The Free Trade Trap: Why Wealth Isn't Reaching Everyone (And How to Fix It)

 

The Free Trade Trap: Why Wealth Isn't Reaching Everyone (And How to Fix It)

We all hear how free trade is supposed to make the world richer. Countries sell what they're good at making, and we get cheaper stuff.¹ But lately, it feels like only some people are really winning. What's going on?

Think of it like a three-sided problem: free trade, land rent, and wages. They're all connected, and if we don't understand how, we can't fix the problems.

The Upside of Free Trade: When countries trade freely, they get better at making things. This makes the whole world a bit wealthier, and we get more choices when we shop, often at lower prices.

The Hidden Problem: Land Rent: But here's where things get tricky. When the economy gets bigger thanks to free trade, land becomes more valuable. Think about land for factories, shops, or even just houses. There's only so much of it, and everyone wants it. This means the people who own land can charge more and more rent. This rising rent eats into the profits of businesses – the very businesses that free trade is supposed to help.

The Squeezed Workers: Wages: Now, what about workers? At first, when the economy is booming, there might be more jobs and wages might go up a little. But over time, higher wages can attract more people looking for work, sometimes from other countries where wages are lower. This can create more competition for jobs, pushing wages back down to a basic level. At the same time, as more people move in, the cost of everything, especially rent, goes up, leaving workers with less buying power even if their paychecks look a little bigger.

The Unfair Result: So, free trade makes more wealth, but a lot of it ends up in the pockets of landowners through higher rent. Businesses have less profit because of this, so they try to keep wages low. Workers struggle because their pay doesn't keep up with the rising cost of living, especially rent.² This can lead to the economy slowing down because people don't have enough money to buy things, and businesses don't see a reason to invest more.

The Usual "Fixes" - And Why They Don't Go Far Enough

People have tried to fix these problems with some common ideas:

• Taxing Land: Taxing the value of land might stop people from just sitting on land to get rich, and the money could be used for other things. But this doesn't directly stop rent from going up in the first place.
• Controlling Rent: Limiting how much rent can increase might help people afford homes and businesses afford space. But it can also make people less likely to build new rental properties.
• Building Public Housing: Having the government or community own more land and housing could lower rent. But it can be slow and expensive.
• Helping Unions and Raising Minimum Wage: Stronger unions and higher minimum wages can help workers get better pay.³ But if rent keeps going up, those extra wages don't go as far.
• Education and Training: Giving workers more skills can help them get better jobs.⁴ But even skilled workers can struggle if rent and living costs are too high.
• Fairer Trade Deals: Making trade rules better for workers and the environment is a good idea.⁵ But it doesn't solve the problem of rising land costs at home.

These are all attempts to patch the holes, but they don't really fix the underlying problem of how wealth gets stuck with landowners.

A Smarter Way: The Theory of Constraints Approach

There's another way to think about this, called the Theory of Constraints (TOC). Instead of just treating the symptoms, it asks: What's the real bottleneck that's stopping wealth from flowing to everyone?

The TOC says the main problem is that landowners can take extra money (rent) without having to put that money back into making things better for the economy. It's like a pipe where wealth flows, but the landowners have a valve that lets them take a big cut without putting anything back in.

So, instead of just trying to give more money to workers after the landowners have taken their share, the TOC suggests we need to fix the valve:

• Tax land more and other things (like work and profits) less. This could make it less attractive to just hold onto land and more attractive to actually use it productively.
• If rent goes up, make landowners invest that money back into things that benefit everyone. This could be building more housing, improving infrastructure, or making businesses more productive.
• Make it easier for people to live in different areas. This could reduce the high demand for land in expensive cities and naturally lower rent.
• Have the community or government own important land. This way, if the land becomes more valuable, everyone benefits, not just private landowners.
• Share the extra wealth created by a strong economy directly with workers. This could be linked to how much more productive the economy becomes, and the money could come from the extra value of land.

Why This Approach is Better:

The TOC way is better because it focuses on the root cause of the problem – the unchecked power of landowners to capture wealth. It tries to make the whole system work better so that wealth flows more fairly to everyone who contributes to the economy. It's not just about taking money from one group and giving it to another; it's about making sure the system itself is designed to share the benefits of free trade more evenly from the start.

Instead of just fighting the fires of high rent and low wages, the TOC approach aims to remove the fuel that keeps causing those fires in the first place. It's a way to make free trade truly benefit everyone, not just those who happen to own the land.