Extremism is Seldom Convincing

Ben Linskey writes for the Observer online (London) HERE:

“Health care debate masks real issues"

“There are two basic means by which to do this. One option is to establish a free market, in which the "invisible hand" famously identified by Adam Smith works to distribute goods in the most efficient means possible. The other is to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what. This latter method, of course, is fraught with problems. America has long favored free markets over central planning, but in recent years, the United States have abruptly and dramatically shifted course, bringing many formerly private sectors of the economy under government control and spending at an astonishing rate.”

Comment
Ben Linskey, reportedly a Libertarian, paints the picture in contrasting colours, when in fact it should be monochrome.

For a start Adam Smith did not use the metaphor of the invisible hand to illustrate how it “works distribute goods in the most efficient means possible”. That is a modern interpretation somewhat different from Adam Smith’s idea.

It gives the metaphor an aura it does not deserve nor does it carry it well. It’s what some Libertarians and assorted ideologues wish rather what happens.

I would think this should be abundantly plain to any reader of Wealth Of Nations who reads of Smith’s unfriendly suspicions of how 18th- century ‘merchants and manufacturers’ actually behaved in their steadfast pursuit of monopoly profits, schemes to eliminate competition, lobbying for special favours from legislators, gifts to those who influenced them, and hostility to free-trade for themselves.

Has that much changed in their behaviour today? How many lobbyists does it take to pass legislation in Congress or Parliament?

Smith’s use of the metaphor of the invisible hand in Book IV of Wealth Of Nations related to some – not all – merchants who were risk averse in respect of foreign trade (including with the North American British colonies) and who naturally preferred to trade locally in Britain. By doing so, they added to domestic capital formation, which raised domestic GDP (using modern terminology), considered by Smith, rightly, to be in Britain’s interests).

Markets were analysed in Books I and II of Wealth Of Nations and Smith did not mention the invisible hand as having any role in them. Whether the goods were distributed “efficiently” depended on a host of other factors, including profitability, successful investments, productively, lack of monopolies, the absence of restrictive practices and tariff protections.

Ben’s alternative to his vision of markets led by an invisible hand is “to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what.” This reads more like something Marx and Engel’s might have written. It was not the alternative postulated by Adam Smith to his ideas in Wealth Of Nations.

The alternative to freer markets where possible (not laissez-faire, which was never advocated by Adam Smith), with state-funded and legal interventions where necessary. This was precisely what obtained in 18th-century Britain, the system of “mercantile political economy”, with state interventions at all levels (the Statute of Apprentices; the Settlement Acts; hostile tariff and prohibitions based on “jealousies of trade”, wars of dynastic succession in Europe, the Navigation Acts, and colonies).

Modern states have gone far beyond the interventions of the 18th century, as well as continuing some of the habits inherent in jealousies of trade. That modern societies required new forms of intervention does not decry their need. Smith advocated state interventions in banking, for example, to protect the citizenry even though individually they were “manifest violations” on perfect liberty (WN II.ii.94: 324).

He was never an ideologue, a tag that unfortunately cannot be disclaimed by some Libertarians.

Beyond The Facts

Anthony North posts in Beyond the Blog HERE:

“Let me make something very clear. Greed is not bad. In order to succeed both individually and as a society, we need to be stimulated. Due to this, we have urges. Without them I doubt if humanity would have advanced at all – and greed is one of those urges.

The problem comes in the level of greed we display. Be too greedy and we hurt both ourselves and society, so it’s a matter of balance. Sadly, though, in today’s capitalism we have a glorification of greed, with it getting out of control. This was not how capitalism was meant to be, originally devised by Adam Smith as a
philosophy to go alongside thrift. We seem to have turned something noble into a feeding trough.”

Comment
“Greed is one of those urges” but is it predominant? Is everybody greedy for everything all of the time? I don’t think so. Life would be pretty grim if it was.

Bernard Mandeville, author of “The Fable of the Bees” (1724), developed a whole philosophy on the basis that greed predominated and he gave it his blessing (“Private Vice, Public Virtue”).

Ayn Rand modernised the idea that selfishness was a virtue and created a school for her philosophy (“Objectivism”) which found popularity undergraduates philosophy classes. (You can find some of her lectures on U-Tube, with wide-eyed students listening in awe).

However, greed and selfishness were never popular with Adam Smith. He called Mandeville’s philosophy “licentious” but plausible in parts as an observation of an aspect of human nature in his book The Theory of Moral Sentiments (1759).

Anthony asserts that “in today’s capitalism we have a glorification of greed, with it getting out of control.” Well, is a point of view, though you can read 18th-cxentury sermons in the same tone, and I doubt whether you will find examples throughout history where similar sentiments have not been expressed by someone about their contemporaries.

But Anthony also asserts “This was not how capitalism was meant to be, originally devised by Adam Smith as a philosophy to go alongside thrift.” Where does Anthony get the mishmash of erroneous ideas to compose such a sentence?

There is no such way in which ‘capitalism was meant to be’. Social systems are not ‘designed’ by anyone. The appear in various forms and experience different histories according to how individuals react to circumstances.

Hayek, and others, refer to this as a ‘spontaneous’, or ‘emergent’ order, unintentionally arising by the independent actions of people. That, if I may say so, is their strength. No single person could undertake the myriad of actions that would enable an economy to establish itself, for good or ill.

Which makes the second part of his paragraph, “originally devised by Adam Smith as a philosophy to go alongside thrift”, a misreading of both the emergence of what we call now call capitalism and a misattribution to Adam Smith of that which he had no conscious part.

For a start, Smith neither knew the word, nor the phenomenon of ‘capitalism’. The word itself was first used in English (Oxford English Dictionary) in 1854 by Makepeace Thackeray in his novel, The Newcomes. Smith died in 1790. He couldn’t devise that which did not yet exist, and couldn’t devise a complex economic system even if he had wanted to. In fact, he warned against ‘men of system’ who, ‘wise in their conceit’, force their designs upon others.

Adam Smith was a moral philosopher and saw his scholarly duty as ‘doing nothing, but observing everything’. He analysed how commercial societies functioned in 18th-century Britain – already a major trading economy and major political player in Europe – and wrote in his Wealth Of Nations a devastating critique of mercantile political economy, as practised in Europe.

The players in commercial society dispersed in their private lives did not conform to a master plan for commerce or government. Depending on their history and circumstances their commercial societies grew ‘slowly and gradually’ (some of which struggled because state interventions held back their natural courses and all were affected by the usual ‘jealousies of trade’, petty wars of dynastic succession, legislated anti-competitive tariffs, protections and prohibitions, and the vagaries of different personalities.

To see history as a journey from a sort of ‘ideal’ design towards “a feeding trough” is quite inadequate. Anthony North should re-think his assessments, perhaps read a bit more Adam Smith, and reflect on his current opinions.

Adam Smith Did Not 'Invent' Capitalism

Natasha Chart writes in Sustainable Food (HERE)
Natasha Chart writes in Sustainable Food (HERE)

‘Market Consolidation and Anti-Trust’

“It would have disgusted Adam Smith, the moral philosopher who invented capitalism, to see such powerful monopolies still running the show and claiming to be following the system he proposed to rid the world of mercantilism and all-powerful guilds.

Comment
We know what Natasha means but, for the record, Adam Smith did not ‘invent capitalism’.

The word itself was unknown in English until 1854 (Oxford English Dictionary) and Smith died in 1790. Smith wrote about ‘commercial society’, as practised in mid-18th century.

Moreover, societies are not ‘invented’ by anyone. They evolve of their own volition from the unintended consequences of the actions of individuals over long time periods. Attempts to ‘invent’ societies always fail (e.g., Marxist , socialist and other ‘utopias’, as, nowadays calls for a complete legislative change from modern capitalism to independent, local, entities), and end up with tyrannies unanticipated by their idealistic initiators.

Adam Smith was a philosopher who ‘did nothing, but observed everything’.

He was a fairly severe critic of the existing commercial arrangements of Britain, but also a very moderate realist about the prospects for major legislative changes in the near future. He believed tariff changes would only work if introduced slowly and gradually because of their disruptive consequences for the labourers affected by unemployment, and for the lack of will among legislators and those who influenced them, for example.

He did, however, propose the repeal of the mercantile Acts of the British Parliament, especially those pertaining to the ‘all-powerful guilds’, the Settlement Acts (preventing labourers leaving their parish to look for work in other parishes), the Apprenticeship Acts (preventing skilled and semi-skilled labourers from exercising their skills in places other than where the served their 7-years as apprentices, and preventing the easier spread of new technologies in 'apprentised trades'), and the legislative abuses of the Acts of Navigation (he agreed with the Act in principle when limited to ensuring that Britain had enough seamen and ships to defend it island from naval attack, but thought the all-embracing monopoly of the colonial trade (with North America and the Caribbean) was detrimental to Britain’s (and the colonists’) interests (see Book IV, Wealth Of Nations)

In the event, some of these changes were not affected until the mid (the Navigation Acts) and late 19th century (universal education provisions).

But, of Adam Smith ‘inventing’ capitalism, there is no evidence whatsoever. That he would see modern society as essentially unchanged from 18th century mercantile political economy that he knew so well (timid steps to free-trade in the major economies, like the US and Europe; predominant popular views associated with ‘jealousies of trade’ and beggar-thy-neighbour' popular policies; wars not for defence and often for indeterminate ends; and the dominant practises of local monopolies, etc.,) I do not agree with Natasha that he would be 'disgusted', or even surprised.

Smith well understood the foibles of people, especially in government and the legislatures. In probably the only prediction he ever made - the future supremacy of the USA's economy over all others by the late 19th century - he would feel vindicated
But 'disgusted' - I don't think so.

Adam Smith on What Needed to be Done

‘sposton’, a commentator, responds to Paul Krugman, Nobel Prize winner, in a column on the recession and when it will end (recovery in the summer, and ending in 2014, says, Krugman), in the Huffington Post HERE.

‘Sposton’ broadens the discussion:

‘My friend, you know very little about moral philosophy and its history. Did you know that Adam Smith was first and foremost a moral philosopher? And so were many other early liberal economists. Smith's never reduced himself to a mere economist in your sense of the word. Your statements are the end result of modern reductionism than liberal economists. Our current situation is precisely the result of this kind of thinking where one discipline is utterly divorced from another and all divorced from any moral or ethical anchor. Without such an anchor our knowledge is utterly devoid of any wisdom and that is what our world need now more anything else. This methodology may have brought some good results in science but on the other hand it has diminished us all.

In its own little thought universe all you have said makes some sense. The problem lies in the nature of your universe. It belongs more to the domain of our problems and less so to the domain of solutions.’

Comment

I have no idea who ‘Sposton’ is or what else he/she stands for. Another commentator lists all of Krugman’s impressive awards beside a Nobel Prize, but while I acknowledge them and Krugman’s achievements, I am sceptical of their relevance when precise dates are given for a global event of the current magnitude.

If Krugman is correct, we shall stand in awe; if his precision is wrong, we can expect concurrent explanations from him about ‘surprises’, ‘lags’ and such like. We certainly will not hear his silent retirement from the prediction business.

This partly is why I noted ‘Sposton’s’ comment. Moral philosophy in Smith’s day encompassed many areas of science beyond political economy, or ‘police’ as it was known in the 18th century.

In Smith’s case, it included jurisprudence (how civil societies ‘ought’ to be governed – he wrote but did not publish a book on the subject; it was burned on his order in 1790), but he saved the philosophical method, published posthumously in 1795, and known as his ‘History of Astronomy’). He also wrote on history and the history of politics, and how the range of human behaviour influenced events in all their complexity.

Above all, Adam Smith did not make predictions about the future; his was a backward-looking appreciation of the past and a studied analysis of the present.

He did not say that everybody pursuing their self interest would necessarily produce an outcome beneficial to society; a ludicrous proposition as any acquaintance with history – of the present! – would confirm. It was human intervention, for good or ill intentions, that creates the very situation that policy makers, and individuals following their self interests, try to improve (often making them worse in the process too).

Adam Smith did not recommend sitting back and doing nothing – the logical advice if he had the views attributed to him by modern economists. Wealth Of Nations was a critique of the then political economy of the governments of Britain since the 16th century, know to Smith as mercantile political economy (‘mercantilism’ is a word, also attributed to Smith, first applied in the late 19th century; Smith died in 1790).

If he had believed that self-interest was enough he would have had no need to spend 12 years writing Wealth Of Nations!

Smith’s critique was aimed at the high policy levels of legislators, and those who influenced them, trying to persuade them to desist from policies that slowed down the growth path to the spread of opulence.

In these policies, ‘merchants and manufacturers’, were complicit; indeed, their self interests made them so; by narrowing the competition they widened the market for their goods and raised prices against consumers, many already on the bread line. Their self-interests did not benefit society; Smith knew this and said so, explicitly.

Only modern economists, Krugman included, teach a model of society without humans, who supposedly are rational maximisers, harmoniously creating an optimum output; or, in the sophisticated version (I am being a touch sarcastic) would be doing so if only government did not intervene at all.

It is the moral corruption of the players, legislators and influencers, producers and consumers, alike that leads to a far less sub-optimal outcome, precisely because self-interest, while the powerful driving force behind human endeavour, is best not left completely alone.

If moral teaching is not enough, which was the subject of Adam Smith’s earlier work, The Theory of Moral Sentiments (though its ideas were taught by Smith alongside his lectures on ‘police’ and civil government at Glasgow University in 1751-64), as Smith believed it was not, then a strong system of justice was essential, as well as a culture of Liberty, enforced by law.

Smith was not a utopian. He did not believe that there was a ‘master plan’, which if adopted would change the world towards perfection. Far from it; he denounced such ‘plans’ as the dangerous illusions of ‘men of system’, arrogant in their approach to society.

Smith took human nature as it was, pointed out several major areas where what was going on was deleterious to society (protectionism, monopolies, ‘jealousy of trade’, wars beyond the needs of defence against invasion, legal restraints on labouring people ‘combining' to raise wages or stop them being cut, while employers could ‘combine’ to resist their employees, laws preventing anybody but members of ancient Guild monopolies from exercising applying their labour as they wished, laws preventing working men seeking employment elsewhere than in the parish they lived in, and national policies that failed to educated children in ‘reading, writing, and account’ (girls were not educated at all, except in the middle class and above), and the absence of palliative care for persons afflicted with leprosy and ‘other loathsome diseases’.

In all this, Smith did not expect sweeping changes or any immediate changes. He set out only to persuade; not to impose. He did not believe that international free trade would ever be enacted, nor that slavery would ever be abolished (it’s still operating today in some countries), nor that the world would become full of ‘sweetness and light’. But it could be improved, at the margin, if legislators and those who influenced them were persuaded to do so.

Adam Smith on Defence

The Public Choice Capitalist (‘shifting your thought consumption’) HERE writes on:

“Rent Seeking during Wartime: A Smithian View of Military Action”

“Adam Smith believed that British Imperialism was bankrupting the country. He believed that most of the time the cost of the action was much higher than the benefit for the public. This is an area of research I have done a lot in. Scholars from Hobbes, Sumner, Cobden, and Schumpeter have all concluded at one time or another the companies that benefit from war either foreign or abroad will lobby the government for the exclusive contract. This is no different than domestic lobbying from teachers unions to Department of Education. The lobbying will allow the politicians who support more war actions to stay put in place. This is likely why the Democrats have not been as strong in their actions as they have been in their rhetoric.”

Comment
A good start to the post (a bit exaggerated: he didn't suggest that Britain would be bankrupted - its rate of growth would be curtailed), but needs to go further to explain Smith’s views on ‘military action’.

Smith's first duty of government action was the defence of the country from invasion and violence of other societies (WN Book V, Chapter 1: apologies; my Smith library is in Edinburgh; I am in France; it would take too long to consult my 1818 edition of WN, given my other tasks this morning). This was not a trivial duty, especially on a shared continent, riddled with dynastic conflicts and ambitions. It was, however, a defensive stance, not an ambitious stance for the covetous.

Smith’s critique of mercantile political economy (WN Book IV) including those policies that were based on ‘jealousy of trade’, suspicion of neighbours, and what we call ‘zero-sum’ trade relationships.

Smith saw the dangers of colonial ventures, especially when accompanied by monopolistic measures beyond their initial role when setting up trading posts in distant countries (India and North America). However, for an island power, such as Britain, which was exposed to naval sanctions by foreign kingdoms, he saw the minimal commercial necessity for the Navigation Acts (to provide sufficient experienced naval personnel to man warships in defence emergencies), though he had severe reservations about their role in enforcing commercial monopolies of trade as they had become by the mid-18th century with the North American colonies.

Overall, for Smith, defence was of more importance than opulence (without the former, you would lose prospects for the latter). The implied question he posed was how much defence was enough? The slope from sufficient defence to sufficient war capacity to engage in interventions in the affairs of foreign countries was slippery. And Britain was too easily dragged into such conflicts (partly a product of the prevalence of dynastic kingdoms dominating Europe and their colonies).

Smith was not opposed to defence industries where necessary for the defence of the country. For the commercial defence industries their contribution to commerce was productive (they existed to make profits by paying for their costs, which included their owners’ profits; the government’s expenditure on the costs of defence supplies, including the wages of soldiers and seamen, was unproductive – they did not reproduce their costs).

Modern questions relating to ‘how much defence is enough’ are not much different now than in Smith’s time. Britain was projecting its interests with an increasing global reach; its colonies were showing evident signs of becoming major commercial players (held down by the UK Navigation Acts in Britain’s, not the colonies’, interests). The 18th century was a busy century for major, and expensive, wars, and just over the horizon was the even longer, and more expensive, Napoleonic wars (Smith complained at the expence of the 7-years war at £125 million – which could have gone into growth-inducing productive investment).

The crucial decision point was the loss of the British colonies in 1776-83 (itself no mean expense). Smith advised:

‘If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in times of war, and of supporting any part of their civil or military establishments in times of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.’ (WN last paragraph, last page).

Smith’s principled advice was disregarded: Britain went on to build a second empire, bigger than the first, which with the smaller 19th-century wars, and the two much bigger world wars, was to cost unprecedented amounts of gross annual product. It many senses, Britain has still not reconciled herself to the ‘real mediocrity of her circumstances’, and still plays, or pretends to play a role as a world military and diplomatic player.

Adam Smith on Government Roles

Leon Fink, a history professor at the University of Illinois at Chicago, writes (16 April) on “The piratical world of commerce” at the Chicago Tribune HERE.

“Unlike the 18th Century Barbary pirates, to whom they have been compared on the superficial grounds that they are both poor Muslims feeding off oceanic traffic, today's pirates are stateless actors generally operating in a medium (the ocean) of weak or even fictive states. Moreover, though they may be the most violent actors at sea, the pirates' mercenary motives and ethics place them in the mainstream of today's shipping world.

In "The Wealth of Nations," 18th Century political economist Adam Smith famously anticipated a world in which an unfettered marketplace would maximize production, trade and wealth. Yet, even as he counseled restraint from governmental interference, Smith allowed himself wiggle room when it came to commerce and the sea. Maintaining access to the navigable world and, if possible, control of the world's trade, was a crucial mark of national power.

For the most part, world shipping today is the prototype for "globalization," the reign of private marketplace competition over any national or political consideration. In keeping with a pattern of deregulation that has steadily grown since World War II, shipowners (commonly centered in the richer, Western countries and Japan) have evaded the labor and tax laws of their home states by registering their vessels with governmental weaklings like Panama, Liberia and the Marshall Islands as "flags of convenience".”

Comment
Smith was far too much a ‘man of the world’ to have ‘anticipated a world in which an unfettered marketplace would maximize production, trade and wealth’ (much of that notion was invented by modern economists in the 20th century).

Also, he was not confident that free trade would be established (he called that idea utopian) [WN IV.ii.43: 471], and he criticised the French Physiocrats for demanding that ever aspect of their philosophy or 'precise regimen' (which some of them called ‘laissez-faire’) be implemented in full (WN IV.ix.28: 674].

Smith did not anticipate 'a world in which an unfettered marketplace would maximize production, trade and wealth' nor counsel against all government interference as a principle; he certain counselled against those 18th-century examples of government interference, some of them going back to Elizabethan times (Acts of Settlement, Statute of Apprentices, Incorporated Trades and Guilds, Mercantile Political Economy, legislators and those who influenced them imposing legal monopolies and tariff protections, and general arrogance that they knew better than individuals about managing their affairs.

But it is essential to understand that Smithian political economy saw important roles and major roles for government in infra-structure investment (roads, canals, harbours, city sanitations, pavements, and street lighting), administration of justice, and in public-interest activity (Royal Mail, banking regulations, interest rate ceilings, cloth stamping, gold assaying, palliative health care, education and ecclesiastical freedoms).

To these must be added his acknowledgement of the government’s ‘first duty’, to protect the society from invasions, among which he recognised the need for an island society like Britain to ensure a sufficiency of naval power to protect its foreign trade (the Acts of Navigation). Of course, British governments, captured by special interest groups, took these sensible measures to the extremes of armed unnecessary interventions beyond defensive necessity to wilful intervention in Continental dynastic disputes, in unprofitable trading companies and colonies, and general hostilities based on toxic ideas of ‘jealousy of trade’, mercantile monopolies, and excessive expenditures (the seven-years war being typical at £120 million).

However, Professor Leon Fink’s article on the modern problem of piracy, apart from these observations, is an excellent read and I recommend that you follow the link above.

Apologies for some duplicate postings but I could not post this afternoon for some reason and my attempts led to duplication off screen.

A Reckless Optimist Writes

Pete Murphy posts on Five Short Blasts Forum HERE:
His recent post is on “Clumsy Trade Policy” and it expounds a new theory of ‘safe’ protectionism by weighting tariffs on manufactured goods by an index of the population of a country – the larger a country’s population the more the imposed tariff. It's not difficult to work out who he is aiming at.

His assurances are also predicated on a ‘hope’ and ‘assumption’, but not much more, namely that countries (I see Germany is included!) affected by a substantial fall in their exports to the USA would not retaliate.

History shows that there is no fire-safe way in which imposing tariffs is ‘safe’ from retaliation, and retaliation is more likely when there is economic distress, of which all affected parties are aware. It called a ‘beggar thy neighbour’ strategy. Moreover, all US trading partners will be aware of the aims of the policy – they read the US press, watch Fox News and CNN, and their diplomats keep tabs of Congressional Debates.

The open and obvious aim of such a tariff policy is to improve the fortunes of the US while necessarily worsening the economic performance of those upon which the weighted tariff policy would be applied.

Pete Murphy includes these assertions in his post:

“The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong - culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application - like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.”

And:

“Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.”

Comment
The trade policies of the US (which are not free trade) are not there because of what Adam Smith wrote in 1776 or David Ricardo wrote in 1817 (that gives far too much credit to them); they take their current forms because it is in the interests of the US to apply such policies.

I should think that international trade policy is the most researched area of economics imaginable, from all sides of the arguments about it, from people of significant standing in the subject, plus not a few ‘scribblers’ who believe they have spotted some missing element the theory and practice of internation trade (I remember as a student almost only having time to read the titles of all the books and articles written on the topic, never mind their contents) backed by endless econometric analyses, in what thousands of these lifetime-scholars did not manage to spot, in two or more hundred years.

International trade is highly political, and has been since medieval times. European countries went to war many times with neighbours over all kinds of issues, including the trivial and the momentous, and trade relations were often the cause of, first ‘jealousy of trade’, then angry resentment, and almost always in the spirit of mere speculation by scribblers about which side would ‘win’ as a result of the contest of arms, or a contest of those surrogate arms, called tariffs and retaliatory prohibitions. Trade wars are not a one round game.

Pete Murphy describes his proposal as “an elegant approach that’s rooted in logic”, which he assures readers “can avoid the unnecessary collateral damage of a trade war”.

It’s a safe bet he is wrong.

Tariffs Are No Answer

Three economists, Drs Raymond Richman, Jessie Richman, and Howard Richman, write the
Trade and Taxes Blog HERE:

“Balanced Trade will Create Jobs”

“While the bailouts have given financial enterprises some stability, they haven’t created a single job. During the last two decades we lost millions of good industrial jobs as a result of our huge trade deficits. By restoring our trade balance, we could create millions of good jobs. We can do this at very little cost. Indeed, the solution we recommend would earn hundreds of millions of dollars for the U.S. treasury. Moreover, the trade deficits are the result of mercantilist policies of foreign governments that are the antithesis of free trade. Under World Trade Organization rules, countries experiencing chronic trade deficits with another country are entitled to take remedial actions, such as tariffs and quotas. Free market forces to correct trade imbalances are practically non-existent.

Economic theory describes the mechanism for correcting trade deficits under a system of flexible exchange rates. In theory, the value of a country’s currency should rise when it is experiencing a chronic trade surplus and fall when it experiences a chronic trade deficit. China’s yuan, for example, is believed to be grossly undervalued relative to the U.S. dollar. If the yuan appreciated, Americans would have to pay higher prices for imports from China, while the Chinese would find the prices of American goods to have become cheaper. According to the theory, the U.S. would import fewer goods from China, and China more goods from the U.S. until trade is in balance. The system has not worked. Dr. Bernanke himself has said market forces were not succeeding in reducing the trade deficits because as the result of the huge flow of foreign savings to the U.S. the dollar remained overvalued. He suggested that foreigners should be encouraged to use their savings at home instead of sending them to the U.S. The trouble with his advice is that the trade surplus countries, particularly China but also Japan, Germany, OPEC, and many emerging economies adopt policies to perpetuate and grow their trade surpluses with us. They call their policies export-based development but we call it by its pre-Adam Smith name, mercantilism.

Incoming flows that are invested in new plant and equipment, like new automobile plants, have given employment to hundreds of thousands of American workers. But such investment was a small fraction of the flow of funds to the U.S. as a result of the trade deficits. The latter financed the irrational exuberance we experienced in the securities and housing markets without creating a single job. Indeed, the flow of funds to the U.S. weakened our own savings and investment.

Both the Japanese, until recently, and the Chinese limit imports from the U.S. by requiring prospective importers to obtain the permission of a government agency. In effect, they have been applying a form of import licenses in addition to exchange controls. Although the U.S. government has repeatedly sent missions to complain about such practices, jaw-boning has had little effect, none on Chinese policy. The purpose of international trade is to enable countries to exchange a bundle of goods they value less for a bundle of goods they value more. There is no reason to accept deliberate policies of foreign governments to deindustrialize the United States.

To bring trade into balance, we recommended in our book, Trading Away Our Future (2008) a system of Import Certificates similar to a proposal by Warren Buffett, which we believe violated the rules of international trade. In effect, our proposal would restrict imports by physically limiting the value of the total amount of goods that could be imported from any country with which we have chronic trade deficit. I now believe that to be a poor way of reducing the trade deficits. It would create a bureaucracy to auction off import rights and would inevitably become corrupted by our elected representatives in Washington. Instead, we recommend a cross-the-board tariff at a single rate, say 10 percent, applicable to China, Japan, Germany. OPEC, and other countries enjoying a chronic trade surplus with us. The result works just like flexible exchange rates are supposed to work.

It would act like a revaluation of the currencies of the countries with which we are experiencing chronic deficits. The price of imports from, say, China would rise, reducing our demand for imports from China. Countries could reduce the tariff by importing more from us. In the meantime, our tariff revenues would amount to billions of dollars.

We are left with no alternative except a tariff on all imports from these countries.”

Comment:
The unfairness complained of by the good Drs assumes that the US is a free trade economy. It isn’t. They argue that “trade deficits are the result of mercantilist policies of foreign governments”. However, the politics of foreign trade suffer from protectionist instructs everywhere, including in the USA.

“They call their policies export-based development but we call it by its pre-Adam Smith name, mercantilism”.

I thought this was promising until I got to this sentence. Adam Smith called these protectionist policies part of ‘mercantile political economy’ – he never used the word ‘mercantilism’ (he died in 1790); it is a late 19th-century German word, imported, if you like, into the writings of English speaking economists from then on. Moreover, the policies of mercantile-minded governments never went away from the 16th century onwards in some form or other, and they operate, still today, across the world. It’s called ‘beggar thy neighbour’.

This is illustrated in the article by the statement: “Free market forces to correct trade imbalances are practically non-existent”.

Yes, it’s a world wide phenomenon, against which the WTO is impotent. Governments everywhere cannot deliver free trade because of domestic politics, where these count, and won’t deliver free trade where domestic politics don’t. Governments of all kinds prefer the benefits of cross-border manipulation of exchange rates where they benefit their economies.

So, what do the three Dr Richman’s suggest as their remedy?

“we recommend a cross-the-board tariff at a single rate, say 10 percent, applicable to China, Japan, Germany. OPEC, and other countries enjoying a chronic trade surplus with us. The result works just like flexible exchange rates are supposed to work.”

They also conclude that:

“Balanced trade would create new investment opportunities.”

Oh dear! I assume most Lost Legacy readers will spot the weakness in their policy of imposing across the board US tariffs on all deficit trading countries.

Yes, the success of uch tariff impositions assumes there will be no retaliation by the countries concerned! And retaliation is almost inevitable.

Everybody can play the game of passing their existing, or future, trade problems onto their trading partners. After how many rounds of mutual ‘across-the-board-tariff impositions’, would it take for mercantile economies to slow down the world’s foreign trade? And how many jobs would that cost in America and elsewhere?

If, say, the US has a trade deficit in automobiles – because US consumers prefer the better value (for them) of buying imported models – it may be more sensible to require the US domestic car industry to start over and to dramatically improve its products (electric, hydrogen, and hybrid fuelled model, also tackling the oil deficit). Given an opportunity to enforce change on the US giants – no bail outs – the US government may be missing the golden opportunity to do just that.

However, all governments, including the supposed ‘free market’ US version, are subject to immense lobbying forces capable of influencing legislators where it hurts (loss of political power) and where it benefits (helping to keep them in power and, for some of them, in the living standards to which they have become accustomed).

It was ever thus.

In fact Adam Smith wrote all about it in Wealth Of Nations
in his critique of mercantile political economy (the ‘capture’ of legislators and those who influence them by the vested interests of some UK ‘merchants and manufacturers’) in his detailed analysis of Britain in the 18th century under governments run mainly by rich landowners, who followed the fallacies of the political economists of his day, because they didn't know any better.

Today, there is no excuse for such ignorance, unless you ignore the politcal dimension of political economy.

An Historian on British History

Richard Reeb asks in DesertDespatch.com (9 December) HERE:

“Whatever happened to political economy?”

“In a previous column I questioned the idea that there is something called “the economy” and suggested instead that we refer to our multiple transactions in the global marketplace with the term of the United States Constitution, viz., commerce.
This is not just a matter of semantics. For if we choose our words with care, we accurately name the things to which the words refer. Before the term “economy” was applied to our domestic and foreign commerce, it referred to a virtue — of individuals, businesses and nations. The first dictionary definition of economy, after all, is “careful, thrifty management of resources, such as money, materials, or labor.”

Just as households and businesses must practice economy in order to make the most prudent use of their resources, so must governments. But with its powers of taxing, spending and borrowing, government has access to considerably more resources than any household or business. That means the temptations and opportunities for abuse are much greater.

As the purpose of our national government is to make laws for the common defense and general welfare, it is not, by definition, designed, like the household, to meet the daily recurrent needs of anyone; or, like a business, to make a profit. It exists to make households and businesses safe and secure.

For most of our history, American government has practiced political economy, out of conviction and necessity. That is, it is limited in its scope and its powers and not entitled to huge sums to conduct its functions, however greater those were than anyone else’s. And as long as the federal government in particular performed its constitutional functions, heavy taxation was both difficult to justify and hard to obtain against jealous state governments.

To appreciate the soundness of this limited view of economy, it is helpful also to be mindful of what commerce is and why it is so indispensable to modern republics. In ancient times, commerce referred to sea-going trade, as commerce includes the root “mer,” meaning sea. Hence, Athens, a naval power, supported commerce that its rival, Sparta, a land-based power, took little interest in.

Commerce contributed greatly to the decline of medieval feudalism, a system that combined perpetual armaments and subjugation by the lords of the peasants. Those aristocrats who aspired to national crowns found the nascent commercial classes a vital alternative to depending upon their rivals for financing their kingdoms, especially their wars.

The middle class, so called because its members were neither aristocrats nor peasants, made money in trade with cities and states other than their own. In return for protection or favored treatment, they would lend money to kings.

There were essentially two approaches that kings of the early modern nation states took toward the generation of national wealth. One supported acquisition of precious metals and hoarding them for national purposes. Spain, the first great nation at this time, was an exponent of that view. Another view, favored in Britain, was that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation.

Adam Smith’s Wealth of Nations provided the most powerful argument for the second view of national wealth. The British government was no less tempted to commandeer the resources of the country than the Spanish, but Smith made a compelling case for laissez-faire (let them do as they please) as far more productive than national missions to exploit natural resources the world over to enrich the government’s coffers. Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be.

As we stand on the brink of massive efforts to “rescue our economy” from its current credit crisis, it is helpful to remember these historical lessons on how to build up national wealth and, by implication, what diminishes it. The federal government tried to spend its way of the Great Depression and failed, just as its massive programs 30 years later failed to end poverty. Only individuals and businesses practicing economy, supported by a government practicing the same virtue, can accomplish that.

To the extent that our government embarks on a massive program of public works, business bailouts, unemployment compensation, forced unionism and uneconomical energy schemes, our current crisis will become much worse and we will imagine only that we didn’t do enough rather than far too much to “save” our commerce.”

[Richard Reeb taught political science, philosophy and journalism at Barstow College from 1970 to 2003, and is the author of “Taking Journalism Seriously: ‘Objectivity’ as a Partisan Cause” (University Press of America, 1999).

Comment
On the whole Richard Reeb’s article is very good. It is quite close in its treatment of history to Adam Smith’s approach and analysis in his Lectures on Jurisprudence (1762-3), published in 1982 and, later, which he reproduced in Wealth Of Nations (1776), both republished by Liberty Press, Indianapolis. For this I was impressed by Richard Reeb’s understanding as presented in a few sentences.

First, I would agree which Richard’s depiction of the Spanish policy of mercantile political economy – seize the gold from its colonies in South America (of which Smith was extremely critical of their barbaric methods) and then hoard the gold in Spain under the misunderstanding that gold constituted real wealth.

I would agree that “Adam Smith’s Wealth of Nations provided the most powerful argument” that national wealth did not consist of gold and silver bullion, but consisted of the ‘annual production of the necessaries, conveniences, and amusements of life’ and ‘that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation’ (I am not sure that Smith made an issue of the amount of taxation; he remarked also that the expenses of the State required the continuation of some level of tariffs and duties, despite this inhibiting some level of foreign trade).

But from here I think Richard conflates his analysis of the errors of mercantile political economy and Adam Smith’s advocacy of his alternative policy to the dominant political economy of his age, to imply that with “the most powerful argument Wealth Of Nations” the errors of the old political economy were approved, replaced and practiced by Britain. Would that this happy event had happened!

The problem for the ‘most powerful argument’ of political economy is the politics part of it. Britain was engaged throughout the 18th century with numerous wars and their related diplomatic intrigues, and practised the far more important errors of mercantile political economy than the ‘gold-hoarding fallacy’, prominent as it may have been in the debates at the time.

I refer to the fallacy of the ‘jealousy of trade’ which necessarily led to trade wars, penal tariffs, trade monopolies such as the Acts of Navigation, and at the apex of the errors, the foundation of colonies.

Britain, an island commercial economy with a burgeoning naval power around Europe and across the north Atlantic and Caribbean, followed these aspects of mercantile political economy with a ruthlessness that made it a major European power, which not even the loss of its north American colonies (excepting Canada and its Caribbean possessions) dealt a stunning blow, or even a serious inhibition.

Adam Smith’s robust critique of the errors of mercantile political economy (Books III and IV of Wealth Of Nations), were not adopted by the British or any other government of the day, and, if I may suggest, are still largely ignored by modern historians of economics.

Richard Reeb, sees a set of ideas and assumes they became government policy; they were a menu for change but were treated by politicians more a la carte than table d’hote.

Indeed, having lost one Empire, Smith admonished the government (in the last paragraph of Wealth Of Nations, V.iii.92: p 947; Canaan, p 900) to “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”. Instead, Britain continued to found a second Empire around the remnants of the first in north America, the Caribbean, India, Australia, and New Zealand (and other spots around the globe).

My last comment, not surprising to regular readers of Lost Legacy, is the statement that “Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be”.

This needs to be treated with caution on two grounds: first, the ‘invisible hand’ is and remains a myth as presented by Richard (details of Smith’s actual singular use of the metaphor in Wealth Of Nations can be consulted in regular posts, and my detailed critique downloaded from the Home page).

Second Smith’s preference for ‘businessmen’ over sovereigns and governments was conditional on competition, justice and education. He considered the damage that business monopolies, protected markets, tariffs, and ‘jealousy of trade’ did to the spread of opulence, severely qualified whether their merits on ‘efficiency’ worked for the public good.

Bad government and bad traders were close competitors in distorting a commercial economy; I would not give the latter the endorsement of a blank cheque for their superiority over the former.

But Richard Reeb's article is well worth reading and passing around.