing political coordination and collaboration that follow the creation of a supranational political institution can only act as a restraint upon the property owners’ attempts to vote with their feet or to engage in yardstick comparisons. This is not to say that we are trying to infer motive from result. Our argument is purely a priori, and states that: if political integration is pursued, the necessary results that follow it are going to limit the effects of international political competition.

Therefore, if political integration does not naturally stem from voluntary cooperation, it must find its originating factor in the logic of political action. By interpreting political integration in the light of the broader phenomenon of political cooperation, we may counterfactually state that in the absence of political integration, the scope of political action would have been narrower. Political integration comes precisely to impose a supranational architecture that enables political actions to become viable and effective, beyond the scope that would have prevailed under the circumstances of international political competition.

The theoretical analysis allows us to grasp the fact that political integration brings certain advantages for policymakers, which is tantamount to saying that policy makers have incentives to follow such a path. Of course, incentives are not sufficient elements for explaining human action in any determinist sense. At the end of the day, all political action is dictated by free will, and therefore by the ideas and errors that dominate the minds of policymakers. But make no mistake, the incentives are there, and, as the statistic provided at the start of this article shows us, policymakers have made extensive use of this instrument: 419 regional trade agreements are now in force!

• Because of harmonization and other protectionist measures that are going to be implemented from supranational level, some economic agents that are located in the politically integrated area can gain access to a larger market than the national one. Exporters will gain market share to the detriment of more efficient companies from third party countries. Although this amounts to a deviation of trade, and is not the result of a truly representative economic calculation on the part of entrepreneurs, a larger market may lead to a deeper division of labour. This will make up in part for some of the lost productivity which came as a result of preceding interventionist measures;
• At the same time, a larger market means that interventionist measures will reveal their futility in attaining the professed objectives after a longer period. If the negative consequences become evident only in a later stage, the time discount factor will make their costs appear lower. This will lead to the adoption of more costly political projects;
• A larger market managed by more than one policy maker will dilute the responsibility when a policy reveals its limits. Policy makers will be able to shift the blame on their peers, thus minimizing the negative impact on his legitimacy. Also, more intrusive measures can be motivated by pointing to the requirements imposed by other countries in international negotiations. This means that riskier and costlier political decisions are going to be adopted;
• Political integration, by definition, will lead to a harmonization of interventionist measures. Because policy makers are interested in maximizing their grip on the economy (only someone with a free market orientation would try to do the opposite, but political positions tend to attract, by their nature, people who favour the political means), the tendency will be to push harmonization toward the level reached by the most intrusive political entrepreneur that participates in the integration process;
• The process of harmonization will involve international agreements on matters that are the direct responsibility of the legislative branch. As the executive is the one to send representatives for negotiations, it can be argued that this represents a good opportunity to bypass a series of institutional constraints (suppose that the governing coalition does not have sufficient legitimacy or a majority in parliament) and for the executive to arrogate in its favour legislative prerogatives. At the same time, if a supranational institution is created to manage certain policy areas, national negotiators would be expected to favour ceding legislative powers, but keep executive responsibilities in their own grasp. This translates to supranational institutions favouring the enactment of regulation, as a means of compensating for the national executives’ reticence in allotting them a larger piece of the budget they enviously cling to (Vaubel, 2009);
• Because some barriers have to be dropped between the countries involved in the integration process, and because harmonization is going to bring in a rise in interventionist measures, other things being equal, higher barriers will be erected to combat the more productive exporters from third party countries, and sanctions will be imposed on the owners of capital that attempt to relocate their property.

Concluding remarks

First of all, this article has restored economic integration to the scope of economic science. We have shown that the essence of economic integration consists in the extension and intensification of the division of labour, a self-reinforcing process that originates in the voluntary interaction between individuals. At all times, in an unhampered market, all entrepreneurial projects, from all regions, are going to push specialization, and, therefore, economic integration to their praxeologically relevant limits.

The second aspect touched upon in this article was the nature of political action. As argued above, political integration enables more political action, which can come only at the expense of private property owners. Therefore, political integration can only undermine the division of labour, making it an inappropriate means for seeking deeper economic integration, but an excellent tool for maintaining the omnipotence of the state.

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