Protectionism and Free Trade: Recent Episodes
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Search Protectionism and Free Trade for how government policies and intervention protect certain areas and markets, while they hinder and make those markets less responsive to the will of the consumer.
People migrate for many reasons, including moving to a better economy and escaping political persecution. But one thing is certain: people are going to vote with their feet.
Original Article: "Voting with Their Feet: The Lure of Migration"
The Biden Administration is attempting to do a victory lap for "Bidenomics", but the public isn't buying it. On this episode of Good Money, Dr. Jonathan Newman joins the show to talk about his doubts of a "soft landing" for the economy, and the lies being told to sell Central Bank Digital Currencies.
Jonathan Newman's article on CBDCs: Mises.org/GM18a Jonathan Newman's article on "Soft Landing" headlines from 2007: Mises.org/GM18b
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
The Federal Trade Commission is heavily scrutinizing the proposed merger between Microsoft and Activism. Why? Sony is against it, demonstrating that antitrust law is about protecting favored producers, not consumers.
Original Article: "The FTC Should Answer Its Call of Duty to Gamers"
During a debate on capitalism with James Otteson, Michael Anton opined that free markets are harmful to a nation's economy. Perhaps he needs to learn economics.
Original Article: "The Economic Nationalists Are Wrong: Free Trade Means Freedom and Prosperity"
The Biden administration has decided that the REAL problem with housing is that the wrong people are saving money and making timely mortgage payments. They must be punished.
Original Article: "Biden’s New Intersectionality: Where Equity Policies Meet Bad Economics"
As the US government debases the dollar, other nations take notice and possibilities increase that another currency based on sound principles might emerge.
Original Article: "Will a New BRICS Currency Change Anything? Maybe"
A bedrock of Austrian economics and libertarianism has been free trade. Unfortunately, some people who claim to value liberty no longer value unhampered exchange.
Original Article: "Are Libertarians Abandoning Free Trade?"
Are NASA contracts propping up the private space industry? Or are Government regulations stifling the private space race?
Dr. Eli Dourado, Senior Research Fellow with the Center for Growth and Opportunity at Utah State University, joins Bob to discuss the recent "successful failure" of the exploded SpaceX launch and the differences between government and privately funded space travel.
Dr. Dourado on NASA contracting private companies to build their shuttles: Mises.org/HAP393a
Dr. Dourado on the Artemis moon program: Mises.org/HAP393b
The Murray N. Rothbard Memorial Lecture, sponsored by Steven and Cassandra Torello.
Recorded at the 2023 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 16–18, 2023.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
How do people in a pluralistic society live peacefully with each other? In his review of Kenneth McIntyre's book, David Gordon points to negative liberty as the best way to preserve values.
Original Article: "Nonmeasure for Nonmeasure"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Ludwig von Mises Memorial Lecture, sponsored by Yousif Almoayyed.
Recorded at the 2023 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 16–18, 2023.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
President Biden's call for more protectionism isn't aimed improving the US economy. Instead, it is about creating a war-footing autarky.
Original Article: "Readying the War State: Biden Recommits to Protectionism in the SOTU"
This Audio Mises Wire is generously sponsored by Christopher Condon.
President Biden's recent call to "buy American" is doomed to failure, just like all other protectionist schemes.
Original Article: "Biden versus Bastiat"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Relatively free trade and capital mobilization have greatly raised living standards in recent years. Yet those that call themselves globalists are less interested in trade than in unipolar political power, pushing violent, disastrous schemes.
Original Article: "Globalization, Not Globalism: Free Trade versus Destructive Statist Ideology"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Despite worries that foreign "competitors" will surpass economic production in the United States, innovation and entrepreneurship are still important here. For now.
Original Article: "For Now, Innovation and Entrepreneurship Still Holds a High Place in the USA"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In the name of "protecting workers," progressive legislators put people out of work. For their own good, of course.
Original Article: "Leviathan Devours Free Range Entrepreneurs"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Biden wants to roll out yet another "assault" weapons ban. Supporters claim it will reduce crime, but it will do no such thing.
Original Article: "Bans on "Assault" Weapons Do Not Reduce Crime"
This Audio Mises Wire is generously sponsored by Christopher Condon.
While both the Left and Right celebrate the government's new drive to subsidize American microchip manufacturing, we should remember that political "investments" always result in crony capitalist disasters.
Original Article: "American Chip "Independence": Protectionism by Another Name"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
More than forty years ago, California voters enthusiastically passed Proposition 13, which limited property tax hikes. Politicians have been lying about it ever since.
Original Article: "Why Proposition 13 and Attacking It Are Both Popular"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Populists on the right (and left) are claiming that American prosperity came about because of high protective tariffs. But political rhetoric can't replace sound economics.
Original Article: "Do Tariffs Create Prosperity? Challenging the Populist Right on Trade"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Since the 1940s, failed statist schemes have dragged Argentina into poverty. Javier Milei, who is gaining popularity there, hopes to change his nation's sad history.
Original Article: "Will Argentina's Next President Be a Rothbardian?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The world is in chaos, so politicians MUST do something. Hence, they demand autarky, which is like attempting to put out a fire by pouring gasoline on it.
Original Article: "And Now for a Really Bad Response to Political Calamity: Autarky"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Trade war means increasing the debt, eroding the public confidence, raising prices, and burdening the economy with interventions. All of it done in the name of the "public good."
Original Article: "There Is No Winner in This Trade War"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Conservatism is allegedly grounded in a recognition of the natural limits of humanity. But when it comes to free trade, conservatives throw all that out the window.
Original Article: "Conservatives and the Free Trade Straw Man"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Tariffs and trade controls are little more than tax increases and a chance to further empower a bloated bureaucracy. Not surprisingly, Biden doesn't appear to be enthusiastic about embracing free trade.
Original Article: "Biden Has Embraced Trump's Protectionism"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Some think that beer's history of regulation begins with hops, but beer has been hemmed in by government red tape for much longer.
Original Article: "Beer: A Short and Bitter History of Regulation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Most people understand that it's a good thing when others invest money and capital in your community. But when Canadian investors offered to pour money into France as part of a deal to buy a French company, the regime said no thanks.
Original Article: "Why Is the French Government Running Off Foreign Investors?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In response to a listener request, Bob starts a 3-part series explaining areas where his views have changed. In this episode, he covers trade deficits, justice vs. mercy, the 2000 election, WMDs in Iraq, and Arrow’s Theorem.
Mentioned in the Episode and Other Links of Interest: Bob’s article on why free traders should be more careful when defending trade deficitsBob’s article explaining the capital account in reference to trade deficits, in the context of criticizing Peter Schiff. Then Bob’s mea culpaBob’s article on Robert MundellBMS episode explaining Arrow’s TheoremSteve Landsburg’s The Armchair EconomistBob’s link for Tom Woods’ Liberty Classroom (which features a lecture on Arrow’s Theorem) For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
The problem with the European Union is not that it seeks to integrate Europe's economies. The problem comes from attempts to integrate politics as well.
Original Article: "The EU's Woes Are a Political Problem, Not an Economic One"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If Punjabi farmers had been portrayed as affluent, the media would view them as greedy entrepreneurs. But leveraging the political capital of perceived powerlessness has allowed them to obscure their true status as rent seekers.
Original Article: ""India's Farming Reform: A Lesson in Interest Group Politics"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Our guest today is Terence Kealey, Professor Emeritus of clinical biochemistry at the University of Buckingham in the United Kingdom, where he served as Vice Chancellor until 2014. He is also a Research Fellow at the Cato Institute. Professor Kealey trained in medicine at Bart’s Hospital in London and obtained his doctorate at Oxford University following which he pursued a career in clinical biochemistry research, before joining the faculty at Buckingham University.
He is the author of 3 books. The first, published in 1996 and titled The Economic Laws of Scientific Research is a sweeping exploration of the relationship between government and science and argues against public funding of scientific research. The second, Science, Sex, and Profits, published in 2008, continues the same theme and develops the notion that science is not a public good but is organized around what he terms “invisible colleges.” His third book, Breakfast is Your Most Dangerous Meal, was published in 2014 and links government intervention to very unhealthy nutritional advice.
SHOW NOTES Watch the episode on our YouTube channel
A trade deficit isn't actual evidence that anything is wrong. But if it were, one of the best things to do would be to reduce government spending. Unfortunately, politicians disagree.
Original Article: "Want to Reduce the Trade Deficit? Cut Government Spending".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
- Mises on Nationalism, the Right to Self-Determination, and the Problem of Immigration
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Introduction In the current discussion about immigration, Ludwig von Mises is often invoked by libertarians as a staunch proponent of free trade in the broad sense that pertains to the free movement of goods, capital, and labor. Mises has even been proclaimed by some libertarians as an advocate of open borders. However, Mises’s views on the free migration of labor across existing political borders were carefully nuanced and informed by political considerations based on his first-hand knowledge of the deep and abiding conflicts between nationalities in the polyglot states of Central and Eastern Europe leading up to World War One and during the subsequent interwar period. Thus Mises did not evaluate immigration in terms of purely economic optima such as maximizing the productivity of human labor, irrespective of the political context. Rather, he assessed the effects of immigration from the viewpoint of the classical liberal regime of private property. My purpose in this short essay is to set forth Mises’s views on immigration as he developed them as an integral part of the classical liberal program he elaborated.
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Liberal Nationalism For Mises,Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager (New York: New York University Press, 1983), pp. 34, 36. liberalism first emerged and expressed itself in the nineteenth century as a political movement in the form of “peaceful nationalism.” Its two fundamental principles were freedom or, more concretely, “the right of self-determination of peoples” and national unity or the “nationality principle.” The two principles were indissolubly linked. The primary goal of the liberal nationalist movements (Italian, Polish, Greek, German, Serbian, etc.) was the liberation of their peoples from the despotic rule of kings and princes. According to Mises,Ibid. liberal revolution against despotism necessarily took on a nationalist character for two reasons. First, many of the royal despots were foreign, for example, the Austrian Hapsburgs and French Bourbons who ruled the Italians, and the Prussian king and Russian czar who subjugated the Poles. Second, and more important, political realism dictated “the necessity of setting the alliance of the oppressed against the alliance of the oppressors in order to achieve freedom at all, but also the necessity of holding together in order to find in unity the strength to preserve freedom.”Ibid., p. 38. This alliance of the oppressed was founded on national unity based on common language, culture, and modes of thinking and acting.
Even though forged in wars of liberation, liberal nationalism was for MisesIbid., p. 35. both peaceful and cosmopolitan. Not only did the separate national liberation movements view each other as brothers in their common struggle against royal despotism, but they embraced the principles of economic liberalism, “which proclaims the solidarity of interests among all peoples.” MisesIbid., pp. 36–37. stresses the compatibility of nationalism, cosmopolitanism, and peace:
[T]he nationality principle includes only the rejection of every overlordship; it demands self-determination, autonomy. Then, however, its content expands; not only freedom but also unity is the watchword. But the desire for national unity, too, is above all thoroughly peaceful. … [N]ationalism does not clash with cosmopolitanism, for the unified nation does not want discord with neighboring peoples, but peace and friendship.Mises (ibid., p. 34) gives the charming example of the Italian nationalists who shouted to the imperial Austrian soldiers: “Go back across the Alps and we will become brothers again.”
As a classical liberal, MisesLiberalism in the Classical Tradition, Trans. Ralph Raico, 3rd ed. (Irvington-on-Hudson, NY and San Francisco: The Foundation for Economic Education and Cobden Press, 1985), p. 109. is careful to specify that the right of self-determination is not a collective right but an individual right: “It is not the right of self-determination of a delimited national unit, but rather the right of the inhabitants of every territory to decide on the state to which they wish to belong.” MisesIbid., pp. 109–10. makes it crystal clear that self-determination is an individual right that would have to be granted to “every individual person … if it were in any way possible.” It should also be noted in this respect that Mises rarely speaks of the “right of secession,” perhaps because of its historical connotation of the right of a government of a subordinate political unit to withdraw from a superior one.
While championing self-determination as an individual right, MisesNation, State, and Economy, pp. 39–40. argues that the nation has a fundamental and relatively permanent being independent of the transient state (or states) which may govern it at any given time. Thus he refers to the nation as “an organic entity [which] can be neither increased nor reduced by changes in states.” Accordingly, MisesLiberalism, p. 106. characterizes a man’s “compatriots” as “those of his fellow men with whom he shares a common land and language and with whom he often forms an ethnic and spiritual community as well.” In the same vein, MisesNation, State, and Economy, p. 79n 45. cites the German author J. Grimm, who refers to the “natural law … that not rivers and not mountains form the boundary lines of peoples and that for a people that has moved over mountains and rivers, its own language alone can set the boundary.” The nationality principle therefore implies that liberal nation-states may comprise a monoglot people inhabiting geographically non-contiguous regions, provinces and even villages.Liberalism, p. 113. MisesIbid., 110. contends that nationalism is thus a natural outcome of and in complete harmony with individual rights: “The formation of [liberal democratic] states comprising all the members of a national group was the result of the exercise of the right of self-determination, not its purpose.”However, Mises (1983, p. 37) concedes that in rare cases, “where freedom and self-government already prevail and seem assured without it,” such as Switzerland, the right of self-determination may not result in a nationally unifi ed state. MisesOmnipotent Government: Th e Rise of the Total State and Total War (Spring Mills, PA: Libertarian Press [1944] 1984), p. 101. elaborates on this important point:
Liberalism does not say: Every linguistic group should form one state and one state only, and each single man belonging to that group should, if at all possible, belong to that state. Neither does it say: No state should include people of several linguistic groups. Liberalism postulates self-determination. That men in the exercise of this right allow themselves to be guided by linguistic considerations is for liberalism simply a fact, not a principle or a moral law.
It should be noted here that, in contrast to many modern libertarians who view individuals as atomistic beings who lack emotional affinities and spiritual bonds with selected fellow humans, Mises affirms the reality of the nation as “an organic entity.” For Mises the nation comprises humans who perceive and act toward one another in a way that separates them from other groups of people based on the meaning and significance the compatriots attach to objective factors such as shared language, traditions, ancestry and so on. Membership in a nation, no less than in a family, involves repeated, concrete acts of volition based on subjective perceptions and preferences with respect to a complex of objective historical circumstances.
According to Murray Rothbard,Murray N. Rothbard, “Nations by Consent: Decomposing the Nation-State,” Journal of Libertarian Studies 11, no. 1 (Fall 1994): 1–3. who shares Mises’s view of the reality of the nation separate from the state apparatus:
Contemporary libertarians often assume, mistakenly, that individuals are bound to each other only by the nexus of market exchange. They forget that everyone is necessarily born into a family, a language, and a culture. Every person is born into one of several overlapping communities, usually including an ethnic group, with specific values, cultures, religious beliefs, and traditions. … The “nation” cannot be precisely defined; it is a complex and varying constellation of different forms of communities, languages, ethnic groups or religions. … The question of nationality is made more complex by the interplay of objectively existing reality and subjective perceptions.
- Colonialism as the Denial of the Right of Self-Determination Unlike many late nineteenth- and early twentieth-century liberals, Mises was a passionate anti-colonialist. As a radical liberal, he recognized the universality of the right of self-determination and the nationality principle for all peoples and races. He wrote powerful and scathing indictments against the European subjugation and mistreatment of African and Asian peoples and demanded a quick and complete dismantling of colonial regimes. It is worthwhile quoting MisesLiberalism, pp. 125–26. on this at length:
The basic idea of colonial policy was to take advantage of the military superiority of the white race over the members of other races. The Europeans set out, equipped with all the weapons and contrivances that their civilization placed at their disposal, to subjugate weaker peoples, to rob them of their property, and to enslave them. Attempts have been made to extenuate and gloss over the true motive of colonial policy with the excuse that its sole object was to make it possible for primitive peoples to share in the blessings of European civilization. … Could there be a more doleful proof of the sterility of European civilization than that it can be spread by no other means than fire and sword?
No chapter of history is steeped further in blood than the history of colonialism. Blood was shed uselessly and senselessly. Flourishing lands were laid waste; whole peoples destroyed and exterminated. All this can in no way be extenuated or justified. The dominion of Europeans in Africa and in important parts of Asia is absolute. It stands in the sharpest contrast to all the principles of liberalism and democracy, and there can be no doubt that we must strive for its abolition. … European conquerors … have brought arms and engines of destruction of all kinds to the colonies; they have sent out their worst and most brutal individuals as officials and officers; at the point of the sword they have set up a colonial rule that in its sanguinary cruelty rivals the despotic system of the Bolsheviks. Europeans must not be surprised if the bad example that they themselves have set in their colonies now bears evil fruit. In any case, they have no right to complain pharisaically about the low state of public morals among the natives. Nor would they be justified in maintaining that the natives are not yet mature enough for freedom and that they still need at least several years of further education under the lash of foreign rulers before they are capable of being left on their own.
In those areas where native peoples were strong enough to mount armed resistance to colonial despotism, MisesIbid., p. 124. enthusiastically supported and cheered on these national liberation movements: “In Abyssinia, in Mexico, in the Caucasus, in Persia, in China — everywhere we see the imperialist aggressors in retreat, or at least already in great difficulties.” To completely phase out colonialism, Mises proposed the establishment of a temporary protectorate under the aegis of the League of Nations. But he made it clear that such an arrangement was “to be viewed only as a transitional stage” and that the ultimate goal must be “the complete liberation of the colonies from the despotic rule under which they live.” MisesIbid., p. 127. based his demand for the recognition of the right of self-determination and respect for the nationality principle among colonized peoples on the bedrock of individual rights:
No one has a right to thrust himself into the affairs of others in order to further their interest, and no one ought, when he has his own interests in view, to pretend that he is acting selflessly only in the interest of others.
- The Breakdown of Liberal Nationalism: Majority Rule and Nationality Conflicts This bring us to Mises’s key insight into the irreconcilable “conflict of nationalities” bred by majority rule — even under liberal democratic constitutions. As a keen observer of the pre- and post-Great War polyglot states of Central and Eastern Europe, MisesNation, State, and Economy, p. 46. notes that “national struggles can only arise on the soil of freedom.” Thus as prewar Austria approached freedom, “the violence of the struggle between the nationalities grew.” With the collapse of the old royalist state, these struggles were “carried on only more bitterly in the new states, where ruling majorities confront national minorities without the mediation of the authoritarian state, which softens much harshness.” Mises attributes such a counterintuitive outcome to the fact that the nationality principle was not respected in the creation of the new states.Mises (Liberalism, pp. 87–88) refers particularly to the Poles, Czechs, and Magyars, who substituted an “aggressive nationalism” for “the liberal principle of self-determination” with the aim of “domination of people speaking other languages.” German and Italian nationalists and other nationalities quickly followed suit. Mises’s point is illustrated in the modern ethnic conflicts that erupted in the wake of the collapse of Communism and the breakup of the Soviet Union and of Yugoslavia.On the ethnic-religious confl icts in the former Yugoslavia see Murray N. Rothbard, “Hands Off the Serbs,” (RRR: Rothbard-Rockwell Report, 1993): 1–5 and “Nations by Consent,” pp. 1–10.
MisesNation, State, and Economy, pp. 48–49. maintains that two or more “nations” cannot peacefully coexist under a unitary democratic government. National minorities in a democracy are “completely politically powerless” because they have no chance of peacefully influencing the majority linguistic group. The latter represents “a cultural circle that is closed” to minority nationalities and whose political ideas are “thought, spoken, and written in a language that they do not understand.” Even where proportional representation prevails, the national minority “still remains excluded from collaboration in political life.” According to Mises,Ibid., p. 51. because the minority has no prospect of one day attaining power, the activity of its representatives “remains limited from the beginning to fruitless criticism … that … can lead to no political goal.” Thus, concludes Mises,Ibid., p. 47. even if the member of the minority nation, “according to the letter of the law, be a citizen with full rights … in truth he is politically without rights, a second class citizen, a pariah.”
In a later, unpublished paper dealing with the post-World War II reconstruction of Eastern Europe, Mises“An Eastern Democratic Union: A Proposal for the Establishment of a Durable Peace in Eastern Europe,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Richard M. Ebeling (Indianapolis, IN: Liberty Fund, 2000), p. 184. put the matter even more strongly: “To be a member of such a linguistic minority means to be an outlaw. … There were and are autonomy and democracy only for the members of the ruling linguistic majorities. …” It is no wonder, then, that MisesIbid., p. 181. portrayed linguistic minorities as “bearers of permanent unrest … and hatred.”
MisesNation, State, and Economy, p. 50 thus characterizes majority rule as a form of colonialism from the point of view of the minority nation in a polyglot territory: “[It] signifies something quite different here than in nationally uniform territories; here, for a part of the people, it is not popular rule but foreign rule.” Peaceful liberal nationalism therefore is inevitably stifled in polyglot territories governed by a unitary state, because, MisesIbid., p. 56. argues, “democracy seems like oppression to the minority. Where only the choice is open oneself to suppress or be suppressed, one easily decides for the former.” Hence, for Mises,Nation, State, and Economy, p. 50. democracy means the same thing for the minority as “subjugation under the rule of others,” and this “holds true everywhere and, so far, for all times.” Mises dismisses “the often cited” counter-example of Switzerland as irrelevant because local self-rule was not disturbed by “internal migrations” between the different nationalities. Had significant migration established the presence of substantial national minorities in some of the cantons, “the national peace of Switzerland would already have vanished long ago.”
With respect to regions inhabited by different nationalities, MisesLiberalism, p. 113. therefore concludes, “the right of self-determination works to the advantage only of those who comprise the majority.” This is especially true, for example, in interventionist states where education is compulsory and “peoples speaking different languages live together side by side and intermingled in polyglot confusion.” Under these conditions, formal schooling is a source of “spiritual coercion” and “one means of oppressing nationalities.” The very choice of the language of instruction can “alienate children from the nationality to which their parents belong” and “over the years, determine the nationality of a whole area.” The school thus becomes the source of irreconcilable national conflict and “a political prize of highest importance.” With respect to the debate over compulsory education, MisesIbid., pp. 114–15. emphasizes, the only effective solution is to depoliticize schooling by abolishing both compulsory education laws and political involvement with schools, leaving the education of children “entirely to parents and to private associations and institutions.”
Compulsory education is only an extreme example of how interventionism exacerbates the inevitable conflict between different nationalities that are living together under the jurisdiction of a single state. In such a situation, MisesIbid., p. 116. argues: “Every interference on the part of government in economic life can become a means of persecuting the members of nationalities speaking a language different from that of the ruling group.” Perhaps Mises’s most important insight, however, is that even under a laissez-faire system, where government is rigorously restricted to “protecting and preserving the life, liberty, property and health of the individual citizen,” the political arena will still degenerate into a battleground between disparate nationalities residing within its geographical jurisdiction. Even the routine activities of the police and judicial system in this ideal liberal regime “can become dangerous in areas where any basis at all can be found for discriminating between one group and another in the conduct of official business.”Rothbard (1994, pp. 5–6) makes a similar point about the unavoidable political conflicts that arise in a situation where diff erent nationalities are bound together under the jurisdiction of a single, laissez-faire liberal government: “But even under the minimal state, national boundaries would still make a difference, often a big one, to the inhabitants of the area. For in what language … will be the street signs, telephone books, court proceedings, or school classes of the area?” This is especially true in states where “differences of religion, nationality, or the like have divided the population into groups separated by a gulf so deep as to exclude every impulse of fairness or humanity and to leave room for nothing but hate.” MisesLiberalism, p. 116. gives the example of a judge “who acts consciously, or still more often unconsciously, in a biased manner” because he believes “he is fulfilling a higher duty when he makes use of the powers and prerogatives of his office in the service of his own group.”
Not only is the member of a national minority subjected to ingrained and routine bias in the political sphere, he is unable to grasp the thought and ideology that shape political affairs. His social and political worldview as well as his cultural and religious attitudes reflects ideas formulated and discussed in the national literature of, in effect, a foreign language, and these ideas diverge, possibly radically, from those of the majority linguistic group. According to MisesNation, State, and Economy, pp. 47–48. even though political and cultural ideas are transmitted and shared among all nations, “every nation develops currents of ideas in its own special way and assimilates them differently. In every people they encounter another national character and another constellation of conditions.” Mises gives the example of how the political ideal of socialism differed between Germany and France, and between the latter two and Russia.
The result of this natural “nationalizing” and differentiating of even similar ideas and intellectual trends is that the member of the minority nation confronts a linguistic and intellectual barrier that prevents him from meaningfully participating in the political discussion that shapes the laws under which he lives. Explains MisesLiberalism, pp. 119–20.:
Cast into the form of statute law, the outcome of [the majority’s] political discussions acquires direct significance for the citizen who speaks a foreign tongue, since he must obey the law; yet he has the feeling that he is excluded from effective participation in shaping the will of the legislative authority or at least that he is not allowed to cooperate in shaping it to the same extent as those whose native tongue is that of the ruling majority. And when he appears before a magistrate or any administrative official as a party to a suit or petition, he stands before men whose political thought is foreign to him because it developed under different ideological influences. … At every turn the member of a national minority is made to feel that he lives among strangers and that he is, even if the letter of the law denies it, a second-class citizen.
The result of the political impotence of the national minority in a majoritarian democracy is that it perceives itself to be a conquered or colonized people. For as MisesIbid., p. 119. points out: “The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest. …” In the 1920s Mises had already identified the phenomenon of what today is misleadingly called “institutional racism” — because the problem lies not with all institutions, only political ones — but is better described as “democratic subjugation.” In the 1960s, Malcolm X“Malcolm Explains the Difference between Separation and Segregation.” Transcribed text from audio excerpt from “The Race Problem,” a speech at Michigan State University, East Lansing (January 23). gave poignant expression to the yearning for self-determination on the part of minority African nationalities in the U.S. saddled with an interventionist state controlled by peoples of European extraction:
This new type of black man, he doesn’t want integration; he wants separation. Not segregation, separation. To him, segregation … means that which is forced upon inferiors by superiors. … In the white community, the white man controls the economy, his own economy, his own politics, his own everything. That’s his community. But at the same time while the Negro lives in a separate community, it’s a segregated community. Which means it’s regulated from the outside by outsiders. The white man has all of the businesses in the Negro community. He runs the politics of the Negro community. He controls all the civic organizations in the Negro community. This is a segregated community. … We don’t go for segregation. We go for separation. Separation is when you have your own. You control your own economy; you control your own politics; you control your own society; you control your own everything. You have yours and you control yours; we have ours and we control ours.
Malcolm X“An Interview by A. B. Spellman,” in Malcolm X, By Any Means Necessary, 2nd ed. (New York: Pathfinder: [1964] 1992), pp. 31–32. later explained the concept of separation in terms more congenial to the liberal concept of national self-determination:
A better word to use then separation is independence. This word separation is misused. The thirteen colonies separated from England but they called it the Declaration of Independence; they don’t call it the Declaration of Separation, they call it the Declaration of Independence. When you’re independent of someone you can separate from them. If you can’t separate from them it means you’re not independent of them.
- Liberal Constitutions and Laissez-Faire Policies Are not Enough In analyzing the causes and solution of nationality conflicts, MisesNation, State, and Economy, p. 39. coined the terms “militant” or “aggressive” nationalism, which he contrasted with “liberal” or “peaceful” nationalism. Thus for Mises, the choice was never between nationalism and a bland, atomistic “globalism”; the real choice was either nationalism that was cosmopolitan and embraced universal individual rights and free trade or militant nationalism intent on subjugating and oppressing other nations. As pointed out above, he attributed the rise of anti-liberal nationalism to the failure to apply the right of self-determination and the nationality principle consistently and to the utmost degree possible in the formation of new political entities in the wake of the overthrow of royal absolutism by war or revolution. The consequence was peoples differentiated by language, heritage, religion, etc., arbitrarily and involuntarily bound together in artificial political unions. The inevitable outcome of these polyglot, mixed-nation-statesA more felicitous term than “mixed-nation-states” for these political entities would be “multinational states” but, given its current connotation, the latter term is likely to be misleading. was the suppression of minorities by the majority nationality, a bitter struggle for control of the state apparatus, and the creation of mutual and deep-seated distrust and hatred. This state of affairs often culminated in state-sanctioned physical violence, including the expropriation and expulsion and even the murder of minority populations.
Mises argues that all of this could have been avoided if only the complete liberal agenda had been implemented. This includes, in addition to an economic policy of domestic laissez-faire and international free trade in goods, the crucial right of self-determination and the nationality principle to which it gives rise. MisesLiberalism, pp. 22–23. does not mince words in describing the plight of minority nationalities in an illiberal, interventionist system:
If the government of these territories [inhabited by members of several nationalities] is not conducted along completely liberal lines, there can be no question of even an approach to equal rights in the treatment of the members of the various national groups. There can then be only rulers and those ruled. The only choice is whether one will be hammer or anvil.
Mises goes further, however, and argues that even an end to interventionism will not resolve the conflict of nationalities. Almost alone among classical liberals and libertarians of his era and ours, Mises clearly recognizes that laissez-faire capitalism and free trade are necessary but not sufficient to ensure peace among different groups of individuals forced to live under a unified political system, each of which voluntarily and naturally self-identify as different peoples or nations on the basis of language, shared customs and traditions, religion, ethnic heritage or any other objective factor that is subjectively meaningful for them. As MisesIbid., p. 129. states:
All these disadvantages [experienced by minorities] are felt to be very oppressive even in a state with a liberal constitution in which the activity of the government is restricted to the protection of the life and property of the citizens. But they become quite intolerable in an interventionist or socialist state.
For MisesIbid., p. 118. the best that can be said of a government whose functions are strictly limited to protection of person and property and enforcement of contract is that it does not “aggravate artificially the friction that must arise from this living together of different groups.”
Mises defends the complete liberal agenda—the laissez-faire and self-determination principles — against those who vacuously attribute the “violent antagonisms” between nations inhabiting a single political jurisdiction to an “innate antipathy” between different peoples. To the contrary, argues Mises,Ibid., pp. 120–21. despite the hatreds that may naturally exist between various groups of people of the same nationality, they are able to get along peacefully when living under the jurisdiction of the same state, while different nationalities that are forcibly bound together under common political arrangements are in constant conflict:
The Bavarian hates the Prussian; the Prussian, the Bavarian. No less fierce is the hatred existing among individual groups within both France and Poland. Nevertheless, Germans, Poles, and Frenchmen manage to live peacefully within their own countries. What gives the antipathy of the Pole for the German and of the German for the Pole a special political significance is the aspiration of each of the two peoples to seize for itself political control of the border areas in which Germans and Poles live side by side and to use it to oppress the members of the other nationality. What has kindled the hatred between nations to a consuming fire is the fact that people want to use the schools to estrange children from the language of their fathers and to make use of the courts and administrative offices, political and economic measures, and outright expropriation to persecute those speaking a foreign tongue.
So it is not natural antipathies between peoples — which may or may not exist — but the political denial of the right of self-determination that is the underlying cause of national conflicts. In this vein, Mises issues a dire and, in hindsight, prescient warning: “As long as the liberal program is not completely carried out in the territories of mixed nationality, hatred between members of different nations must become ever fiercer and continue to ignite new wars and rebellions.” This is certainly true of today’s world, particularly in Asia and Africa, where European imperialists and colonialists dragooned different “nations” (tribes, chiefdoms, linguistic groups, ethnicities, religions) into deeply dysfunctional political unions. Most of the 37 wars being waged in 2015 on these continents were “intrastate” or civil wars and, of these, most are “fueled as much by racial, ethnic, or religious animosities as by ideological fervor.”GlobalSecurity.org 2019. Retrieved August 27, 2019. At their root lie the attempts of minority groups to resist or end oppression by the majority by seizing the existing state apparatus, seceding from the state, or creating an entirely new state, e.g., ISIS.
- Immigration as a Political Problem This brings us to the vexed question of immigration. For Mises, immigration is entirely a political problem. MisesLiberalism, pp. 138–39; Human Action: A Treatise on Economics, Scholar’s Edition (Auburn, AL: Mises Institute, 1998), pp. 160–63, 742–49. summarily dismisses the strictly economic arguments against free immigration as fallacious. He points out that, from the global point of view, migration raises the productivity of human labor, the supply of goods, and standards of living because it facilitates the reallocation of labor (and capital) from regions with less advantageous natural conditions of production to those with more advantageous natural conditions. Barriers to labor migration therefore cause a misallocation of labor and its geographic maldistribution, with a relative oversupply in some areas and undersupply in other areas. The effects of migration barriers are thus exactly the same as the effects of tariffs and other barriers to the international trade of goods: the reduction of productive efficiency and real income because comparatively unfavorable opportunities for production are exploited in some regions while comparatively favorable opportunities remain unutilized in others.
Although Mises argues that free movement of goods, capital, and labor tends to maximize the productivity of labor and the total output of goods and services, he does not envision this as the ultimate goal of liberalism. As MisesCritique of Interventionism, trans. Hans F. Sennholz, 2nd ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 1996), p. 35. argues in another connection, it was a mistake to believe “that the essence of liberal programs was not private property but ‘free competition’ [i.e., free of the ‘economic power’ of large business enterprises].” The same also applies when evaluating the social desirability of labor migration: the welfare standard for Mises and classical liberals is not the “economistic,” Chicago-school goals of production efficiency or maximum labor productivity measured in objective terms but the securing of a full private-property regime. For it is the operation of the unhampered market based on private property that best satisfies consumer preferences for both exchangeable and non-exchangeable goods, which is the ultimate goal of all economic activity.On the crucial distinction between “exchangeable” and “nonexchangeable” goods, see Murray N. Rothbard, Man, Economy and State: A Treatise on Economic Principles with Power and Market: Government and the Economy, Scholar’s Edition, 2nd ed. (Auburn, AL: Mises Institute, 2009), pp. 214–18, 1323–24) and Philip Wicksteed, The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, ed. Lionel Robbins (New York: Augustus M. Kelley, 1967), pp. 132–34.
In his brilliant but neglected analysis of the labor market in his economic treatise, Human Action, MisesHuman Action, p. 622. points out that even the completely unhampered migration of labor across political boundaries does not lead to maximum labor productivity and a distribution of labor that equalizes wage rates for the same kind and quality of labor services throughout the global economy. The reason?
The worker and the consumer are the same person. … Men cannot sever their decisions concerning the utilization of their working power from those concerning the enjoyment of their earnings.
Descent, language, education, religion, mentality, family bonds, and social environment tie the worker in such a way that he does not choose the place and the branch of his work merely with regard to the height of wage rates.
In discussing labor migration Mises therefore shifts the focus from the analytical abstraction of the “laborer” seeking the highest wages consonant with his leisure preferences to the real human actor who demonstrates preferences across a broad range of goals that include non-exchangeable goods like close proximity and association with members of the same family, religious affiliation, ethnicity or language group. Hence, MisesNation, State, and Economy, p. 64. explicitly recognizes that once the outdated assumptions underlying the free-trade doctrine advanced by Ricardo and the classical economists are dropped, and the international mobility of capital and labor as well as goods is considered, the case for free trade, while it remains valid “from the purely economic point of view … presents a quite changed point of departure for testing the extraeconomic reasons for and against the protective system.” Mises thus takes the analysis of migration beyond the realm of narrowly economic considerations and brings it into contact with the concrete political reality of the democratic mixed-nation-state and its characteristic suppression and violation of the property rights of national minorities by the majority nationality.
This analysis leads Mises to view mass “immigration,” that is, labor migration across state borders, even when it occurs for purely economic reasons, as posing an inherent problem. MisesLiberalism, p. 123; Nation, State, and Economy, p. 59. maintains that the creation of mixed-nation-states resulting from the immigration of workers of a foreign nationality “gives rise once again to all those conflicts that generally develop in polyglot territories” and “to particularly characteristic conflicts between peoples.” MisesNation, State, and Economy, p. 61n. 33 does recognize that peaceful cultural and political assimilation can take place “if the immigrants come not all at once but little by little, so that the assimilation process among the early immigrants is already completed or at least already under way when the newcomers arrive.” He cites the example of Chinese immigration to the United States in the nineteenth century, which did occur in a manner amenable to assimilation. MisesIbid., p. 61. remarks, however, that “perhaps” the Chinese would have “achieve[d] domination in their new home … in the western states of the Union if legislation had not restricted their immigration in time.” But this is strictly a positive observation and Mises draws no policy implications from it.
Indeed, MisesLiberalism, p. 139. exposes the economic arguments to restrict immigration put forward by protectionist trade unions in relatively high-wage countries like the U.S. and Australia as transparently self-serving and injurious to the economic interests of their fellow nationals as well as contrary to the teachings of sound economic theory. But MisesIbid., pp. 139–40. takes a more measured tone when considering the extra-economic argument in favor of immigration restriction that is disingenuously resorted to by the protectionists as a fallback position. According to the latter argument, in the absence of immigration barriers “hordes of immigrants” of non-English-speaking European and Asian nationalities would “inundate Australia and America.” Because these immigrants would arrive rapidly and in great numbers, the argument asserts, they could not be assimilated and Anglo-Saxons in the host countries would find themselves in a minority and their “exclusive dominion … would be destroyed.”
In evaluating this argument, MisesLiberalism, pp. 140–41. emphasizes the political problems that would arise in a mixed-nation-state created overnight by mass immigration:
These fears may perhaps be exaggerated with regard to the United States. As regards Australia, they certainly are not. … If Australia is thrown open to immigration, it can be assumed with great probability that its population would in a few years consist of Japanese, Chinese and Malayans. … The entire nation [not just workers] is unanimous, however, in fearing inundation by foreigners. The present inhabitants of those favored lands [the U.S. and Australia] fear that some day they could be reduced to a minority in their own country and that they would then have to suffer all horrors of national persecution to which, for instance, the Germans today [1927] are exposed in Czechoslovakia, Italy, and Poland.
While Mises does not take an explicit position on the desirability of a policy curbing massive immigration flows that are induced by economic opportunity, he acknowledges that “these fears” of the nationality inhabiting the receiving country “are justified,” especially in a world of interventionist states.Writing during World War II Mises (Omnipotent Government, p. 114; “The Fundamental Principles of a Pan-European Union,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Rich-ard M. Ebeling [Indianapolis, IN: Liberty Fund, 2000], p. 47) did strongly argue against admitting immigrants from the Axis states of Germany, Italy, and Japan. Mises,Liberalism, p. 141. who for many years observed firsthand the egregious maltreatment of national minorities in Central and Eastern Europe, vividly expresses the basis of the majority nation’s fear of being transformed into a national minority:
As long as the state is granted the vast powers which it has today and which public opinion considers to be its right, the thought of having to live in a state whose government is in the hands of members of a foreign nationality is positively terrifying. It is frightful to live in a state in which at every turn one is exposed to persecution — masquerading under the guise of justice — by a ruling majority. It is dreadful to be handicapped even as a child in school on account of one’s nationality and to be in the wrong before every judicial and administrative authority because one belongs to a national minority.
Thus, MisesIbid., p. 142. views immigration as always and everywhere a “problem” to which there is “no solution,” as long as interventionist political regimes are the norm. Only when the crossing of state borders by members of a different nation portend no political dangers for the indigenous nationality will the “problem of immigration” disappear and be replaced by the benign migration of labor that creates unalloyed and mutual economic advantages for all individuals and peoples. From Mises’s perspective, then, the solution to the immigration problem is not to legislate some vague, ad hoc right to the “freedom of movement” between existing fixed-boundary states. Rather, it is to complete the laissez-faire liberal revolution and secure private property rights by providing for the continual redrawing of state boundaries in accordance with the right of self-determination and the nationality principle. Then — and only then — can the continual and wealth-creating global reallocation of labor generated by a dynamic capitalist economy be peacefully accommodated without precipitating political turmoil and conflict.
- Conclusion Mises was a radical liberal nationalist and cosmopolitan whose overarching goal was to promote policies that facilitated the peaceful extension of the social division of labor founded on private property to all individuals and nations. He acknowledged the reality of separate nations and its meaningfulness for political and economic policy analysis. He recognized that political borders that were not formed according to the nationality principle were an insurmountable impediment to the fullest realization of the concept of free trade and an important source of national conflicts and protectionism that destroyed wealth. In particular, Mises realized that “immigration” was not the solution to the problem of the uneconomic spatial distribution of labor, but the very cause of the problem. The problem of immigration would be solved only with the consummation of the classical liberal revolution in the universal recognition of the right of self-determination. Then the problem — and the very phenomenon — of immigration would disappear, as the borders of states would move with the migration of peoples and nations.
Epilogue: Did Mises Change His Mind? Mises laid out his radical liberal program of self-determination and peaceful nationalism in two books written during the interwar period, Nation, State, and EconomyNation, State, and Economy. and Liberalism,Liberalism. originally published in German in 1919 and 1927, respectively. Later, however, during the dark days of World War II, MisesOmnipotent Government; “Postwar Reconstruction,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Richard M. Ebeling (Indianapolis, IN: Liberty Fund, 2000); “An Eastern Democratic Union.” wrote a number of works in which he abandoned hope that the liberal program would ever provide a workable solution to the problem of national minorities in Eastern Europe. Given the intellectual trends of economic nationalism and interventionism that had taken hold among the political leadership and public intellectuals in all nations, Mises“An Eastern Democratic Union,” p. 184. had come to believe “that the principle of nationality, as developed in Western Europe, is simply inapplicable in Eastern Europe, where the linguistic groups are inevitably mingled.” In lieu of the nationality principle as a guide to political organization, MisesIbid., p. 176. proposed an Eastern Democratic Union (EDU), a highly centralized and supranational democratic state to rule over all nationalities residing in the area “between the eastern boundaries of Germany, Switzerland, and Italy and the western borders of Russia … from the shores of the Baltic to those of the Black, Adriatic, and Aegean seas.”
MisesIbid., pp. 182, 183, 186–87. was remarkably forthright about the nature of the EDU: it would involve “a total suppression of local sovereignty” with “the whole territory of Eastern Europe … organized as a political unit under a strictly unitary government,” with the “foremost aim” being “to eliminate the problem of national minorities.” In the territory of the EDU, the largest linguistic group would be the Poles, comprising 20 percent of the population. There would thus be no national majority to lord it over minority nationalities. Under these politico-demographic conditions, MisesIbid., p. 187. believed that the constitution of the EDU would be able to effectively ensure every citizen equal treatment under the law and the right to free movement and choice of occupation within the union.
Without delving further into the details of Mises’s proposal, we may make three observations. First, although desperate times may have moved Mises to change his mind about the nature of the solution, he never wavered in his view of the essential problem, namely, the impossibility of the peaceful coexistence between majority and minority nationalities under a unitary government, especially a majoritarian democracy. Second, Mises anticipated criticism that his plan was an attempt to restore the old Austro-Hungarian Empire on a larger scale. In partially conceding this point, MisesIbid., p. 198. emphasized the liberal aspects of the empire: “This is true as far as old Austria … was the only power among those ruling in this area which tried to treat all citizens on an equal footing.” While admitting that the Austrian system had failed, Mises argued that his proposed constitution for the EDU embodied details “based on precisely the lessons the Austrian failure teaches us.” Finally, after World War II, Mises stopped writing about nationality conflicts because the problem had been rendered moot by the forcible incorporation of the warring nationalities of Eastern Europe — with the connivance of the other Allied powers — into the sphere of influence of a rigidly centralized despotic state, the Soviet Union. Mises restricted his focus to a strictly positive analysis of immigration barriers as an interventionist policy of economic nationalism that was designed to raise wage rates for domestic laborers, especially those belonging to labor unions. In sum, despite his EDU proposal, MisesHuman Action. never later expressed any departure from his interwar views about the source and nature of nationality conflicts and the insurmountable political problem they pose for mass immigration.
- The Nationalist Case for Free Trade, in the Words of Classical Economists The founders of classical economics, namely David Hume (1711–1776), Adam Smith (1723–1790), and David Ricardo (1772–1823) and their British followers were fervent advocates of the principle of free trade between nations. Even more so were J.-B. Say (1767–1832), Frédéric Bastiat (1801–1850) and their Continental disciples of the liberal school (who for simplicity I will broadly classify as classical economists because of their link to Adam Smith). Despite their devotion to free trade, the classical economists were nationalists. They viewed free trade as one of the most important means for advancing the security, prosperity, and cultural achievements of their own nations. In this sense, they tended to be what Ludwig von Mises described as “peaceful” or “liberal” nationalists,For Mises’s description and defense of liberal nationalism, see the previous essay in this book. who recognized the existence of profound differences among nations and nationalities and loved their own nations above all others, yet discerned that the economic and cultural flourishing of each nation was inextricably linked with the flourishing of all other nations. In recognizing this international harmony of interests, the classical economists were naturally thoroughly cosmopolitan and anti-war.
The cosmopolitanism and pacifism of the classical economists has in the past been misconstrued — often deliberately — by their protectionist opponents as a lack of affection and concern for their nation and its interests. This erroneous interpretation of the classical case for free trade has once again gained currency in the writings of some contemporary libertarians and free-market economists who have embraced the anti-nationalist, globalist agenda. Fortunately, eminent historians of economic thought have previously demolished this gross caricature of the classical position and clarified the rationale of the classical economists in promoting free trade. Let us take a few examples.
Lionel Robbins was a British economist who was heavily influenced by Mises, Hayek, and the founders of the Austrian school early in his career. He was also one of the foremost historians of the classical school of economics, having written several articles and books on the subject. Robbins was emphatic in defending the view that the British classical economists promoted free trade because it improved economic conditions for Great Britain:
To the extent to which [classical economists] repudiated former maxims of economic warfare and assumed mutual advantage in international exchange, it is true that the outlook of Classical Economists seems, and indeed is, more spacious and pacific than that of their antagonists. But there is little evidence that they often went beyond the test of national advantage as a criterion of policy, still less that they were prepared to contemplate the dissolution of national bonds. If you examine the ground on which they recommend free trade, you will find that it is always in terms of a more productive use of national resources. … I find no trace anywhere in their writings of the vague cosmopolitanism with which they are often credited by continental writers [such as the protectionist, Friedrich List]. … All that I contend is that we get our picture wrong if we suppose that the English Classical Economists would have recommended, because it was good for the world at large, a measure which they thought would be harmful to their own community. It was the consumption of the national economy which they regarded as the end of economic activity.Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan, 1953), pp. 10–11.
In a classic work, published just after World War II, Edmund Silberner surveyed the thought of the leading economists of the nineteenth century, including the British classical and French liberal economists, on the problem of war, its causes and solution.Edmund Silberner, The Problem of War in Nineteenth Century Economic Thought, trans. Alexander H. Krappe (Princeton, NJ: Princeton University Press, 1946). Silberner pointed out that the classical economists, whom he called “liberals,” viewed war as “economically and socially harmful” and “not only immoral but stupid” because “it is in effect the natural state of men ignorant of the laws of political economy.”Ibid., p. 280. Silberner summarized the classical-liberal position on the connection between free trade, prosperity, war, and the science of political economy as follows:
By favoring international accord … [free trade] contributes not only to the material prosperity of nations but also to the intellectual and moral progress of mankind as a whole. Of all known economic systems it is therefore … the most favorable to each nation as well as to the human race in its entirety. … [T]he establishment of commercial freedom will bring about one of the most profound revolutions in history. Free trade will assure to all men the maximum possible of material well-being, which in fact will know no other limits than the natural resources of the globe and the creative work of men. What is more, the influence of free trade will not be restricted to the economic field: freedom of international commerce will also considerably increase the external security of nations. … The role assigned by the liberals, in this matter, to political economy is most significant. This science must deal with war because peace is an essential element of public prosperity. Political economy … is regarded by the liberals as the science par excellence of peace. The diffusion of economic knowledge thus tends, in their eyes, to prevent wars.Ibid., pp. 281–82.
Having demonstrated the profoundly cosmopolitan and pacific attitudes of the classical economists, Silberner, like Robbins, emphasized that they were first and foremost nationalists. Thus he wrote: “Though hostile to militarism, they make it clear that their attitude is opposed neither to an enlightened patriotism nor to the principle of nationalities.”Ibid., p. 282. In addition, the classical economists not only saw free trade as the most effective policy for avoiding war but also as the best means of preparing for a war that was impending. According to Silberner, “whatever their differences of view [on the relative effectiveness of free trade as a deterrent to war] they all take it for granted that, if war is truly inevitable, free trade, by enriching the nations, prepares them better for it than does the protective system, which impoverishes them all.”Ibid. Finally, despite their abhorrence of war, the classical economists, “with a few exceptions,” were “opposed or hostile” to surrendering national sovereignty to a “supernational peace organization.”Ibid., p. 283.
In an important recent work, Razeen Sally has investigated the views on international economic order held by classical liberals from Hume and Smith to Wilhelm Röpke and other economists of the twentieth-century German Ordoliberal school.Razeen Sally, Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (New York: Routledge, 1998). In his treatment of Hume and Smith, Razeen argues that both view a person’s discriminative love for his or her nation as psychologically and morally warranted:
[B]oth Hume and Smith strongly believe that human fellow-feeling (or approbation of others) — the famous “sympathy” principle in eighteenth-century moral philosophy — might apply within a nation but hardly at all between nations. Sympathy subsumes a sentiment of patriotism or “love of country,” but does not extend to “love of mankind.” … Both Hume and Smith opine that this is right and proper, for the public interest is secured when one fixes one’s attention on something limited and proximate, stretching to patriotism or love of country, rather than something vague and uncertain like love of humanity.Ibid., pp. 56–57.
Accordingly Razeen insists that Hume’s and Smith’s advocacy of free trade is based on their belief that it is the policy that best conduces to enhancing the wealth and welfare of their own nation. Sally is emphatic on this point:
… Hume and Smith stick to considerations of the nation and the national interest as practical objects of analysis. This is a point of absolutely vital importance. Note that Smith does not expatiate on the wealth of “the world”; rather he focuses on the wealth of nations. First and foremost, the interrelation of economic phenomena is examined according to the criterion of national, not global, wealth maximization. … In contradistinction to the mercantilists, however, he holds that, under free trade, the national interest corresponds to the global interest. However, as a by-product, such a regime benefits the rest of the world through a better allocation of world resources, not to mention the dynamic gains of technology transfer, competitive emulation, and a widening market that spread across the globe. … This then is the context for Smith’s advocacy of unilateral free trade which the nineteenth-century classical economists believe in as well: one or a number of nations adopt free trade independently in their own interest; others, also acting in their self-interest, are likely to follow the example of pioneering free trading nations once the benefits of such a policy become readily apparent. [Emphases in the original.]Ibid., p. 58.
We need not, however, depend only on the interpretation of modern historians of thought on this matter for we have the words of the classical economists themselves. There is no better place to start than a famous statement by one of the first classical economists, David Hume. Hume’s dictum poignantly illustrates how, in the eyes of classical economists, free trade perfectly harmonized nationalism and cosmopolitanism.
I shall therefore venture to acknowledge, that, not only as a man, but as a British subject, I pray for the flourishing of commerce of Germany, Spain, Italy, and even France itself. I am at least certain, that Great Britain and all those nations, would flourish more did their sovereigns and their ministers adopt such enlarged and benevolent sentiments towards each other.David Hume, “Of the Jealousy of Trade,” in David Hume, Writings on Economics, ed. Eugene Rotwein (Madison: University of Wisconsin Press, 1970), p. 82.
As Robbins pointed out,Robbins, The Theory of Economic Policy, p. 10n. 5 Adam Smith “expressly repudiates” the globalist position that places the welfare of one’s own nation on all fours with that of other nations:
France may contain, perhaps, near three times the number of inhabitants which Great Britain contains. In the great society of mankind, therefore, the prosperity of France should appear to be an object of much greater importance than that of Great Britain. The British subject, however, who upon that account should prefer upon all occasions the prosperity of the former to that of the latter country, would not be thought a good citizen of Great Britain. We do not love our country merely as part of the great society of mankind — we love it for its own sake, and independently of any such consideration.Adam Smith, The Theory of Moral Sentiments (New Rochelle, NY: Arlington House, 1969), p. 337.
Ricardo’s closest disciple, J. R. McCulloch (1789–1864), argued that free trade unites all nations and peoples in common interest. “Commerce embracing different nations,” declared McCulloch,
by … making every people to a great extent dependent on others … forms a powerful principle of union and binds together the universal society of nations by the powerful ties of mutual interest and reciprocal obligation.John R. McCulloch, The Principles of Political Economy, 5th ed. (New York: Augustus M. Kelley, 1965), p. 92.
Now McCulloch is not saying that free trade will dissolve peoples and nations into a homogeneous globalist mass or eradicate the desire most individuals have for the flourishing and pre-eminence of the nationality or “people” they identify with. In fact he is saying quite the opposite: that free trade and the mutual benefits it confers on all nations are the only rational means available to sustain one’s own nation and secure its desired advancement and distinction among other nations. In McCulloch’s words:
It has been shown over and over again, that nothing can be more irrational and absurd, than that dread of the progress of others in wealth and civilization that was once so prevalent; that what is for the advantage of one state is for the advantage of all; and that the true glory and real interest of every people will be more certainly advanced by endeavoring to outstrip their neighbors in this career of science and civilization, than by engaging in schemes of conquest and aggression.Ibid., pp. 92–93.
Henri Baudrillart (1821–1892) was an eminent French liberal economist and economic historian and a follower of Bastiat’s. He was an avid free trader and anti-militarist, who objected to standing armies. Baudrillart however maintained that international free trade and division of labor are not only consistent with separate nations and nationality differences but require such separateness and differences. Wrote Baudrillart:
Those who do not consider at all the differences produced among men by climate, race, and institutions, are the very theoreticians of prohibitions who want every nation to be self-sufficient and devote itself to all industries at the same time. … By endeavoring to maintain that division of labor which Providence itself has established among men, political economy is obviously not hostile to the spirit of nationality; it bases the alliance of peoples on the difference of characters and faculties; it wants each to excel under the conditions peculiar to it, and each to produce so as to have means of exchange. To generalize and extend trade, it localizes industry.Henri Baudrillart quoted in Silberner, The Problem of War in Nineteenth Century Economic Thought, p. 111.
It is imperative to emphasize the nationalist basis of the classical case for free trade for two reasons. First, modern libertarians and “classical” liberals who favor open borders and are indifferent to the dissolution of historical nations often invoke the names of Hume, Smith, and Bastiat in support of their position. But as we saw, the liberality, pacifism, and cosmopolitanism of these great thinkers and their nineteenth-century followers is far different from the homogenizing globalism embraced by their modern epigones. Second, without taking a position on the vexed question of immigration, it is important to bear in mind that the classical rationale for the free movement of goods cannot be simply extended to justify the “free movement of labor,” that is, open borders, especially if the result is mass immigration. As nationalists, the classical economists would hardly look on with equanimity as their nation disintegrated.
GDP is not a useful measure of the material prosperity of a nation, and the way GDP is measured tends to hide the benefits of free trade.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "GDP, Free Trade, and Prosperity".
EU membership is a sort of bait-and-switch for states that were sold on membership as an opportunity to join a free trade bloc and a chance to participate in a more cooperative Europe.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why the EU Keeps Fighting Brexit".
Bob explains some of the basic–but crucial–errors in the cost/benefit analyses that have been offered by economists to justify the political lockdowns issued in light of the coronavirus. Specifically, economists have conflated voluntary physical distancing with coerced lockdowns, and they are also misusing the concept of a Value of a Statistical Life (VSL).
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Economist David R. Henderson returns to the podcast to explain some of the major problems with the so-called "stimulus" bill, including its payment of $600 a week to the unemployed, as well as perverse payments to airlines. He then discusses the protest he helped organize against California's lockdown.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
France faces a future of spiraling debt and declining economic growth. So Emmanuel Macron has now embraced economic nationalism as a way out. It's not likely to work.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Facing Economic Disaster, France Turns against Globalism"
Current global bailouts may put off global busts for quite some time. But they will weaken output and employment gains. People's standard of living will stagnate or even fall, even in the short term. With this comes impoverishment and perhaps even social unrest.
Narrated by Daniella Bassi.
Original Article: "Why This Bubble Economy Keeps Going and Going"
Politicians and pundits have a blind spot when it comes to international economic transactions. They ignore a portion of trade! In particular, they ignore trade in claims on future income—that is, stocks and bonds.
Narrated by Daniella Bassi.
Original Article: "Free Trade Brings More Foreign Investment into the US. That's a Good Thing."
Bob Murphy has a friendly discussion and debate with Karl Smith. First, Bob pushes Karl to clarify the conditions under which government deficit spending could, even in theory, help a depressed economy. Then, they switch to the economics of climate change, and Bob’s view that the case for a carbon tax is much weaker than most economists admit.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Tucker Carlson gives unambiguous approval for Elizabeth Warren’s call for “economic nationalism,” saying her proposal sounds like “Trump at his best.” Carlson pillories American companies for outsourcing their operations to other countries, and blames Republican leadership for its dedication to doctrinaire libertarianism and Austrian economics. (Not a joke.) Bob disagrees with this take.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Radical Markets: Uprooting Capitalism and Democracy for a Just SocietyEric A. Posner and E. Glen WeylPrinceton University Press, 2018xii + 337 pages
Radical Markets has at least one virtue. The book contains many unusual proposals, and I propose to concentrate on one of the strangest of these. Eric Posner, a legal scholar, and Glen Weyl, a principal researcher at Microsoft, call for speculative boldness, and they have given us that; but sound argument is another matter.
The authors agree with prevailing leftist dogma on one matter, but differ with it on another. They accept the conventional wisdom that inequality in the world economy is extreme. “Together, the trends of rising inequality and stagnating growth mean that typical citizens in wealthy countries are no longer living much better than their parents did. ... These trends pose the same problem for the neoliberal economic consensus that stagflation posed for the Keynesian consensus before it. We were promised economic dynamism in exchange for inequality. We got the inequality, but dynamism is actually declining.”
Posner and Weyl do not discuss skeptics about the rise of inequality, such as Thomas Sowell and the authors of Anti-Piketty. Let us leave that point, vital as it is, to one side. They also fail to address this question: why is inequality bad? Like almost all egalitarians, they just assume that it is and proceed from there. Though they continually call for fresh thinking, they never question this prevailing shibboleth of our age.
They differ with the left, though, in their view of markets. For Posner and Weyl, the market deserves praise: “Our premise is that markets are, and for the medium term will remain, the best way of arranging a society.”
Posner and Weyl support markets and favor equality. The free market does make the poor, along with everyone else, better off; but this does not for our demanding authors suffice. The market allows too much inequality.
What then is to be done? The authors have detected a crucial flaw in markets as they are now constituted. Markets are not perfectly competitive, “meaning that there are a small number of homogeneous commodities, and no individual holds or buys a large fraction of them.” Because of this, most buyers and sellers have “bargaining power.” This wastes time and resources. “Each party works hard to ascertain what the other would be willing to pay or accept and jockeys for the best price possible. Such strategic behavior often causes trades to fail. Even when they succeed, huge amounts of time and effort have been wasted in the process. These problems are magnified in complex business transactions.” In other words: bargaining power withholds vast amounts of resources from the market.
Just as the authors never pose the question, why is inequality bad, they never provide an argument that all resources should at all times be available for sale. Why is it bad to withhold resources in the hope of better terms later? We are never told.
The best the authors manage is this: “How can we measure ‘the greatest happiness for the greatest number’? How is it possible to compare the happiness of one individual to that of another? Many economists have argued that this task is impractical. They suggest that all we can hope for is ensure that no one’s happiness can be increased without decreasing anyone else’s, a condition called Pareto efficiency, and that the total happiness is distributed fairly.”
Now the cat is out of the bag. If an increase in the monetary value of resources is taken as roughly equal to an increase in utility, then bringing withheld resources into the market generates efficiency gains. It is Pareto superior, as neoclassical economists phrase it.
This merely pushes back our question: why should Pareto efficiency be the criterion by which economic
policies are assessed? Murray Rothbard has trenchantly remarked: “there are several layers of grave fallacy involved in the very concept of efficiency as applied to social institutions or policies: (1) the problem is not only in specifying ends but also in deciding whose ends are to be pursued; (2) individual ends are bound to conflict, and therefore any additive concept of social efficiency is meaningless; and (3) even each individual’s actions cannot be assumed to be ‘efficient’; indeed, they undoubtedly will not be. Hence, efficiency is an erroneous concept even when applied to each individual’s actions directed toward his ends; it is a fortiori a meaningless concept when it includes more than one individual, let alone an entire society.”
How do Posner and Weyl propose to curtail bargaining power? Their solution is a “common ownership self-assessed tax (COST) on wealth.” In this proposal, everyone would set a price for each of his assets, and that assessment would be the basis for taxes. If you object that people would set this assessment absurdly low to avoid taxation, here the ingenuity of the scheme emerges. Once someone makes his self-assessment, anyone could purchase the asset at that price. In this way, efficiency goes up, because the purchaser would not buy the asset unless he thought he could generate a greater return than he paid for it. Wealth, our proxy for efficiency, rises, and bargaining power has been curtailed.
To this there is an obvious objection, and the authors have a response to it. The objection is that an investor would not buy an asset he wanted to develop over a number of years if he thought someone else could purchase it from him by paying his assessment price. They answer by lowering the tax rate; people who had to surrender less of their gain to the state would invest more. That is indeed so, but would this not defeat the purpose of the efficiency plan? With lower taxes, people would, in order to deter buyers, raise their self-assessment prices for assets they wanted to keep. You would no longer find it so easy to snatch someone’s assets out from under him. Posner and Weyl respond: “When the tax is reduced incrementally to improve investment efficiency, the loss in allocative efficiency is less than the gain in investment efficiency.” “A fully implemented COST,” they suggest, “could increase social wealth by trillions of dollars every year.” Further, the vast revenue generated by taxes on the added wealth could be used to reduce inequality.
The authors admit a drawback to their plan. What if you have assets that you do not wish to sell at any price? Is the only way to avert the chance someone will purchase your asset to set a price on it that will subject you to crushing taxation? They suggest averting this through exemptions; but they have a more fundamental response: “The COST could also make us think about property in a different and healthier way. A COST taxes objects, not personal relationships. Wouldn’t it be better if people invested less of their emotional energy in objects and more in their personal relationships? ... Fetishistic attachment to a privately owned automobile — an extremely expensive durable asset ... is, thankfully, becoming a thing of the past. Increasing economic evidence suggests that excessive attachment to homes is inhibiting employment and dynamism in the US economy, a problem a COST would greatly reduce.”
Here the difference between the position of Mises and Rothbard and the “radicalism” of Posner and Weyl emerges with complete clarity. Mises and Rothbard accept people as they are: from that starting point, they argue that the free market permits mutually beneficial trades. Posner and Weyl are “Progressives” who want to remold people in their own image.
When I read the authors’ account of COST, I wondered: if the authors are so concerned to increase social wealth, why allow individuals to choose their occupations? What if you could generate more revenue in a different occupation from the one you prefer? Suppose that a writer could earn vastly more money as a stockbroker. Should he be free to deprive society of all the taxable wealth he would earn in the higher paying job?
Sure enough, the authors head in this direction, though they draw back from its implications. “Consider a very radical extension of the COST: to human capital ... imagine that individuals were to self-assess a value of their time, pay a tax on this self-assessed value, and stand ready to work for any employer willing to pay this wage ... in principle, A COST on human capital would be immensely valuable.”
Unfortunately, society is not yet ready for this proposal. “A COST on human capital might be perceived as a kind of slavery — incorrectly in our view, at least if the COST were properly designed. Still, we can see the problem.” For now, the proposal is premature.
Whatever the defects of their ideas, though, do not Posner and Weyl deserve credit on one score? They do, after all, say that markets “are ... the best way of arranging a society.” Alert readers will have noticed, though, a qualification in the passage where they say this, quoted earlier in this review: “and for the medium term will remain.”
What do they mean by this? They pay generous tribute to Mises’s socialist calculation argument, but unfortunately they misunderstand it: “The brilliant economist Ludwig von Mises argued that the fundamental problem facing socialism was not incentives or knowledge in the abstract but communication and computation.” Mises’s socialist critics argued that there was “no difficulty in principle with solving a (very large) system of equations relating the supply and demand of various goods, resources, and services.”
Mises was right. “Yet the later development of the theory of computational and communications complexity vindicated Mises’s insights. What computational scientists later realized is that even if managing the economy were ‘merely’ a problem of solving a large system of equations, finding such solutions is far from the easy task that socialist economists believed.” New developments in parallel and distributed processing, though, may enable these problems to be solved, and the market as we know it may be superseded. Mises is thus a pioneer in computer science. One can only quote, on Mises’s behalf, Eliot’s lines in “The Love Song of J. Alfred Prufrock”: “That is not what I meant at all;/ That is not it, at all.
[Excerpted from Chapter VII of Principles of Political Economy and Taxation (1817). Ricardo, an economist of the "Classical School," deserves credit for having been among the first to point out the advantages of specialization and trade, even if one party to the transaction could produce everything better and cheaper than the other. Reprinted from Free Market Economics: A Basic Reader, compiled by Bettina G. Greaves.]
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by in creasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilised world. It is this principle which determines that wine shall be made in France and Portugal, that com shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.
In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.
If Portugal had no commercial connection with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.
The quantity of wine which she shall give in exchange for the cloth of England is not determined by the respective quantities of labour devoted to the production of each, as it would be if both commodities were manufactured in England, or both in Portugal.
England may be so circumstanced that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.
To produce the wine in Portugal might require only the labour of 80 men for one year, and to produce the cloth in the same country might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.
Thus England would give the produce of the labour of 100 men for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.It will appear, then, that a country possessing very considerable advantages in machinery and skill, and which may therefore be enabled to manufacture commodities with much less labour than her neighbours, may, in return for such commodities, import a portion of the com required for its consumption, even if its land were more fertile and com could be grown with less labour than in the country from which it was imported. Two men can both make shoes and hats, and one is superior to the other in both employments; but in making hats he can only exceed his competitor by one-fifth or 20 per cent, and in making shoes he can excel him by one-third or 33 per cent — will it not be for the interest of both that the superior man should employ himself exclusively in making shoes, and the inferior man in making hats?
It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth should be removed to Portugal for that purpose. In that case, the relative value of these commodities would be regulated by the same principle as if one were the produce of Yorkshire and the other of London: and in every other case, if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities than the additional quantity of labour required to convey them to the various markets where they were to be sold.
Experience, however, shows that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and intrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital ...
[Reprinted from the Quarterly Journal of Austrian Economics 20, no. 1 (Spring 2017): 84–96.]
Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for AmericaBy Nancy MacLeanNew York: Viking Press, 2017
The primary theme of Democracy in Chains by Nancy MacLean, a Duke University history professor, is that participation in American democracy by conservatives or libertarians threatens the destruction of American democracy by imposing restraints on the unlimited growth of government. She claims to have only realized this dire threat in “the early 2010s” when “something extraordinarily troubling had somehow entered American politics” (p. xv). Rather than the usual “bipartisan” support for the never-ending growth of government by both parties, a few “actions” of a few Republican governors and congressmen “seemed intended in one way or another to reduce the authority and reach of government. ...” To Nancy MacLean this was “a fire bell in the night,” to borrow a phrase from Thomas Jefferson.
The alarming things that were so disturbing to MacLean were the actions of Wisconsin Governor Scott Walker attempting to save his state from bankruptcy by restraining the political clout of teachers’ unions and other public employee unions; New Jersey Governor Chris Christie’s criticisms of the teachers’ unions in his state; opposition to proposals to allow voter registration without showing proper I.D.; and the existence of articulate arguments in opposition to more socialist central planning of health care (a.k.a. “Obamacare”).
Everything seemed to be going swimmingly, with the most far-left ideologue in history occupying the White House, and Democrat Party dominance of Congress, and then all of this happens. Leftists like Nancy MacLean claim to have been blindsided by political opposition that they thought had been completely neutered. So left-wing academics, armed with their generous government and (left-wing) foundation grants, immediately “tried to get a better handle on what exactly was driving this sortie from the right.” This sudden opposition to the practice of effectively granting unlimited powers to raise taxes to public employee unions, and critiques of socialized medicine, is un-American, un-democratic, and a mortal threat to the American way of life, she claims.
There’s no need to panic, however, for MacLean claims to have discovered the root of the problem. Other leftist academics have attempted to uncover some kind of secret and sinister “master plan” to transform America into the dreaded (by the Nancy MacLeans of the world) free society by investigating the writings of Adam Smith, Milton Friedman, Ayn Rand, and F.A. Hayek, she says. But with no avail. “[S]uch inquiries ran aground, because none of the usual suspects had sired this campaign” (p. xvii). “The missing piece of the puzzle,” she victoriously announces, “was James McGill Buchanan” and the Public Choice school of economics (p. xvii). This, she claims, is “the true origin story of today’s well-heeled radical right.” Without Buchanan and public choice economics, the “far right” would be “incapable of doing serious damage to American society” (p. xvii).
The mortal threat to MacLean’s cherished goal of the relentless push toward unlimited government (i.e., totalitarian socialism) that the public choice school supposedly poses is that it has taught a great many people a great deal about how government actually works. Once they understand the process, it then becomes possible to propose changes to the process — or to the constitutional rules of the game — that could re-impose founding-father-style constitutional limits on the growth of government. All those years of Hamiltonian manipulation of “the living constitution” by leftist government lawyers in black robes could conceivably be reversed!
Indeed, Buchanan himself often said that public choice was essentially a rewriting of much of the writings of men like James Madison and Jefferson in the language of modern public choice economics (it was Jefferson who said that “the natural tendency of things is for government to gain ground and for liberty to yield”; and that government needed to be “bound by the chains of the Constitution”). He also was fond of saying that “no one could be a socialist” if they understood public choice theory. Perhaps Nancy MacLean is on to something here.
In Nancy MacLean’s mind, there’s nothing wrong with America’s government establishment employing vast resources educating people how to use the levers and processes of government to expand its size, scope, powers, and budgets. This is accomplished today with the help of the vast university system which has become one giant taxpayer-financed think tank for statism with only a handful of exceptions; through a “mainstream media” that seems every bit as propagandistic as Pravda was during the Cold War; hundreds of thousands of government bureaucrats at all levels of government, every one of which is a propagandist/lobbyist for bigger government; a K-12 school system that is thoroughly embedded with leftist political correctness; huge armies of political consultants, lobbyists, and paid propagandists; a popular culture that endlessly repeats anti-capitalist, anti-libertarian, and pro-statist themes; and thousands of government-funded nonprofit organizations, from the AARP to the Wilderness Society, that promote more interventionism and less freedom. On top of that are private foundations like Ford, Carnegie, and Rockefeller that have showered leftist academics with foundation grants for decades, not to mention the contributions of socialistic billionaires like George Soros, Ted Turner, and Bill Gates. For years, the Capital Research Center in Washington, D.C. published an annual study entitled Patterns of Corporate Philanthropy that documented that for every $1 corporate foundations gave to a conservative or libertarian organization, between $2 and $3 was given to a left-of-center group.
All of this is apparently a proper if not essential part of American democracy, but not the writings of James Buchanan and other public choice scholars, and certainly not conservative or libertarian foundations that would financially support such research and writing, even if their multi-million dollar donations are a mere pittance compared to the funding of the Left. Hence the purpose of Democracy in Chains is to discredit and even defame Buchanan, the public choice school, and especially wealthy conservative or libertarian philanthropists like Charles Koch who have funded such research and education. The bulk of the book is a relentless critique, sometimes bordering on libel and slander, of James Buchanan and Charles Koch, the bogeyman of the American Left.
MacLean learned a great deal about Buchanan by spending what must have been weeks, or months, going through all of his personal files in “Buchanan House” on the George Mason University campus. (When James Buchanan and his Public Choice Center moved from Virginia Polytechnic Institute to George Mason University in the mid 1980s the old president’s house was allocated to Buchanan as his office and was named “Buchanan House”).
MacLean boasts of how Buchanan’s intellectual heirs at George Mason left the door to Buchanan House unlocked so that someone like herself could rifle through all of the Nobel laureate’s private papers and files and use them to write a book that attempts to defame him. (She does call him a genius, but an “evil” genius).
The book is also an attack on libertarianism in general, as MacLean cherry picks quotations here and there from various libertarian-oriented writers, usually out of context, in order to critique and ridicule them. Oddly, there is only one mention of the most famous (non-academic) libertarian in the world, Ron Paul. MacLean mentions in passing on page 144 that, in the late 1970s, Ron Paul once voiced approval of a Reason Foundation proposal for city governments to put city services up for competitive bidding.
MacLean’s critique begins with a chapter about John C. Calhoun, of all people, who is not even cited a single time in Buchanan’s magnum opus (with Gordon Tullock), The Calculus of Consent. I never heard Buchanan mention Calhoun when I took his Ph.D.-level Public Finance course at VPI in the fall of 1977, or when I was a colleague of his for a few years at George Mason University in the 1980s. If he mentioned Calhoun in any of his writings, I am not aware of it. Neither is Nancy MacLean, apparently, for she does not present a single footnote to make the point that Buchanan was somehow following in Calhoun’s footsteps.
Nevertheless, Calhoun did write in the same philosophical spirit as Madison and other founders, and MacLean quotes Murray Rothbard (p. 2) to that effect. Buchanan did consider much of public choice theory to be derived from the kind of thinking possessed by the framers of the Constitution. Her discussion of Calhoun, however, is often distorted, just plain incorrect, and even cartoonish. For example, she claims that the only people in Calhoun’s South Carolina who would have been harmed by the 1828 Tariff of Abominations, which imposed an extortionate, 45 percent average tariff rate on imports, were wealthy plantation owners. The man who was supposedly Buchanan’s intellectual inspiration, she is saying, was a mere apologist for slave owners. Such talk is simply a joke, for high tariffs on woolen blankets (100 percent), shoes, farm tools, leather goods, and myriad other consumer products negatively affected the entire population. Moreover, the Tariff of Abominations was a deeply regressive tax that imposed a harsher burden on the lower-income people whom MacLean, as a card-carrying leftist, claims to be championing.
MacLean is also factually wrong when she calls South Carolina’s opposition to the Tariff of Abominations “the first regionwide tax rebellion in U.S. history” (p. 6). The Pennsylvania Whiskey Rebellion (1791) and Shay’s Rebellion in Massachusetts (1786) occurred decades earlier. The American Revolution itself was in part a tax rebellion (“Taxation Without Representation!”). Did the American colonists fight a revolution so that they could maintain the system of slavery that the king of England had imposed on them? This is what MacLean’s logic, such as it is, would suggest.
These facts illustrate another falsehood in the book, namely, slavery was absent” (p. 7). Yes, they did, and they were led mostly by yeoman farmers in Pennsylvania and Massachusetts who protested the imposition of national whiskey and property taxes.
MacLean’s apparent strategy here is to falsify history by insisting that all early-American tax protests occurred only to “protect slavery” for the wealthy “propertied class.” She quotes another leftist historian who wrote incorrectly that “the anti-government rhetoric that continues to saturate our political life is rooted in [support for] slavery rather than liberty” (p. 7). This would imply that all of the anti-government rhetoric of the founders, including Jefferson’s “train of abuses” in the Declaration of Independence, the writings of Thomas Paine, and much else was all designed only to “support slavery.” What nonsense.
She then makes numerous analogies to today’s libertarian intellectual critics of Big Government, arguing that they of course are not slavery defenders, but their motives are not much better — they are merely paid intellectual prostitutes defending the super-rich. The academic recipients of multi-million-dollar government or (left-wing) foundation grants, on the other hand, are assumed to be as morally pure and objectively honest as the driven snow.
Like all radical socialists, MacLean is a harsh, sneering critic of private property, following in the footsteps of Marx and Engels who called for the “ABOLITION OF PRIVATE PROPERTY” in The Communist Manifesto. She repeats her mantra in several chapters that libertarian defenders of property rights are really only defending the rights of perhaps the top one-half of one percent of income earners — the wealthiest of the wealthiest. Not even the “one-percenters,” she says, but the one-half-of-one-percenters. Who needs private property if only the wealthiest of the wealthy, who became wealthy in the first place by exploiting the rest of us, benefit from it?
That was supposedly true in Calhoun’s day, as it is today, she insists. She cites Mises, Rothbard, Hayek, and Friedman as though she has read their writings on property rights, but she either hasn’t or chose to ignore them. Mises was especially clear when he wrote in The Free and Prosperous Commonwealth (p. 67) that “Private property creates for the individual a sphere in which he is free of the state. It sets limits to the operation of the authoritarian will. ... It thus becomes the basis of all those activities that are free from violent interference on the part of the state. It is the soil in which the seeds of freedom are nurtured and in which the autonomy of the individual and... material progress are rooted.” Secure property rights are a prerequisite for market exchange, market prices, the division of labor, and the human civilization created thereby.
Like other advocates of unlimited powers of the central state, MacLean also falsifies the history of nullification and interposition by asserting that the idea began with Calhoun, and was only meant to defend slavery. But as Tom Woods (2010) shows in his book, Nullification, the American colonists were the first nullifiers. Jefferson and Madison then adopted the concept in the Virginia and Kentucky Resolutions of 1798 that nullified the outlawing of free political speech through the Sedition Act that was being enforced by the Hamiltonian Federalist Party. Northern states nullified the Fugitive Slave Act, and Ohio nullified the chartering of branches of the Bank of the United States within its borders. New Englanders cited Jefferson’s Kentucky Resolve to justify nullifying President Jefferson’s trade embargo and to decline participation in the War of 1812.
McLean also falsely asserts that Calhoun was the first to talk of two conflicted classes in terms of net taxpayers (producers) and net tax consumers. This, too, was not original with Calhoun, but was introduced to American political philosophy by Jefferson and others who were familiar with the writings of the French “Industrialist School” of such writers as Augustin Theiry, Charles Comte, Charles Donoyer, Antoine Destutt de Tracy, Benjamin Constant, and Jean-Baptiste Say (Raico, 2006). Nor was Calhoun the lone American writing about what is known as libertarian class analysis; William Leggett, the owner and editor of the New York Post during Calhoun’s time and a well-known abolitionist, was a prolific libertarian writer who also wrote of the injustice of empowering “net tax consumers” to plunder their fellow citizens.
MacLean really did her homework after spending all that time in Buchanan House, for a good portion of the book is a biographical sketch of James Buchanan, beginning with his birth in Gun, Tennessee in 1919. She briefly discusses his intellectual exodus from Middle Tennessee State Teachers College (triple major in English, Economics, and Mathematics), his time on the staff of Admiral Nimitz during World War II, the University of Tennessee (Master’s degree in Economics), the University of Chicago, University of Virginia, UCLA, Virginia Polytechnic Institute, and George Mason University. She discusses at length the Thomas Jefferson Center for Political Economy and Social Philosophy that Buchanan founded at the University of Virginia, which produced many fine scholars in the classical liberal tradition.
Throughout the book, MacLean strains mightily to distort Buchanan’s views to make him sound as outlandish as possible. For example, on page 49 she quotes Senator Harry F. Byrd of Virginia as having been opposed to any government borrowing at all for “public investments” and then writes that Byrd “would have applauded the book on public debt that Buchanan was writing at the time.” She is implying here that Buchanan shared this view of debt, which he did not. If she had read Buchanan’s book on public debt she would have learned that he approved of government debt for infrastructure, for example, as long as the taxes to service the debt were earmarked for that purpose.
There is a long-winded discussion of the resistance to desegregation of education in Virginia in the 1960s, which seems totally irrelevant to the supposed theme of the book, or to anything Buchanan was writing about at the time. Again, her purpose here seems to be to argue that the origins of modern libertarianism are in the Virginia opponents of desegregation. “In these final hours of the massive resistance [to desegregation] era ... can be found the seed of the ideas guiding today’s attack on the public sector and robust democracy alike,” she writes on page 72.
Another outlandish falsehood in Democracy in Chains is MacLean’s statement on page 79 that “the major deficiency” of the Virginia School (i.e., the Public Choice School), is “the failure to search for empirical tests of the new theories.” If MacLean had looked at any one issue of the journal Public Choice she would have learned that this is unequivocally untrue. Public Choice became very mainstream, and Buchanan was awarded the Nobel Prize for his part in it, precisely because there had been hundreds, or thousands, of published econometric tests of its propositions. Bob Tollison alone, Buchanan’s most prolific student, authored and co-authored literally hundreds of academic journal articles that were econometric tests of various hypotheses drawn from public choice theory. I personally attended every weekly Public Choice seminar, and every economics department seminar, at VPI from September 1976 to June 1979 as a graduate student and can attest that at least 90 percent of all the papers presented there contained some kind of empirical test. MacLean’s assertion is preposterous. It’s hard to believe that with all the effort that went into this book, sitting in Buchanan House for weeks on end, she never once looked at an issue of Public Choice on the shelf in Buchanan’s office.
Among the mountain of falsehoods in this book is the further statement on page 98 that public choice scholars involved in the rent-seeking literature “depicted as rent-seeking any collective efforts by citizens or public servants to prompt government action that involved tax revenues” (emphasis added). This is another silly falsehood. Buchanan and Tullock were not anarchists; they were proponents of limited, constitutional government who generally approved of the use of taxation for the constitutional functions of government. This viewpoint is quite pervasive in the rent-seeking literature for anyone who looks for it. This literature is highly empirical, as most of public choice research is, yet MacLean falsely claims that it only involves “hypothetical scenarios with no true research — no facts — to support them ...” (p. 98).
MacLean discusses Buchanan’s departure from the University of Virginia after Gordon Tullock was denied a promotion to full professor for the third time, an act that Buchanan believed was an outrage, considering Tullock’s achievements and reputation in the economics profession at the time. MacLean basically slanders the late Gordon Tullock by quoting an anonymous person who supposedly called him a “twit;” writing that “he was an awful teacher;” and “his publication record — apart from the book he coauthored with Buchanan — was undistinguished.” He didn’t deserve the promotion, in other words, so there must have been some other reason for Buchanan’s departure from Virginia.
I took Gordon Tullock’s Ph.D.-level seminar course in Public Choice in the fall of 1977 with some of the survivors of the first year of the graduate economics program at VPI (about half dropped out or flunked out after the first year). The Calculus of Consent was one of the textbooks and Tullock, being a University of Chicago-trained legal scholar, conducted the class like a law professor—or at least like the Harvard law professor portrayed in the movie Paper Chase. He would come to each class with a couple of questions that were of the sort that they could have been final exam questions, research paper topics, or even dissertation topics in public choice. He would arbitrarily hand one of us a piece of chalk, and instruct us to stand in front of the rest of the class at the blackboard and explain how we would go about answering the question. It became a team effort, led by the professor, to think through the problem. He was always helpful and encouraging, sharing his great learning with us. He was not an “awful” teacher.
As for MacLean’s smear that Tullock’s publication record was “undistinguished,” she should have taken ten seconds or so to Google “Gordon Tullock vita.” She would have discovered that by the time Buchanan and Tullock left Virginia Tullock had published six books, not one (The Calculus of Consent with Buchanan; The Politics of Bureaucracy; The Organization of Inquiry; Toward a Mathematics of Politics; Private Wants, Public Means; and The Logic of the Law). In addition, he had published four articles in the prestigious Journal of Political Economy, four in the American Economic Review, and others in the Quarterly Journal of Economics, Economic History Review, Oxford Economic Papers, Economic Journal, Western Economic Journal, Il Politico, and Social Science Quarterly, among others. All while founding and editing Public Choice and refereeing at least half of all the articles himself.
The second half of Democracy in Chains is mostly about Charles Koch, the network of conservative and libertarian organizations that he has funded, and his relationship, such as it was, with James Buchanan. MacLean accurately states that after spending many millions of dollars over some three decades, Koch’s efforts “produced few results” (p. 127). She details how Koch worked with Murray Rothbard to co-found the Cato Institute, but says nothing at all about how Koch later confiscated Rothbard’s shares in the organization and disassociated himself with Rothbard. No mention is made of this, or of the reasons why the two men had a falling out. She does get much of the Koch story backwards, however, by saying that Charles Koch insisted that his well-funded minions remain “uncompromisingly radical” (p. 145). That, in fact, is why Rothbard was booted — he was in fact uncompromisingly radical whereas Koch, who moved the Cato Institute from California to Washington, D.C., was not. He wanted to pursue a patently un-radical plan of trying to teach free-market and libertarian principles to the Washington, D.C. bureaucracy — at least in a watered-down and compromised form that would not be too offensive to them. That has always been the Cato Institute’s business plan.
In the middle of her discussion of Koch, MacLean inserts a diversion chapter to take one more swipe at Buchanan by noting that he, like Milton Friedman, had accepted an invitation from faculty members to speak at a Chilean university after the overthrow of the socialist government there in the 1970s. (The faculty members were University of Chicago graduates). He offered advice to the Chilean students and faculty about a balanced budget, an independent central bank, and the importance of some kind of system of constitutional checks and balances. MacLean uses this narrative to repeat once again the ridiculous falsehood that “there was no empirical research” in the public choice literature (p. 158) in order to make the argument that Buchanan was spouting nonsense to his Chilean hosts. The main purpose of this diversion chapter is apparently to once again attempt to imply that “libertarianism” is really an evil, stealthy, centuries-long plot to benefit dictators and billionaires at the expense of the rest of society. And MacLean claims that it is public choice economists who lack facts and evidence!
One interesting and informative part of the book is MacLean’s discussion in the last two chapters of how Charles Koch and his lieutenant, Richie Fink, talked seventy-nine-year-old James Buchanan into lending his name to an organization on the George Mason campus that would become essentially a lobbying arm of Koch Industries. The James Buchanan Center, funded by a $10 million grant to George Mason University in 1997, was staffed mostly by non-academics who conducted “outreach” programs for “Senators, Congressmen, and state legislators, legislative staff and regulators. ...” (p. 199). Some academics were involved, but they were in the minority, writes MacLean. Most were apparently Richie Fink’s political cronies from the D.C. corporate lobbying world.
Buchanan was not happy with this arrangement. MacLean uncovered a September 17, 1998 memo from Buchanan to Fink in the files at Buchanan House in which Buchanan wrote: “Quite frankly, I am pissed off.” What was being done under his name “verges on fraud and surely, at a minimum amounts to exploitation of me, of you, of JBC [the James Buchanan Center], of the university” (p. 201). “Buchanan had been played like a fiddle” by Koch and Fink, writes MacLean, and she is right. Buchanan retired to his farm in Blacksburg soon thereafter.
Buchanan was not the only George Mason faculty member who was disgusted with the Koch/Fink gambit. The late Charles Rowley, a distinguished public choice and law and economics scholar whom Buchanan had brought from England to George Mason and the Public Choice Center in 1985, wrote on his blog in 2012 that Richie Fink, Charles Koch’s top “strategist,” was “a third-rate political hack” and “a man who is very appropriately named” (p. 209). “Far too many libertarians have been seduced by Koch money into providing intellectual ammunition for an autocratic businessman,” he wrote. Many libertarians understood this, Rowley said, but remained silent because “too many of them benefit financially from the pocket money doled out by Charles and David Koch.”
When Buchanan died in 2013 Nancy MacLean attended the memorial service for him in Fairfax. “[N]either Koch nor Fink ... bothered to attend his memorial service,” she noticed. “Why should they? His days of usefulness to them had passed” (p. 204).
MacLean’s concluding chapter repeats for about the hundredth time her neo-Marxist, ad hominem theme that the whole history of classical liberalism, or libertarianism, is that of a small number of people working as paid apologists first for slave owners, and now for billionaires who want to use the powers of the state to line their own pockets at the expense of the rest of society. This is perhaps why, in a book about libertarianism in America, she completely ignores Ron Paul’s extraordinary, worldwide popularity; the millions of voters who wanted him to become president; his voluminous writings and speeches; and the millions of dollars of spontaneous individual contributions to his campaigns based on nothing more than his recitation of libertarian economics, defense of civil liberties, and his advocacy of a foreign policy of national defense instead of offense.
MacLean also completely ignores the educational institution that Ron Paul is most closely associated with, the Mises Institute, and the more than two dozen Mises institutes around the world (Chafuen, 2014). Not to mention the thousands of independent libertarian scholars, bloggers, columnists, authors, radio and podcast hosts, television personalities, and others. Acknowledging the existence of any of this would contradict her hoary Marxistinspired, ad hominem theme that opponents of socialism and defenders of freedom and property rights are all “capitalist tools,” paid liars for corporate plutocrats. This reality also makes her conspiracy theory of “the radical right’s stealth plan for America” appear to be simply crazy.
Much of the confusion prevailing in the historical study of liberalism can be traced to John Stuart Mill, who occupies a vastly inflated position in the conception of liberalism entertained by English-speaking peoples.Elevating Mill to the status of model liberal thinker has also tended to reinforce the search for an underlying philosophical (in the narrower sense) basis in liberalism. This basis is often taken to include an empiricist epistemology and utilitarian ethics. But too many conflicting philosophical traditions — from Aristotelianism and Thomism, to Kantianism, British empiricism, and others — coexist within the history of liberalism for this to be credible. Cf. Bedeschi 1990: pp. 1–2. This "saint of rationalism" is responsible for key distortions in the liberal doctrine on a number of fronts.Mill's deviation from authentic liberalism comes out in his differences with Wilhelm von Humboldt, although according to Mill Humboldt was a major inspiration of On Liberty, which carries an epigraph from the latter's Limits of State Action. See Valls 1999, who, however, considers Mill the more realistic liberal. In economics, Mill's opinion that "the principle of individual liberty is not involved in the doctrine of free trade," provided ammunition for the protectionist arsenal, and accepted and even elaborated socialist arguments (Mill 1977: p. 293; Mises 1978a: p. 195; Raeder 2002: p. 357 n. 76 and p. 374 n. 23; and especially Rothbard 1995 2: pp. 277–85).Henry Sidgwick concluded that in the later editions of his Principles Mill was "completely Socialistic in his ideal of ultimate social improvement." Richard Cobden held that Mill's argument in favor of protection for "infant industries" "outweighed all the good which may have been caused by his other writings." Dicey 1963: p. 429 and n. 2.
Mill rejected the liberal notion of the long-run harmony of the interests of all social classes, including entrepreneurs and workers, on the grounds that "to say that they have same interest … is to say that it is the same thing to a person's interest whether a sum of money belongs to him or to someone else" (Ashcraft 1989: p. 114). Following that odd and shortsighted reasoning would reveal a very large number of hitherto unsuspected conflicts of interest in society (e.g., between any two people who passed each other in the street). Indeed, in arguing that anticapitalism is one of the hallmarks of liberalism, Alan Ryan (1993: p. 302) invokes none other than John Stuart Mill, who wrote (1965: p. 209), "The generality of laborers in this and most other countries have as little choice of occupation and freedom of locomotion … as they could … on any system short of actual slavery" — this at a time when English and other "serfs" were migrating in the millions to the towns and cities and even to foreign lands.Ryan slightly distorts Mill's statement by omitting the qualification "short of." As for Mill's mature views, a summary by a warm and famous sympathizer seems fair: He came to look forward to a co-operative organization of society in which a man would learn to 'dig and weave for his country,' as he now is prepared to fight for it, and in which the surplus products of industry would be distributed among the producers. In middle life, voluntary co-operation appeared to him the best means to this end, but towards the close he recognized that his change of views was such as, on the whole, to rank him with the Socialists. (Hobhouse 1964: p. 62) One sees what Murray Rothbard had in mind in his heretical reference to Mill as "a woolly-minded man of mush" (1995c 2: p. 277).
In international affairs, Mill repudiated the liberal principle of nonintervention in foreign wars, whose most trenchant exponent was Richard Cobden (1973). Where Cobden feared that such entanglements would undermine liberty at home, Mill provided interventionists with what has become a favorite argument — that a strong and free country like Britain has a moral obligation to come to the aid of peoples struggling for their freedom if they are threatened by outside powers.David Manning (1976: p. 93) categorically asserts, "By the middle of the nineteenth century liberalism was as firmly committed to international support for national self-determination as it was to international free trade." Predictably, his evidence comes from Mill. Manning's assertion ignores the Manchester School (and many others), whose influence on foreign-policy thinking extended into the 20th century. That such a standing policy of intervention would most likely compromise domestic freedom was not a problem that Mill, or those who have followed his lead, cared to address.
Worst of all was Mill's deformation of the concept of liberty itself. Liberty, it seems, is a condition that is threatened not only by physical aggression on the part of the state or other institutions or individuals. Rather, "society" often poses even graver dangers to individual freedom. This it achieves through "the tyranny of the prevailing opinion and feeling," the tendency "to impose, by other ways than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them," to "compel all characters to fashion themselves upon the model of its own" (1977: p. 220). True liberty requires "autonomy," for adopting "the traditions or customs of other people" is simply to engage in "ape-like" imitation.See Loren Lomasky's astute critique of the ideal of "autonomy," beloved of professional philosophers (1987: pp. 42–45, pp. 247–50), e.g., "the advocacy of autonomy is typically accompanied by contempt for the actual. … One who is born to a particular family, nation, and religion is not thereby burdened with an anchor restricting his domain of choice but rather is the beneficiary of an inheritance of a manageable number of prospects for fashioning a worthwhile life."
Where others see men and women choosing goals laid out for them by institutions whose authority over them they freely accept, Mill perceives the extinction of freedom. In a striking and utterly preposterous illustration, the saint of rationalism writes, "An individual Jesuit is to the utmost degree of abasement a slave of his order" (1977: p. 308). One wonders what is supposed to follow from this. Must we form abolitionist associations to emancipate the willing "slaves" of the Society of Jesus? How should we go about selecting our John Brown to lead the storming of the slave-pits of Fordham and Georgetown Universities? One wonders by what right Mill and his alter ego Harriet Taylor could ever have imagined themselves entitled to legislate on the status of members of Catholic or Orthodox orders, of Orthodox Jews and devout Muslims, or of any other believers.Raeder (2002: pp. 324–35) makes good use of the long review of Mill's Autobiography by Henry Reeve. Reeve, who had known Mill most of his life, was the editor of the Edinburgh Review and the translator of Tocqueville's Democracy in America. According to Reeve, one result of Mill's well-known peculiar and isolated upbringing and his and Taylor's later general avoidance of social intercourse was that Mill was "totally ignorant" of English life and society. Reeve added, "Mill never lived in what may be called society at all. … In later life he affected something of the life of a prophet, surrounded by admiring votaries. … Mankind itself was to him an abstraction rather than a reality. He knew nothing of the world."
His comment on the Jesuits illustrates a facet of Mill too rarely noticed — he was, in the words of Maurice Cowling, "one of the most censorious of nineteenth century moralists." He constantly passed judgment on the habits, attitudes, preferences, and moral standards of great numbers of people of whom he knew nothing. As Cowling dryly observes, "Bigotry and prejudice are not necessarily the best descriptions of opinions which Comtean determinism has stigmatized as outdated" (1963: pp. 143–44, emphasis in original).
In a posthumously published work, Joseph Hamburger (1999) examines the "dark side" of John Stuart Mill. Here Hamburger, who tells us that he long entertained the conventional view of Mill as a consummate proponent of individual freedom, analyzes Mill's On Liberty, but also his other writings and letters and the reports of his intimate friends. His conclusion is that the freedom of opinion espoused in On Liberty was largely part of Mill's grand strategy — to demolish religious faith, especially Christianity, and received mores, on the way to erecting a social order based on "the religion of humanity." True individuality would be incarnated in the future "Millian man," dreamt of by Mill and Harriet Taylor, a being in whom selfishness and greed would be replaced by altruism and the constant cultivation of the loftier faculties.
"For a century now, controversy has raged over the true meaning of liberalism." The pioneering revisionism of Cowling and Hamburger has been confirmed by Linda C. Raeder. In her John Stuart Mill and the Religion of Humanity (2002), Raeder thoroughly examines all of Mill's major works and other relevant materials to uncover the pattern behind Mill's "self-avowed eclecticism" and his easy employment of "the idiom of the liberal tradition he knew so well." This pattern she finds in the early and permanent influence on Mill of philosophers Henri de Saint-Simon and Auguste Comte. The notion of progress entertained by these positivist philosophers was the steady advance to a this-worldly "religion of humanity" in which all of mankind would instinctively share. Mill's "aspirations for human beings were not for the flowering of their unique individuality but for their conformity to his personal ideal of value and service." In the end, Raeder concludes (p. 338), Mill was no "true friend of liberty."
The fateful linking of liberalism to an adversarial stance vis-à-vis received religion, tradition, and social norms is due to John Stuart Mill more to than anyone else. It has unfortunately become standard. In a typical example, Owen Chadwick, Dixie Professor Emeritus of Ecclesiastical History at Cambridge, writes (1975: p. 22),
A liberal was one who wanted more liberty, that is, more freedom from restraint; whether the restraint was exercised by police, or by law, or by social pressure, or by an orthodoxy of opinion which men assailed at their peril. … The liberal thought that men needed far more room to act and think than they were allowed by established laws and conventions in European society.
Note how in this statement no distinction is made between state coercion on the one hand, and social pressure, orthodox opinion, and conventions on the other. John Dunn states (1979: p. 29, emphasis in original),
If the central dispositional value of liberals is tolerance [sic], their central political value is perhaps a fundamental antipathy towards authority in any of its forms. … Dispositionally, liberalism has little regard for the past.
So much for Macaulay, Thierry, Lecky, Acton, and the other great liberal historians of the 19th century. Descriptions such as Chadwick's and Dunn's are much more expressive of the "antinomian"The term was used in regard to "collectivist" liberals by Edward Shils (1989: pp. 12–4). mentality of contemporary Western academics than of liberalism historically.
Mill's view tends to erase the rather critical distinction between "incurring social disapproval and incurring imprisonment" (Burke 1994: p. 30),See Burke's cogent discussion (1994: 28–30), where he criticizes Mill's tendency "to blur the dividing line between physical force and other kinds of pressure." See also Norman Barry (1996: p. 50), who refers to "the kind of mindless and deliberate non-conformism recommended by John Stuart Mill. … Under conditions of non-constraint, individuals are the makers of their own lives, whether or not they lead them as fully autonomous agents." and leads to pitting liberalism against innocent, noncoercive traditional values and arrangements, especially religious ones. It also forges an offensive alliance between liberalism and the state, even if contrary to Mill's intentions, since it is hard to see how one can be sure of uprooting traditional norms except through the massive use of political power. Contemporary writers like Steven Lukes, committed to the Millian project of enjoining "autonomy," do not shrink from advocating this course, presumably unaware of its totalitarian implications.See Lukes 1973: pp. 154–55, where the author writes of the need for government "to take an ever more active role in shaping and controlling the natural and social environment if equality and liberty are to be enhanced." One of the areas in which true liberty must be enhanced is religion, for religious belief, Lukes maintains, "is not compatible with the full development by individuals of their consciousness of themselves and their situation, and of their human powers." He concurs with Marx that the "abolition of religion as the illusory happiness of men, is a demand for their real happiness," etc. (Emphasis in Marx.) The government that is to undertake such social engineering, Lukes insists, must be "democratic and representative." Here Lukes runs into what proved to be a major problem for his predecessors in social engineering, Robespierre and Lenin among them — where could a truly democratic and representative government obtain the warrant to transform the retrograde people it intends to operate upon?
It is not disputed that the popular meaning of liberal has changed drastically over time. It is a well-known story how, around 1900, in English-speaking countries and elsewhere, the term was captured by writers who were essentially social democrats. Joseph Schumpeter (1954: p. 394) ironically observed that the enemies of the system of free enterprise paid it an unintended compliment when they applied the name liberal to their own creed, historically the opposite of what liberalism stood for from the start.
For a century now, controversy has raged over the true meaning of liberalism (Meadowcroft 1996b: p. 2). Stephen Holmes (1988: p. 101) scoffs at the dispute as involving nothing more than "bragging rights." That does not stop him, though, from joining others of the camp Schumpeter referred to in fighting to secure the label for themselves. There is a profound truth in Thomas Szasz's proposition (1973: p. 20): "In the animal kingdom, the rule is, eat or be eaten; in the human kingdom, define or be defined." This is nowhere clearer than in the "political kingdom."
How did this momentous transformation of the term liberal — what Paul Gottfried (1999: p. 29) calls "a semantic theft" — come about?
"The fateful linking of liberalism to an adversarial stance vis-à-vis received religion, tradition, and social norms is due to John Stuart Mill more to than anyone else."This is the conventional interpretation — liberals from the 18th century on characteristically believed in laissez-faire. Beginning in the last decades of the 19th century, however, British thinkers like T.H. Green and L.T. Hobhouse (and their counterparts in the United States, Germany, and elsewhere) realized that laissez-faire was totally inadequate to the conditions of modern society. Often inspired by John Stuart Mill — in Hobhouse's reverent words (1964: p. 63), "The teaching of Mill brings us close to the heart of liberalism" — they undertook to give liberalism a more up-to-date shape. As one expositor of the conventional view has written,
The central value of the liberated individual, of man as far as possible his own sovereign, did not change; the understanding of that value and the means for achieving it did. (Smith 1968: p. 280)This is from David G. Smith's entry on liberalism in The International Encyclopedia of the Social Sciences. It is a pity that such an important topic should have been left to Smith, whose treatment is often hopelessly confused; e.g., he claims that Ludwig von Mises cannot be considered a liberal because he was too "extreme" in leaving "the individual at the mercy of nature, society, and group and economic power," yet he labels J.-B. Say and Bastiat "liberal economists" (Smith 1968: p. 277, 280).
In particular, the state, which earlier liberals had feared as the enemy of individual liberty, was now seen as a potent engine for furthering it in vital ways. The old liberalism gave way to the new.
The first thing to be pointed out is the political purpose behind the semantic change. It was to ease the way for the revolutionary extension of the state's agenda (ultimately, this has become in principle a limitless agenda). The crying need for such an extension, however, was grounded in a highly questionable theory, which is still operative. It is that the "old" liberalism of laissez-faire had been made obsolete by deep-seated changes in society. The pioneers of the "new liberalism" and their successors based their claims on the supposedly overwhelming power of business enterprise over consumers and workers. But, despite all their propaganda, such a power cannot be shown, empirically or theoretically, to exist (Rothbard 1970: pp. 168–73; Hutt 1954; Armentano 1982; Reynolds 1984: pp. 56–68; DiLorenzo and High, 1988).
Moreover, and decisively, the standard rationale for speaking of a "new liberalism" is analytically flawed. For the end of achieving "the liberated individual" cannot be definitive of liberalism. Other ideologies, among them communist anarchism and many varieties of socialism, share that end.
Consider this statement by Eduard Bernstein, the founder of revisionist socialism (1909: pp. 129, emphasis in original):
The development and protection of the free personality is the goal of all socialist measures, even of those which superficially appear to be coercive. A closer examination will always show that it is a question of a coercion that increases the sum of freedom in society, that gives more freedom, and to a wider group, than it takes away.Cf. Pierre Angel 1961, especially pp. 7, 9, 287, 332, 382–87, 411–15, and 420–33. Bernstein rejected Marxism's central economic concepts as well as state ownership, and was resigned to the indefinite continued existence of the capitalist order. He insisted, however, that it should evolve into a "democratized" capitalism, with an expanding "social" legislation (he considered the Weimar "social state" a good start). Bernstein's revisionism ended by absorbing German socialism and for all practical purposes Western socialism altogether, except for those who became known as Communists.
How does this differ from the standpoint of the "new liberals" for the past century and more?See also Lukes 1973: p. 12, where the author cites Jean Jaurès as asserting that "socialism is the logical completion of individualism," in that it realizes individualist ends through means more appropriate to the modern age. Lukes agrees, positing that "the only way to realize the values of individualism is through a humane form of socialism." We should be grateful to him for at least keeping individualism (in this context, the equivalent of political and economic liberalism) and socialism conceptually distinct. What divides liberalism from opposing ideologies is precisely its substantive program, the means it advocates — private property, the market economy, and the minimizing of the power of the state and of state-backed institutions.Cf. R.W. Davis (1995: pp. vii–viii), in his foreword to the distinguished series The Making of Modern Freedom: "We use freedom in the traditional and restricted sense of civil and political freedom — freedom of religion, freedom of speech and assembly, freedom of the individual from arbitrary and capricious authority over persons and property, freedom to produce and to exchange goods and services, and the freedom to take part in the political process." Davis, the director of the Center for the History of Freedom at Washington University, the sponsor of the series, adds that this "modern, conceptually distinct, idea of freedom" must be sharply differentiated from "the boundless calls for freedom from want and freedom from fear" of Franklin Roosevelt's Four Freedoms.
In Anglophone countries, those who anywhere else would be straightforwardly identified as social democrats or democratic socialists shy away from acknowledging their proper name. It is hard to avoid the conclusion that this is essentially a matter of political expediency. For some reason, labels suggestive of socialism have not been popular in countries of English heritage (cf. Gottfried 1999: p. 9).
This stark political fact was clear to Edward Bellamy, author of the socialist classic Looking Backward. In 1888, in a letter to William Dean Howells, Bellamy weighed what to call his doctrine. He rejected the term "socialist." That was a word he "never could well stomach," since it is foreign "in itself and equally foreign in all its suggestions." "Whatever German and French reformers may choose to call themselves, socialist is not a good name for a party to succeed with in America," he confided to Howells (Schiffman 1958: pp. 370–71). Bellamy chose instead the name "nationalist." Others, on similar grounds, have preferred the label "liberal."
The social-democratic commandeering of liberal met with great success, leading some laissez-faire liberals to incline towards describing themselves as individualists (Raico 1997). Amusingly, the next step was for socialists like John Dewey to try to capture that term as well. It turned out, according to Dewey, that there was an old individualism before the age of great corporations and modern social science; that kind must now be replaced by a new individualism (Dewey 1930).
One product of this "new individualism" would be "a coordinating and directive council in which captains of industry and finance would meet with representatives of labor and public officials to plan the regulation" of the economy. While this was obviously a replica of the corporate state that Mussolini was erecting in Italy, Dewey chose to ignore that parallel. The power center he proposed would have a voluntarist, and thus appropriately American, slant, as the United States set out constructively "upon the road which Soviet Russia is traveling" in such a deplorably destructive way (Dewey 1930: p. 118).A year later, Rexford Tugwell, of Roosevelt's "Brain Trust," wrote in The New Republic that "the interest of the liberals among us in the institutions of the new Russia of the Soviets has created a wide popular interest in 'planning.'" (Gottfried 1999: p. 66). So, after the concept of liberalism was transformed to exclude adherents of the market economy and private property, now individualism was also to be redefined, to the same end. It is almost as if socialists like Dewey were trying simply to define the advocates of free enterprise out of existence, and debate, altogether.Cf. Gottfried 1999: p. 13: "When Dewey decided to characterize his proposed social reforms as 'liberal,' he had already tried out 'progressive,' 'corporate,' and 'organic.'"
There are many who use the coronavirus crisis to blame freedom to trade for the current epidemic. And, of course, there are those who are already arguing for autarky, closing our borders, and producing everything locally.
But we have been living in a world that relies on trade between different populations since the birth of civilization.
For example, eight thousand years ago, there was an intense trade in lapis lazuli, a semiprecious blue stone, between what is now Afghanistan and the first agricultural civilizations of Mesopotamia, in present-day Iraq. Lapis lazuli was one of the most important symbols of high social status.
Five thousand years ago, Ötzi ("the Iceman") was killed in the Alps in what is now Austria. He carried a hunting ax cast from copper from southern Tuscany, in the Italian Peninsula.
In the first century AD, Pliny the Elder, adviser to Roman emperor Vespasian, complained to his ruler that through trade with India the empire's gold was pouring out of Rome at a rapid rate in exchange for lavish Chinese products, such as silk and other vanity items. Marco Polo's published recollections about China inspired generations of explorers to find their way to the land of fabulous riches. Columbus had accidentally discovered the American continent while searching for a Western route to China through the Atlantic Ocean.
But there was not only trade in physical goods. For centuries, an uncountable number of people traveled for spiritual reasons to holy sites, ranging from Santiago de Compostella in Spain to Mecca in Saudi Arabia, or Tibet.
Others traveled for fun, curiosity, or out of a desire for discovery and knowledge.
There were also those who set out on foot, on horseback, or aboard a vessel, because in the familiar world of their homes there was no room for them or they were persecuted, and sought to conquer a new land to continue their lives. And there were some who set out to prey on foreign peoples.
Free trade and voluntary interactions between various villages, cities, and countries are part of our human nature, not merely a peculiarity of our time. Nor does all this occur in the name of "chasing profit," as is so often claimed.
Certainly, many real-world barriers limit these interactions. The lack of human knowledge and technical capabilities have long limited the depth and scale of trade and travel. It is no coincidence that deadly epidemics repeatedly caused enormous damage to ancient societies. A plague that killed between a third and half of the population ended the rejuvenation of the Byzantine Empire under Emperor Justinian in the sixth century. In Europe, the bubonic plague pandemic of 1347 (the Black Death) caused massive destruction in the most developed areas of the continent, killing as much as 50 percent of the population. There are countless similar cases throughout human history. The novel coronavirus is just one of them.
There is a big difference between previous epidemics and the current outbreak of COVID-19; the virus has struck humanity in a comparatively free world. We are now living in a world that is in many ways more commercially free, a state of affairs whose origins can be traced back to at least the eighteenth century.
Free trade and the abolition of legal constraints on economies has allowed ordinary people—instead of just the wealthy, as in ages past—to improve their own lives through economic exchanges, either materially or otherwise. In a world with freedom to trade, a craftsman such as George Stephenson, tinkering with technical problems, could become the inventor of the steam locomotive, and a clever and talented telegraph operator, such as Thomas Alva Edison, could become to one of the world's most respected inventors and the founder of Edison General Electric, which would become General Electric after a merger.
It is due to this freedom of thought and action that we now have many more resources at our disposal for the treatment and prevention of disease, including COVID-19.
The lesson to be learned is not the failure of trade to offer countless benefits, but that many governments reacted late, and then in a destructive manner. China suppressed information about the new epidemic. The state-run healthcare systems of the world also performed poorly in reaction to the emergency. Italy is a prime example of this failure, whereas the South Korean healthcare system, one of more market-oriented ones in the world, has been one of the most successful in dealing with the virus because of its flexibility.
Autarky offers few solutions. We need more freedom to allow for research cooperation across countries in case of epidemics. We need more markets in order to develop a flexible healthcare system, one that seeks to serve the customers—the patients—and is not solely responding to government orders.
What we don’t need is governments that withhold information and then in a last-minute panic order the rushed closure of whole countries while also cutting local populations off from essential goods and services produced worldwide.
What's a telltale sign of economic illiteracy?
I'm starting to believe the worst is the claim that markets lead to monopoly and the accumulation of wealth in a few hands. Why? Because it makes no sense at all on the face of it and has no logical explanation, so it is indicativeof fundamental confusion and misunderstanding.
Granted, many great thinkers have been deluded by this, including Joseph Schumpeter (the old pessimist, not the young optimist). It is nevertheless a fundamental error. This error lies not in the fact that some, or even many, businessmen strive for empire, that businesses and businessmen would like and may wish for monopoly, or that they seek as much profit as possible, but in mistaking the aims of individual actors for the mechanism that they collectively comprise. This is like figuring the function of money in the economy by studying a dollar bill.
Little, if anything, will come of it, because the instance is not the function.
This difference is captured in the slogans "promarket, not pro-business" or "free market anticapitalism," which here have similar meanings. The core of the market is voluntary exchange undertaken for private gain. But in voluntary (nonfraudulent) exchange both parties, not only one, anticipate gain. There is no transfer of wealth, but an increase on both sides.
The market comprises any and all voluntary exchanges, and sees no barriers to entry other than scarcity: you cannot trade what you do not have.
Markets ease the burden of scarcity on society by determining relative values (prices) and through them allocate resources to the most productive hands (from the perspective of consumers; i.e., value creation). In this situation, one can only accumulate wealth through production followed by an exchange that is anticipated to benefit consumers, who are the final arbiters of value. Even if one were to monopolize some valued resource, it only has value when utilized inproduction. If I were to monopolize meat, I could only use this situation for my benefit by selling the meat.
The typical counterargument is that some resources are necessary for some forms of production, such that the monopolist can extract rents from the rest of the economy. This is only true in a static world, however. In a world where we learn, discover, and innovate, there are no such resources.
In fact, someone's lasting monopoly of a treasured resource means two things: first, it is a great incentive for entrepreneurs to focus their efforts and imagination on finding alternatives (which are always possible because nothing in this world is entirely specific), and, second, it makes the monopolist relatively poorer for as long as s/he does not put the resource to use.
It is only through using the resource (i.e., using it to benefit consumers) that it becomes valuable and can generate income for the owner. In other words, it is through undermining their monopoly that the owner best serves himself. It is also through using (and, thereby, sharing) the resource that innovations that can undermine its value can be limited.
In fact, the more effectively a resource is used to satisfy consumers, the more valuable it is. Additionally, the less bothersome the monopoly is, which means that innovative efforts are directed elsewhere, the better it does.
The market simply does not offer a mechanism for monopolists to exploit consumers. The value of any resource is derived from the valuable contribution it offers to consumers, which means capital and resources are valuable because consumers determine that they are. The owner is a servant of consumers, not the other way around.
So why, then, do we see monopolies in the "market economy"?
Why do we see immense inequality?
It is not a result of voluntary exchange, because that mechanism benefits all involved by improving their positions—and society at large by producing a more beneficial resource allocation. The only reasonable and logical explanation is that something has distorted voluntary exchange. Typically, it is the burden of regulations, which almost exclusively impose costs on and restrict entry for competitors and thereby indirectly protect incumbents, who then no longer respond to consumers on fully marketable terms.
In other words, the market mechanism is partially put out of play, and therefore the outcome too is distorted. By not letting the market mechanism work fully, some of the most beneficial exchanges will no longer take place, which is a loss to those parties. As a result, some resources—especially the ones protected from competition—become relatively overvalued and offer their owners more benefit than the benefit to consumers warrants. As long as they are shielded from(rather than subject to) the market mechanism, they can take advantage of the position.
This is the real problem of monopoly—not that someone is the sole seller or provider of a resource, but that monopolists are artificially protected and thus are no longer subject to profits from benefiting consumers. The market logic no longer applies, which is the reason we see these problems. For this to happen, a market does not need to be fully nationalized or controlled by the government. It is sufficient to circumscribe the market mechanism, and thereby directentrepreneurs to activities that would not otherwise have been their first choice, to cause highly distorted outcomes. The more restrictions affect the market mechanism and limit the realm of voluntary exchange, the greater the burden on consumers.
The common misconception that voluntary exchange leads to monopoly and accumulation of wealth is, consequently, the exact opposite of what follows from the logic of the market.
More regulation cannot solve this problem, because regulation is the problem.
It is very unfortunate that so many fail to consider what mechanism could or must have caused the problems they observe. There is no conceivable way by which voluntary exchange can lead a producer to a position of "market power," because production is valuable only because consumers think so—and this is based on their opportunity costs: the comparison of value gained versus what other value can be gained instead. A monopolist jacking up selling prices is pushing customers elsewhere, directing them to consider other options and providing entrepreneurs with increased profit incentives to find ways to serve consumers without involving the monopolist.
Only by restricting these logical outcomes can the monopolist gain market power. Such restrictions are imposed on the market, typically by the government, but they are not part of the market.
Formatted from Twitter @PerBylund.
“If steel and iron works, copper mines, and sawmills cannot be operated to their full capacity, the reason can only be that there are not enough buyers on the market ready to purchase their whole output at prices which cover the costs” wrote Ludwig von Mises in Human Action.P. 575.
Chairman Mao’s steel obsessionIn his first Five Year Plan (1953–57) and the Great Leap Forward (1958–60), Chairman Mao steered communist China toward heavy industrial production. He was obsessed with steel production as a measure of a nation’s superiority, and so directed the population of China to produce as much steel as possible.
From 1952 to 1957, steel production tripled, but
this was regarded as inadequate, and during the GLF, the drive for steel turned into an all-consuming obsession, and the entire country was mobilized for this goal, despite the rhetoric of “simultaneous development of industry and agriculture.”Alfred L. Chan, Mao's Crusade, p. 158.
During the Great Leap Forward, the Chinese resorted to backyard blast furnaces to further increase steel production, using any fuel they could get their hands on, including the wood from front doors, furniture, and coffins. They melted personal items like cookware and bicycles when they ran out of iron ore. The metals produced by such methods were weak and useless for construction; in some regions the metal content didn’t even qualify it as steel, but low quality pig iron.
The consequences for Mao’s steel obsession was more than just low-quality output: a death toll in the tens of millions as people starved due to the lack of food production or were killed or worked to death by the state.
Steel production and economic calculationSuch dire consequences are avoided in market economies because the production of goods, including capital goods, is strictly regulated by consumer demand. The production of one good is only profitable to the extent that the revenues exceed the costs of production, both of which depend on consumer demand.
Revenues are obviously dependent on what consumers are willing to pay for certain quantities of a good, but the costs of production are also totally dependent on consumer demand. The prices of factors of production are bid up to their anticipated discounted marginal revenue product (ADMRP). That is, the extra revenue the entrepreneur expects to be able to earn due to the employment of the factor, due allowance being made for time preference. And this extra revenue, of course, is dependent on the consumer.
To increase the production of a good, the specific factors of production must be bid away from other lines of production. The price offered must exceed what all other entrepreneurs think the factor’s ADMRP is.
Forcing an entire country to redirect almost all productive efforts and resources toward the production of steel means that the costs of production would rise to outrageous levels as factors are bid away from increasingly important uses. The forgone production of other goods is automatically taken into account in the market economy where entrepreneurs rely on economic calculation to make production decisions. Without market prices, like in Mao’s China, such economizing mechanisms are absent.
Trump takes a cue from MaoThe reason this is important today is because Trump has promised “bold action” against steel imports — steel imports from China, coincidentally — presumably to show off American “industrial might,” according to this article. Trump also believes action against imports will provide “a source of well-paying blue-collar jobs.” Mao would be proud.
In April, as a clever ruse to justify new protectionist measures, Trump instructed his administration to investigate the national security implications of importing steel. An announcement about the outcome of this charade is expected any day now.
Steel isn’t a great source of jobsThis comes at the same time economic commentators are fretting over workers being displaced by automation in many industries. Steel production is not immune; a certain plant in Austria needs “just 14 employees to make 500,000 tons of robust steel wire a year.” This, of course, does not include all of the labor required in earlier stages of production. The trend is magnificent all the same, even though the majority opinion is that it’s bad.
The lamenters don’t seem to understand that increased productivity in one industry frees up resources and laborers for other industries, and, since increased productivity means increased real wages, demand for goods and services will increase as well. They seem to have a nonsensical apocalyptic view of a fully automated future with piles and piles of valuable goods everywhere, but nobody can enjoy them because nobody has a job. I invite the worriers to check out simple supply and demand analysis and Say’s Law.
Technological innovations that displace workers are great because total production of all goods can increase, not just the goods in the newly advanced industry. Or, since we also enjoy leisure time, it means that our work weeks can get shorter without sacrificing our livelihoods. Of course, all changes in the economy require some reshuffling of resources, and in the case of temporarily displaced workers, that can be a difficult process (especially if those workers have to overcome and navigate through labor market interventions). But the positive effects of increased productivity undeniably rule out any proposal to stop or hinder such advancements through government force.
How much steel we produce should be determined by consumersEven Mao would have invited technology to increase steel production, even if it meant that the backyard smelters were no longer needed to produce steel (assuming he could magically realize this without market prices). Those laborers could have been directed to agriculture and perhaps millions of people would have been saved from starvation. Technology, however, will never make socialism workable. Without market prices, even super-high-tech societies as seen in Star Trek or Star Wars can only work in fiction. Technology merely allows us to produce more. Deciding what to produce, in what quantities, using what resources, and all of the myriad production decisions requires market prices and economic calculation.
We have regressed to obsessing over domestic steel production, using industrial might, national security, and jobs as justification, but all three are flimsy when compared with what trade and market economies can accomplish. Neither Trump nor Mao can replace the sovereignty of the consumer over production.
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.Ludwig von Mises, Bureaucracy, pp. 20–21.
Western governments have an overriding problem, and that is they have reached or exceeded the bounds of taxation, at a time when legally mandated welfare costs are accelerating. Treasury departments in all the welfare nations are acutely aware of this problem, to which there’s no apparent solution. The economic recovery, so consistently forecast since the great financial crisis, has hardly materialised and has added to the problem.
There is, if treasury economists could only understand it, a solution in free trade.
One of the UK’s leading economists and Brexiteers, Patrick Minford,Professor Minford currently holds the chair of Applied Economics at Cardiff University. He also chairs Economists for Free Trade. produced an interesting paper, which brought up this subject. It got little coverage in the press, and even that was extremely negative. Trading on the Future was the only economic modelling exercise that showed significant benefits for Britain from free trade.
This is the headline from the Independent (19 April): “Only economic study showing benefits of Brexit debunked as ‘doubly misleading’.” The establishment, which is not attuned to free trade, strongly disagreed and presumably felt bound to protect its position.
The problem with Professor Minford’s paper is that he was compelled, by standard macroeconomic practice, to model the economy under different scenarios. It then becomes a debate about whose model is right, as opposed to which economic theory is right. We all know the old saw about computer models and garbage in and garbage out, so defending statistical assumptions becomes little more than a slanging match. And if all the models but one agree, who is going to take the one seriously?
This diverts attention from the excellent points that Professor Minford makes separately from his model, which broadly concur with common sense. Common sense, in this context is properly reasoned economic theory in terms capable of being understood by one’s fellow man. That it has long been abandoned by the macroeconomic establishment is a theme which will be familiar to my readers.
Professor Minford argues that free trade lowers prices for the benefit of the consumer. If tariffs are removed, it is a statement of the obvious. After all, a tariff is a tax on consumption, and if the tax is not imposed, prices will be lower. Furthermore, the competition triggered by a national market being opened to more foreign manufacturers is likely to drive prices down even more. The consumer benefits from free trade, and with the same wages, he can buy more goods and services.
The boost to the economy from lower consumer prices is an excellent result, with clear fiscal benefits. But hold on; are not higher prices, the objective of monetary policy, the only thing that gets the consumer buying? Professor Minford, to ordinary intelligent men, makes sense. But to the establishment economists in their ivory towers this is no less than insurrection against their cherished assumptions.
The ridiculousness of the establishment view on prices is easily illustrated. Imagine your local supermarket offers its customers tins of baked beans at half price. Presumably, it expects to increase its sales of tins of baked beans sufficiently to increase its profits. And indeed, they fly off the shelves. This, according to the belief-driven theories of establishment economists, should not happen. If the supermarket wishes to stimulate buying of tins of baked beans, it should raise prices to persuade customers that they should buy before the price rises again. It truly is a subject for a latter-day Lewis Carroll.
With this sort of thinking prevalent in the corridors of power, it should be obvious why Professor Minford’s arguments must be taken seriously. We must get away from opinions based on garbage-fed economic models. Furthermore, the cabinet ministers directly involved in Brexit and trade negotiations appear to be more instinctively inclined than their Treasury colleagues to think along Professor Minford’s lines. There is a winnable case to be made.
The Success of Unilateral Free TradeThe thesis is very simple, and has good historical precedent. In the mid-nineteenth century, the British government repealed the Corn Laws and then disposed of all trade tariffs, without waiting for other countries to reduce theirs. Lower food prices meant that instead of just working to feed himself, the average worker had some money left over in his wages to buy other things. Consequently, the standard of living for the ordinary person improved, and employment in manufacturing increased with it.
This is the basic argument behind Professor Minford’s paper. You don’t need a computer model to understand it. But for the government, the most important advantage is that repeating the Corn Law experiment in today’s modern economy will produce higher tax revenues on the back of the economic benefits. Professor Minford estimates this will generate an increase of 7.3% of tax revenue for the British treasury, which in another paper he put at £47.5bn, including the £8bn annual payments to the EU that will cease. This solves the UK’s budget deficit, which in the last fiscal year was slightly less than that at £46.6bn, but expected to be somewhat more in the current fiscal year.
You would think the Treasury would welcome free trade on this basis, but it appears the Chancellor’s advisors are still stuck with the economic establishment’s groupthink, the views that incorrectly modelled an economic disaster post-Brexit. However, that could change, particularly given the carrot of increased tax revenue. If I was an advisor to HM Treasury that is the aspect of Brexit I would promote.
If, and when, the Treasury are fully on board then all Brexit controversy at government level should end. And as Professor Minford argues, there is little Britain can do about the EU’s future trade policy with the UK, making prolonged and detailed negotiations somewhat pointless. If they want to hang themselves, that is up to them.
Nowhere is this more obvious than the debate about border controls between Northern Ireland and the Republic. A free trade policy will mean no border controls on the British side. Only yesterday, the British government confirmed that this is their intention. If the Republic of Ireland decides to put in customs posts and split Ireland into two, going against their long-standing desire to unite the North and South, so be it.
Trumpian BlundersThe point about government revenue being maximised by free trade also has important implications for America, where President Trump has strong leanings towards protectionism. This runs counter to the benefits of free trade maximising tax revenue. Yet this year, once again, debt ceilings are having to be raised, and escalating future welfare liabilities are rapidly becoming today’s problem. Given what we know by applying our common sense, that free trade increases economic activity, and therefore maximises tax revenue on the back of it, trade protectionism is not the way to achieve President Trump’s stated goal of making America great again.
From the fiscal point of view, it should be clear that restrictive trade practices amount to shooting oneself in the foot. Sentiment and catchy slogans are one thing, government mercantilism another. America has been here before, back in the 1930s, when the Smoot-Hawley Tariff Act, driven by the Trumpian sentiment at that time, made a bad situation considerably worse.
Its introduction meant that manufacturing costs increased due to tariffs being raised on over 20,000 imported goods, many of them vital to production. At the same time, consumer prices were collapsing in the crisis phase of the credit cycle. By widening the gap between production costs and consumer prices, Smoot-Hawley made the depression both deeper and longer than it would otherwise be.
Commodity prices at that time were measured in gold, through the dollar-gold exchange standard at $20.67 per ounce. If commodity prices collapse again, it will be reflected in gold’s rising purchasing power, not the dollar’s, which will be in free-fall. The dollar will plummet because we can be certain the Fed will redouble its efforts to expand the quantity of dollar money, because that is its mandate from the government.
Globally, Free Trade Is Taking OverThe days when trade protectionism was enforced on everyone else by America, or the EU for that matter, are over. WTO rules, which are the base-case for trade not regulated by agreements, are not substantially different from free trade, an average tariff burden of four or five percent on manufactured goods. This is much less that currency volatility. These are the conditions that have allowed emerging markets to prosper, not only through trade with the advanced economies, but increasingly between each other. Consequently, they have become far more important relative to the developed nations in the global context. North America, the EU and Japan are currently about 54% of the global economy’s GDP, having been 72% in 2000. America itself has declined from 31% to less than 25% of world GDP over the same time-frame.
The election of President Trump, who is regarded by foreign nations as unsupportive of international agreements, such as NATO, climate change and the rest, or just plain unpredictable, has loosened the ties between America and her long-standing allies. He tells Germany that selling cars in America is unfair, and expects Germany to implement American trade sanctions against Russia, a lucrative and growing market for her. There are credible reports that Germany is unofficially discussing trade matters with Russia, and we should not be surprised.
Germany, now that Britain is leaving, will dominate the EU. She is likely to use free trade to her advantage, bound by but no longer relying on Brussels to negotiate trade agreements. Japan’s corporations have most of their factories spread throughout South-East Asia, with an emphasis on China. Britain is almost certain to follow the Asian story post-Brexit, with the additional bonus of natural markets in the Commonwealth.
A Shift to AsiaThere is little doubt therefore that Japan, the EU, and Britain will refocus their trade from an isolationist USA towards a dynamic Asia and the rest of the world. In the event President Trump introduces a latter-day Smoot-Hawley, the effect on the rest of the world would be relatively minor, compared with the experience of the 1930s. Most harmed will be the American consumer, and the US Treasury.
Alarmingly, there are powerful elements in the Trump administration determined to use trade as a weapon in the fight for global hegemon. Only last week (16 August) Steve Bannon (now-former White House chief strategist) gave an interview with The American Prospect which quoted him as saying “To me, the economic war with China is everything. And we have to be maniacally focused on that.” His stall on trade could not be laid out more clearly.
It’s not only America that sacrifices free trade, but other advanced nations do as well, for differing reasons. The resistance to free trade is essentially political. Big business, which tends to be monopolistic, lobbies for protectionism, disliking competition. After all, if you have a factory making simple widgets in France, paying all the social taxes, and stuck with restrictive work practices, foreign competition without those cost burdens is likely to put you out of business. It is not difficult to get politicians to increase trade tariffs and barriers to protect jobs.
Put another way, the profitable redeployment of capital has become increasingly inefficient in all the welfare states. If widgets are no longer being bought, the factory in France will close, unless government subsidises unprofitable production, which it always does. In Asia, if widgets are no longer wanted in the markets, workers are retrained and redeployed to make something else. The release of labour resources to more productive employment is welcomed, while in countries like France it is strongly resisted. China, and the other countries in South-East Asia, have a far more positive attitude to business and trade, and it shows.
Free trade, or what passes for it under WTO rules, is now driving the global economy, coupled with improvements in communications, technology and automation. The losers are those who will not or cannot adapt to this reality. The EU will be forced to adapt, because Germany will set the pace. No matter the European countries that don’t keep up will go bankrupt — Germany is paying the bills anyway.
Meanwhile, America, pursuing her political and geopolitical agendas is cutting herself off from this future. The decline in her share of world trade will continue, and even accelerate as President Trump calls forth the ghosts of Senator Smoot and Representative Hawley.
Last week US Treasury Secretary Steve Mnuchin warned the US will impose new sanctions on China if it doesn't conform to UN sanctions on North Korea:
"If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful."
In other words, the administration wants to sanction one of the US's biggest trading partners, and the world's second-largest economy.
China is the world's third-largest recipient of Americans exports, behind only Canada and Mexico. China is the world's largest source of imports for Americans, slightly ahead of both Mexico and Canada.
In 2016, Americans exported $169 billion in goods and services to China while importing $478 billion of goods and services. Every year, both consumers and producers benefit from the importation of Chinese electronics, machinery, food, footwear, and more.
Ratcheting up economic warfare with China could serve to cut off these avenues of trade and thus will only cost consumers and small business owners who currently benefit from lower-cost machinery, clothing, and more.
For the mercantilists in the Trump administration, of course, American consumers import "too much" from China anyway, and Americans and ought to be prohibited by the US government from purchasing what they want. The North Korea situation could serve as a convenient excuse for slapping prohibitions on American consumers in the name of "fair trade" while also serving as a foreign policy tool.
The last thing the US consumer needs is a trade war with China.
At this point, however, the US isn't talking about cutting off trade in such a blunt manner.
As Mnuchin notes, the strategy here is to "prevent [the Chinese] from accessing the U.S. and international dollar system." In practice, this would likely mean restricting access to the so-called SWIFT system which facilitates international transactions in dollars.
This idea is highly problematic in its own way. Were the Chinese to be cut off from the dollar, this would only create an enormous incentive for the Chinese to move away from the dollar into other currencies — including its own. China's largest trading partners would likely follow China in this exodus. Moreover, China and Russia have already foreseen the possibility of SWIFT being "weaponized."
As Jeff Thomas notes:
China, Russia and others have seen this day coming and have created their own SWIFT system, world cable network and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation.
Moreover, China is a key trading partner for Germany, Russia, Australia, Japan. Brazil, and South Korea. Will these countries simply write off China as a trading partner because thy can't settle accounts in dollars? It's unlikely.
While this would not necessarily destroy the dollar, a movement away from the US dollar would greatly diminish the dollar's standing as the world's reserve currency. It would diminish the dollar's role as the go-to currency, and this would, in turn, drive up borrowing costs — i.e. interest rates — for the US government. This would turn the US's currently sustainable debt problem into an unsustainable one. Massive domestic budget cuts in the US would follow.
The fact is, as Foreign Policy noted last year, China is becoming "too big to sanction." Todd Williamson writes on how the IMF has now added China’s currency, the renminbi (RMB), to its basket of four reserve currencies known as Special Drawing Rights. In doing so, Williamson notes, the IMF "may have delivered a severe blow to the strength of a key tool in the West’s geopolitical arsenal: financial sanctions."
He continues:
The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out — a total of $112 billion in 2015 — and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility.
In other words, slapping financial sanctions on the Chinese is nothing at all like doing the same to the Iranians or the Venezuelans. The Chinese economy and the Chinese currency are already huge global players which huge trading partners.
Now, as Thomas notes, if the US forces China away from the dollar will not be without pain. If it were painless, the Chinese state would have abandoned the dollar already.
China Is Highly Motivated to Go Its Own Way on North KoreaShould the US force the Chinese regime's hand, the regime will be highly motivated to stay the course on North Korea, in spite of the potential for economic disarray.
China already feels itself surrounded by Western client states, including Japan, South Korea, Taiwan, and the Philippines. The Chinese state is not going to abandon its buffer state in North Korea. Were North Korea to be absorbed into a Greater Korea on American terms, this would be seen as a disaster by the Chinese, since it would place US forces right on a Chinese land border, just across the Yalu River.
To get a sense of why the Chinese will not cave to US attempts at regime change in North Korea, imagine how the US would behave if China threatened the US with sanctions — unless the US permitted Chinese troops on the south bank of the Rio Grande.
Add in the fact that the Chinese state is not subject to elections, and we can see the political will to carry on with de-dollarization in the face of US sanctions would be significant indeed.
Another likely outcome of financial sanctions would be to encourage the Chinese to dump their holdings of US debt. China currently holds seven percent of all US bonds. Were the Chinese to dump these holdings, it will become far more difficult for the US and its central bank to continue paying rock-bottom interest rates on its 20-trillion-dollar debt.
If the US wants to really continue with this sanctions game, it need also be prepared to face the reality that its not 1989, and that the world may not be willing to treat dollars and US sanctions in the way the US expects it to. The likely response will only be the latest evidence that the US "unipolar moment" is over.
Last night, I watched the new Netflix documentary Heroin(e). This documentary was of special interest to me, as it revolved around the opioid epidemic in Huntington, West Virginia. Huntington happens to be home to my alma mater, Marshall University, as well as my entire immediate family. Huntington also has the highest per capita rate of heroin overdose in the country.
The documentary covered the crises in an emotional way, but it utterly failed to inform the viewer about the causes and history of the problem. For the long history of heroin, which is more than can be documented in a short article such as this, you can listen to the episode of Historical Controversies devoted to opium. But what was not covered in that episode is the more recent history of opioid addiction as it applies to the tri-state region surrounding Huntington.
The Fifth Vital SignIn 1986, a paper co-authored by Russell Portenoy and Kathy Foley was published in the medical journal Pain, in which they looked at the use of opiates to treat pain in 38 patients. In the paper, the authors cited in a footnote an obscure 1980 letter to the editor of the New England Journal of Medicine titled “Addiction Rare in Patients Treated with Narcotics.”
The paper was modest in its prescription of opioid painkillers, acknowledging that addiction was a possibility, and in later interviews, Portenoy would stress the need for doctors to prescribe opiates judiciously, only after spending sufficient time with a patient. But regardless of Portenoy’s warnings, new approaches to treating pain were being sought after by a medical community increasingly pressured to supply quick fixes for pain rather than real treatment for the underlying problem.
The pressure to treat pain is hardly the fault of the doctors prescribing the opioids. In the 1990s, the American Pain Society began to push the idea of getting pain added as the fifth vital sign (the four primary vital signs are body temperature, pulse, blood pressure, and respiration). The APS even adopted the slogan “Pain: The Fifth Vital Sign” in 1996. Two years later, the Veterans Health Administration added pain as a fifth vital sign, and the Joint Commission for Accreditation of Healthcare Organizations followed suit.
Although the Joint Commission for Accreditation is a private non-profit organization, several states use their accreditation as a condition for licensure, Medicaid, and Medicare. What this meant is that to maintain accreditation, hospitals were now judged on how they assessed and treated a patient’s pain. Several state legislatures started to require hospitals and nursing homes to screen for pain, and the Board of Pharmacy in California, as one example, pushed opiates as having “extremely low potential for abuse.”Sam Quinones, Dreamland: The True Tale of America's Opiate Epidemic (New York: Bloomsbury Press, 2015), 95.
By the 2000s, the country was starting to view pain as an undertreated epidemic. But doctors were concerned about prescribing opiates, so many states passed laws protecting them from lawsuits based on the prescription of opiates. By now, the incentives were clear. If doctors didn’t aggressively treat pain, they were putting their licenses or their employers’ accreditation at risk. If they irresponsibly overprescribed addictive painkillers, they were protected from legal consequences. State laws were rapidly piling on the incentives for doctors to quickly prescribe opiates, and to ease their minds, Pharmaceutical Boards like the one in California were pointing to the Portenoy-Foley article as evidence that there needn’t be much worry about the development of addiction in their patients (Portenoy himself has warned of the possibility of addiction with opiate prescriptions since the article was published).
Enter OxyContinAbout the same time that this movement against the “pain epidemic” was taking place, Purdue Pharmaceutical released a new painkiller to the market: OxyContin. This new pill was a time-released version of oxycodone.
Purdue started a major marketing campaign to push their new product. They misleadingly advertised it as non-addictive, using Dr. Herschel Jick’s 1980 letter-to-the-editor as their justification. Historically, this tactic is not new, of course, and most likely, the company genuinely believed the claim that the drug was non-addictive (at least, at first). When Bayer first patented heroin in 1898, they marketed it as a non-addictive treatment for morphine addiction. Purdue was repeating this folly a century later, and in 2007, it would cost them $634 million in fines from the federal government.
But it was government policy that, at least in part, created the environment that allowed for OxyContin to create an epidemic, though it was often state-level policy. Doctors were being given increasing incentive to recklessly prescribe painkillers, and healthcare reforms were constantly eating away their time with patients. So when Purdue offered them a supposedly non-addictive option for meeting the new standards of pain treatment, it seemed like an obvious path to take.
But as is now well-known, OxyContin was actually extremely addictive. Furthermore, patients-turned-addicts learned how to break open the capsule to receive the entire 12-hour dose in one shot. Thus, as they were being treated for pain, their addiction developed. Eventually, the doctor would have to cut them off (after all, roughly 20,000 doctors were thrown in prison in the 1920s after the Supreme Court ruled that it was an irresponsible practice to treat addicts by giving them access to pharmacy-grade versions of their drugs). So addicts had to turn to the black market.
This led to the rise of so-called “pill mills,” the largest of which for the entire country was located in Proctorville, Ohio, which is just across the border from Huntington. Here, doctors such as David Proctor (who was probably less well-meaning than many of the other doctors prescribing OxyContin), set up clinics that existed entirely off of writing prescriptions for opiates. Drug seekers and drug dealers would frequent these clinics, and the pills were pushed into the black market to feed the habit of addicts, most of whom got their start from legitimate prescriptions.
But Oxy is pricey, and eventually, an addict would be offered an alternative. They could pay the exorbitant price for a single Oxy pill, or they could pay significantly less for a dose of injectable heroin. Thus the heroin market exploded. Because of the level of poverty West Virginia faces, Huntington and surrounding areas effectively acted like a petri dish for opiate addiction.
The economic devastation in Detroit didn’t help matters. Heroin was transported from there down the “Hillbilly Highway” into Appalachia. To make their heroin more powerful, distributers started cutting it with fentanyl. As I mentioned in a previous article, this is one of the dangers of pushing drugs to the black market through prohibitions. The majority of the deaths by heroin overdose in recent years have been due to the fentanyl, rather than the heroin itself. Other sources of heroin came from the Municipality of Xalisco, in Mexico, where distributers sold low-purity, but uncut, Class 4 heroin – also known as “black tar” heroin because of the dark color it has from its impurities. When addicts were cut off from OxyContin, these suppliers filled the void.
One of the few good things President Obama did was partially liberalize the US government's policy toward Cuba. While it should have gone much further than it did, the Obama administration expanded the types of travel and trade allowed with Cubans in Cuba.
In the wake of these moves, American entrepreneurs responded immediately with new air service, cargo service, and a myriad of other services designed to provide support to American travelers and business people.
The reason these services did not exist before, of course, was because the US government's Cuba policy has been based on severe punishments inflicted on Americans who attempted to engage in trade with Cubans.
As with any set of government regulations, American restrictions against Cuban trade relied on a federal bureaucracy to spy on Americans, track their trade habits, and punish those who engage in the "wrong" type of trade. The penalties are not minor. According to the Treasury Department before the liberalization, this was standard policy for those who engaged in trade with Cubans:
Criminal penalties for violating the Regulations range up to 10 years in prison, $1,000,000 in corporate fines, and $250,000 in individual fines. Civil penalties up to $65,000 per violation may also be imposed. The Regulations require those dealing with Cuba (including traveling to Cuba) to maintain records for five years and, upon request from OFAC, to furnish information regarding such dealings.
Given that Obama's changes were very small, similar policies continue today.
The overall message is this: if you sell the wrong kind of widget to a Cuban, be prepared for many years in federal prison. The bureaucrats, prosecutors, and other government agents who enforce these rules will all be well paid, of course, courtesy of the American taxpayer.
Even today, it is technically still illegal to travel to Cuba as a tourist. The Obama administration elected to not investigate travelers who claimed to be traveling to Cuba for legal purposes — namely, research and education.
This will soon change. Reuters reports:
Laying out his new Cuba policy in a speech in Miami, Trump will issue a presidential directive to reverse some of the loosened regulations that Obama introduced after a 2014 breakthrough between the two Cold War foes, senior White House officials said.
Trump, taking a tougher approach against Havana after promising to do so during the presidential campaign, will outline stricter enforcement of a longtime ban on Americans going to Cuba as tourists and seek to prevent U.S. dollars from being used to fund what the new U.S. administration sees as a repressive military-dominated government.
But facing pressure from U.S. business and some fellow Republicans to avoid turning back the clock completely in relations with communist-ruled Cuba, the president will leave intact many of Obama’s steps toward normalization.
The new policy will ban most U.S. business transactions with the Armed Forces Business Enterprises Group (GAESA), a sprawling conglomerate involved in all sectors of the economy, but make some exceptions, including for air and sea travel, the officials said. This will essentially shield U.S. airlines and cruise lines serving the island.
However, Trump will stop short of closing embassies or breaking diplomatic relations restored in 2015 after more than five decades of hostilities. He will not cut off recently resumed direct U.S.-Cuba commercial flights, though his more restrictive policy seems certain to dampen new economic ties.
Note the key words here: "stricter enforcement" means more government agents, more government spending, more rules, more regulation, more court orders, and more prison time and fines for violators. It means conducting investigations of Americans to make sure they're traveling to Cuba only for the "correct" reasons.
Moreover, the moral argument here, coming from the US government, is questionable at best. So long as the US maintains ties with Saudi Arabia, sells arms to the Saudi regime, and generally falls over itself praising the regime — as Trump recently did — the US has zero credibility in arguing for the necessity of embargoes against "repressive military-dominated" regimes.
Under the Saudi regime — a military dictatorship — Christianity is illegal, criticizing the regime is illegal, property rights for women (i.e., half the population) are non-existent, and people are routinely beheaded for "witchcraft" and "sorcery." The regime is currently waging a brutal war against women and children in Yemen. A variety of Saudi institutions and citizens are among the world's leading financial supporters of global terrorism and jihadism.
"But never mind that!" is the message of the Trump administration. "What we really need is a crackdown on Cuba."
So, as it is abundantly obvious that the US regime has no actual moral problem with the Cuban regime, why do elements of the US Cuban embargo persist even to this day?
Much of it is simply interest-group politics. Sentiment against the Cuban regime remains a powerful political factor in Florida politics, and Florida remains an important prize in the electoral college. During the campaign, Trump attempted to placate Florida voters by promising a crackdown on American freedoms in relation to Cuba. Now, he's attempting to follow through on that promise.
Fortunately, more reasonable heads — those from the business community, for instance — have prevailed to a certain extent, and it appears there is little change of a total breaking of diplomatic relations with the regime, or of a full-blown crackdown in trade.
This is just par for the course with the Trump administration. For Trump, trade policy has always been a political instrument and has never had anything to do with the freedom — or lack thereof — of Americans in exercising their property rights. If Trump wants to teach those nasty Germans a lesson for selling "too many" cars in the United States, then he thinks it's his prerogative to do so. And what if Americans actually want to buy German cars? "Tough luck," is Trump's position. When we're talking about "America first," actual individual Americans apparently come last.
Quebec Premier Philippe Couillard told reporters "Quebec has been attacked. And Quebec will resist. And Quebec will unite. . . .”
This sounds serious. I always thought Canada’s deference to its southern neighbour would preclude a confrontation with the almighty U.S. military. Couillard continued “All together, we will protect our workers.” Okay, now we can relax. As they appeal for public support for their interventionist policies, politicians often resort to hyperbole. I should have known.
The action which Couillard refers to as an “attack” turns out to be an American tariff on the C Series jet produced by Bombardier, a Quebec-based manufacturer of planes and trains. The intent to impose a 220% tariff was announced on September 26th, “after rival Boeing Co accused Canada of unfairly subsidizing the aircraft, a move likely to strain trade relations between the neighbours.” On October 6th, the U.S. Commerce Department proposed to increase the tariff to nearly 300%.
The Evil of Government Subsidies As I have written previously, Bombardier has been the recipient of substantial government aid over the years. Politicians and bureaucrats constantly assure us that when the government provides financial aid to struggling companies, this actually promotes economic prosperity because jobs are ‘saved.’ Nonsense. Unprofitable firms must be allowed to die. It is not the government’s responsibility to preserve jobs in any particular sector. Consumers will make these decisions.
When a company is losing money, this means it is inefficient — customers are unwilling to purchase a sufficient quantity of its products to allow it to be profitable. Environmentalists, take note — losses are the market’s way of telling companies they are wasting resources! Consumers are saying they do not approve of the way the company has refashioned the resources it is using. In other words, the ‘final product’ is worth less than the sum of its parts. Human labour and other resources — wasted!
The inefficiency of Bombardier is further reflected in its inability to attract sufficient investment from the private sector. When the government bails out a loser, it overrides the decisions of consumers and private investors, thereby preventing the reallocation of these resources into lines of production (other jobs) which are more likely to satisfy consumer preferences. Thus, the division of labour is suppressed, and we get a dose of economic regression, not economic growth.
But Subsidies Don't Justify Tariffs Tariffs — another form of bailout — are also economically counterproductive, without exception. As Murray Rothbard wrote, tariffs are “a naked grab for coerced special privilege by inefficient business firms.” These firms benefit, but consumers end up paying higher prices because their choices are limited to buying the expensive domestic product, or the formerly cheap import which is now expensive because of the tariff. This added expense prevents economic growth in other sectors. Here is an example from the Peterson Institute for International Economics:
In his 2012 State of the Union address, President Obama claimed that “over a thousand Americans are working today because we stopped a surge in Chinese tires.”
Our analysis . . . shows that American buyers of car and light truck tires pay a hefty price for this exercise of trade protection. According to our calculations . . . the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. . . . According to the BLS [Bureau of Labor Statistics], tire builders earned an annual average salary of $40,070 in 2011.
The additional money that US consumers spent on tires reduced their spending on other retail goods, indirectly lowering employment in the retail industry. On balance, it seems likely that tire protectionism cost the US economy around 2,531 jobs, when losses in the retail sector are offset against gains in tire manufacturing. Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, costing that industry around $1 billion in sales.
Obama was playing fast and loose with the facts. First, he supposes that if the domestic tire manufacturers had gone bankrupt, none of the 1,200 unemployed workers would have found alternate employment. Second, he said nothing about the number of domestic jobs lost as a result of the tariff. Make no mistake – our standard of living declines when the government suppresses free trade. This is no less true in the case of Boeing, regardless the level of Canadian government support extended to Bombardier.
Let us assume that without government support Bombardier is unable to sell planes to American customers, who instead purchase cheaper planes from Boeing. But with the support of Canadian taxpayers, Bombardier can undercut Boeing’s prices and sell planes south of the border, thus cutting into Boeing’s market share. In this case, it would be economically beneficial overall if no tariff was imposed on Bombardier. Boeing should just ‘move on.’ They will produce fewer planes, but this also means there are various resources at Boeing which the market can reallocate into other lines of production (other jobs). Boeing suffers, but overall prosperity improves – at least in the United States — with cheaper plane prices and more wealth creation through investment in other sectors.
As it turned out, though, the Canadian government adopted a bad economic policy with its financial support of Bombardier. The American government responded with another bad economic policy – the tariff. Invariably, this is exactly what governments do, as we have seen with the U.S./Canada lumber dispute. Such behavior is consistent with the primary role of government, which is to satisfy the desires of special interest groups, who in turn support the government.
Trade Wars and Regular Wars Premier Couillard calls the tariff an attack on Quebec. Montreal mayor Denis Coderre said “Maybe you want to start a war?” Some may think it irresponsible to use such inflammatory language, but perhaps this puts the issue in perspective. There will not be a shooting war between the United States and Canada, but we should never forget that wars are fought over resources, and history shows when coercive restraints of trade are severe, a shooting war often follows. The best way to avoid a shooting war is to avoid a trade war.
The actions of Boeing, Bombardier, and their respective governments are a blatant interference with the free market. They are using coercive political measures to utilize resources to their own advantage, at the expense of others! We would do well to heed the words of Rothbard:
The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade – such as protectionism – cripple, hobble, and destroy trade, the source of life and prosperity.
[This article has been translated from Piombini's Italian original by Bernardo Ferrero.]
Before the StateFor a very extended period of time primitive men lived in small groups of hunters and gatherers at a time in which there was no state. The modus vivendi of these clans was such that after having exhausted all nature-given resources in a particular area, they would move elsewhere in search of other available food supplies. This system of nomadic life could endure as long as the human race was limited and the vast majority of land remained uninhabited. Yet, this lifestyle was not sustainable, and within a short period of time the intensification of these hunting activities provoked an ecological crisis that spread across Europe, the Middle East and America, causing the extinction of 32 animal species [that had been an important food source].
The disappearance of the megafauna inaugurated, around the year 10,000 B.C. the transition to a mode of production based on agriculture. The Neolithic revolution could in fact be described as the pragmatic response to the exhaustion of resources that resulted from the intensified exploitation of the system based on hunting and gathering. Even though the lives of the farmers were admittedly harder than those of the hunters, requiring long and heavy hours of labor in the fields, the sedentary life of the village made it possible for a far greater number of mouths to be fed: thanks to appropriations and to the cultivation of land, the human population increased considerably, giving birth to the first civilizations.
The Violent Origins of the StateAccording to historian William Durant:
Agriculture teaches men pacific ways, inures them to a prosaic routine, and exhausts them with the long day’s toil; such men accumulate wealth, but they forget the arts and sentiments of war. The hunter and the herder, accustomed to danger and skilled in killing, look upon war as but another form of chase, and hardly more perilous, when the woods cease to give them abundant game, or flocks decrease through a thinning pasture, they look with envy upon the ripe fields of the village, they invent with modern ease some plausible reason for attack, they invade, conquer, enslave and rule.
The first states emerged when these nomadic tribes of hunters and herders understood that the systematic exploitation of agricultural villages through taxation constituted a far more efficient and lucrative system than the old one of plunder and extermination. That the state was born in a brutal fashion is confirmed by every historical and anthropological research. On this matter, Friedrich Nietzsche wrote:
a race of conquerors which, aggressive, powerful and organized, pounces with its most horrid claws on an unsuspecting population, one which in numbers may be tremendously superior, but is still undisciplined and nomadic. Such is the origin of the ‘"state."
According to Sociologist Lester Ward,
The state as distinct from tribal organization begins with the conquest of one race by another.
Similarly, wrote the Austrian general and sociologist Gustav Ratzenhofer,
Violence is the agent which has created the state.
and as Franz Oppenheimer observed,
Everywhere we find some warlike tribe breaking through the boundaries of some less warlike people, settling down as nobility, and founding its state.
The concept of State above mentioned is meant in a sociological, rather than in a political sense. In the field of political science one intends the state to be a particular type of political organization that emerged in Europe at the end of the middle ages. According to the more generic definition used in sociology, instead, one talks about the existence of a state whenever society is divided in two distinct classes: a productive majority who gets by through the employment of economic means (production and exchange) and a ruling elite who gets by through the employment of political means (taxation and expropriation). The typical order of a state and the inevitable division in social classes which defines it emerge simultaneously, according to sociologist Franz Oppenheimer, in that very crucial historical instant in which for the first time the conqueror decides to save the conquered from immediate annihilation in order to exploit him permanently in the years to come.
The Struggle between Merchants and Bureaucrats BeginsFrom that moment onwards, writes the anthropologist Marvin Harris, producers have precipitated in a dramatic condition of servitude from which they have never really escaped:
For the first time there appeared on earth kings, dictators, high priests, emperors, prime ministers, presidents, governors, mayors, generals, admirals, police chiefs, judges, lawyers, and jailers, along with dungeons, jails, penitentiaries, and concentration camps. Under the tutelage of the state, human beings learned for the first time how to bow, grove, kneel and kowtow. In many ways, the rise of the state was the descent of the world from freedom to slavery.
The birth of the state was then accompanied by a real class struggle between producers and bureaucrats, a struggle which to a great extent remains alive to this day: while the first group desires to keep the fruits of its own labor, the second aspires to come into possession of those fruits through force and inaugurate a system of rule and exploitation. The eternal conflict throughout history is therefore that between men of freedom and men of administration, between social power on the one hand and state power on the other. As will be illustrated in the examples that follow, the progress or decadence of civilization are determined by the trend of this struggle.
Societies of Bureaucrats1. The Ancient Empires
Since the early days of recorded History, the great majority of people lived miserably under the most tyrannical empires (the Babylonian, Egyptian, Chinese, Persian, Indian, Late-Roman, Arab, ottoman, Incas, Aztec) which extended themselves across large areas. In these ancient empires progress was so slow as to go unnoticed and the reasons for such stagnation were the following: Political power in those empires did not have any need to innovate, rather innovation was fought due to the fear that new discoveries would disrupt the established system; the bureaucratic and military elite that ruled used to come into possession, through force, of every surplus of production repressing every small sign of resistance; every autonomous social force was nipped in the bud and nothing escaped the control of the despot who was the absolute owner of all goods of the reign and of all its inhabitants; finally the people were submitted not only to a confiscatory level of taxation but to forced labor for the construction of grandiose public works such as canals, city walls, pyramids and buildings.
These ancient empires were agglomerates of illiterate peasants who toiled from the morning to the night just to be able to provide for themselves vegetables without protein. Not surprisingly, they were not in a much better condition than their oxen, and at the same time they were completely subjugated to the commands of their superiors who could read and who were the only ones possessing the right of manufacturing and using war like instruments. The fact that these societies have lasted thousands of years sounds like a severe warning: there is no intrinsic force to human activities that can assure material and moral progress.
- A Perfect Example: the Chinese Empire
The millenary empire of China can serve as a typical example of a closed society, that was completely dominated by a cast of intellectuals and bureaucrats. As the greatest historian of ancient China, Etienne Balasz, has explained, the Confucian state was decisively totalitarian. No private initiative was allowed and no expression of the public life could escape official regulation: clothing, private and public constructions, music, parties, and even the colors that one was allowed to wear were subject to the rigid control of the state. In addition, there were prescriptions of birth and death and the state surveilled with terrifying attention every step of its subjects, from the cradle to the grave.
China in the days of the mandarins was an environment of changeless patterns, routines, characterized by traditionalism and immobility and therefore suspicious towards any possible kind of innovation and initiative, let alone free research and entrepreneurship. The ingenious and inventive spirit that was not foreign to the Chinese would have doubtlessly enriched the country, but it was the state that impeded the country to embark upon an age of technical progress and economic development, by crushing every kind of private initiative just because it was thought to collide with the interests of the bureaucratic cast.
It is not surprising that throughout Chinese history technical and economic progress have coincided only with those phases of relative weakness of the central power, like in the period of the warring states (453-221 B.C), probably the richest and most brilliant of all Chinese history, or the period of the three reigns (220-280 A.D.). Even after 907 A.D. when the Tang dynasty collapsed and the period of endless wars for supremacy began, during the so-called period of the five dynasties and the five reigns, the country experimented a striking explosion of inventions and prosperity due to the lack of centralization.
- A Modern Case: The Soviet Union
In our epoch, communist regimes have brought back, albeit in a bloodier form, the totalitarian control that was so characteristic of the ancient oriental despotisms. Marxist ideology with its radical hostility towards property, commerce and free enterprise, revealed itself to be the most suitable paradigm in satisfying the will to power of the parasitic classes. In every country where the political and bureaucratic classes have sought to destroy the productive sector, they have found it useful to uphold Marxist ideology as their mantra.
The extreme exploitation perpetrated by the communist bureaucracies against the productive classes, which in the case of the kulaks reached the stage of physical extermination, was denounced by Lev Trotzkij, Ante Ciliga, Milovan Gilas, Mihail Voslensky. Yet the most penetrating and most insightful analysis of the bureaucratic exploitation that took place under communism has come to us from the works of Bruno Rizzi, an ingenious, self-taught Italian scholar. Rizzi was arguably the first to comprehend that a parasitic class of bureaucrats had taken power in 1917, composed as he wrote of “state officials, policeman, writers, union mandarins and all the communist party in block” that kept plundering the workers in the most ferocious way ever to be seen.
The post-1917 Soviet State, Rizzi noted, had been drastically inflated. The bureaucrats with their respective families constituted a mass of 15 million people who had stuck to the upper levels of the administrative throne with the only job of sucking a great portion of the national product. In the Kolchoz, the state owned agricultural enterprises, only 37% of production remained in the hands of the workers, while the remaining went to the state who then turned it over to the bureaucracy. State functionaries, in addition, continuously made deals at the expense of ordinary citizens by fixing wages and prices for various products and by treating the “workers” as its “forced clients”, obliging them to acquire products in state owned stores with a markup that at times reached 120%.
Officials of the state in addition, obtained notable advantages by being able to destine many of the accumulated capital funds, set aside for the construction of public works, in projects that went to the exclusive benefit of their own class, a lucid example being the headquarters of the bureaucracy, the sumptuous 360 meter’s tall house of the soviets (the workers, meanwhile, had to cope with a home that was 5 meters squared on average). By having total control of the economic levers, guaranteed by an extremely invasive police state in the USSR, the bureaucracy was really omnipotent and every action on her part was aimed at maintaining its political hegemony and its well-established economic privileges.
Societies of Merchants1. The Phoenicians and the Greeks
Around the year 1200 B.C. the empires of the bronze age (the Egyptian, Minoan, Mycenaean, Hittite and Assyrian empires) succumbed into a period of stagnation caused by the progressive suffocation of productive and mercantile activities. The crisis of the central powers gave freedom of action to certain commercial people in the Middle East coming mainly from modern Lebanon, who, with their ships, began to sail the sea transporting goods and products of any kind. For the first time in history one saw the development, in the Mediterranean basin, of a catallactic system based on an integrated division of labor where markets and ports began to grow up to the point of becoming established cities. Commerce soon became the fly wheel of innovation: The Philistines invented iron; the Canaanites the alphabet; the Phoenicians discovered glass and at the same time improved boats, navigational knowledge and accounting systems.
“In truth, writes Matt Ridley, was there ever a more admirable people than the Phoenicians?” Those ancient merchants connected not only the entire Mediterranean, but also the accessible coasts of the Atlantic, the Red Sea and the overland routes of Asia, and yet they never had an emperor and never participated in a memorable battle. In order to prosper the Phoenician cities of Tyre, Byblos, Sidon, Carthage and Gadir did not feel the need of uniting into a single political entity, and therefore never went beyond a very modest federation.
In the words of Matt Ridley:
The Phoenician diaspora is one of the great untold stories of history- untold because Tyre and its books were so utterly destroyed by thugs like Nebuchadnezzar, Cyrus and Alexander, and Carthage by the Scipios, so the story comes to us only through snippets from snobbish and envious neighbors.
Even the Greek miracle confirms the important lesson, first formulated by David Hume, that political fragmentation, by putting a break on the extension of political power, is the real ally of economic progress. The extraordinary dissemination of prosperity and of Greek culture between the years 600 B.C. and 300 B.C presents us with a development similar to that of the Phoenician cities: Miletus, Athens and the other hundred independent cities of Magna Grecia, enriched themselves through the extension of commercial relationships without being part of a single empire. Furthermore, the circulation of ideas that the increased trade made possible, gave birth to the grandiose discoveries of the time. The lesson of the Greek miracle is the following: It is always the merchant who opens the door to the philosopher, not the other way around, by enriching the city and opening it, through foreign trade, to new ideas. Unfortunately, this period of Greek enlightenment died out as soon as new empires began to ascend: first the Athenian, then the Macedonian, and ultimately the Roman.
- The Communes of Medieval Europe
The fall of the Roman Empire in 476 A.D. represented the luckiest event in the history of the old continent. Thanks to circumstances that one could describe as miraculous, Europe never returned to being a unified political entity, after the repeated failures of Charlemagne and the Germanic emperors. The lack of political unity enabled a widespread social experimentation that unleashed into a creative competition between thousands of independent political units of which the byproduct was rapid economic, social and cultural progress. The weakness of the central authority favored the cities which became the leaders in the 11th century of a political and commercial revolution that would mark the European institutional setting for centuries to come. In fights that lasted even hundreds of years, the inhabitants of the cities escaped the dominion of emperors and feudal lords, rebuilding society through self-government from the bottom up. The inhabitants of these communes oriented themselves toward the economy and not toward politics because, unlike those of the ancient cities they lacked a great mass of slaves at their disposal: they found themselves forced to abandon predation (which had been the common means of increasing one’s own well-being up to those days) and engage in manufacturing activities and commerce. In this manner, the medieval bourgeois extended the market economy beyond the limits of the feudal world and by the year 1200 A.D. Europe was a region inundated by working men, farmers, entrepreneurs, artisans and merchants who exchanged the fruits of their own labor at the many annual fairs: this was a very different scenario from the one that prevailed in other areas of the civilized world, where the masses continued to be subjugated by omnipotent imperial bureaucracies.
- 3 Modern Cases: Holland, England, and the United States
In the 17th century the incredible success of the little country of Holland and the disastrous ruin of the Spanish empire, stands to confirm, in the eyes of contemporary historians, the superiority of the commercial society over the bureaucratic one. In Spain, during those years, a new anti-bourgeois ideology had developed among its elite, an ideology that saw with great scorn and contempt the accumulation of wealth through value enhancing work. The Spanish bureaucratic state as a consequence began to be directed by men who were completely foreign to the world of economics and business and who pushed the country into adopting economic policies that played out to be a disaster for commerce and industry.
In the United Provinces at the time, matters were different. Laissez-faire was a consolidated and fully legitimized praxis, and the success that Holland derived from the adoption of free trade caused a mix of admiration, amazement, and envy all around Europe. In 1670, the Dutch were by far the biggest players in the international trade arena to the point that their merchant navy was bigger and mightier than those of France, Scotland, Germany, Spain and Portugal put together. Holland, in the 1600s was a laboratory in which one could observe and study the capitalistic and bourgeois society in its purest form. Its example showed the path toward self-propelled development: ignoring the Dutch reality meant condemning oneself to continued stagnation.
The English were the first to understand how the prosperity of Holland was closely connected to the liberty that individuals and economic agents enjoyed over there, and it was by imitating the Dutch, that they began to build the basis of their world supremacy. In the 19th century then, England adopted unilaterally a series of measures that opened its harbors to the rest of the globe and such a drastic and unprecedented move provoked a reduction of custom tariffs in all major countries, via a competitive process. Finally, humanity was able to experience the birth of a free and authentic market economy that operated internationally: a Phoenician experiment on a planetary scale. Each country that participated in this international division of labor benefited, and this is shown by the fact that the world economy throughout this period grew by 3 times. But It was in the two most free-market countries, namely England and the United States, where economic growth surpassed by far that of the rest of the world: from 1820 to 1913 the gross domestic product of England increased six-fold, while the American one grew by 41 times.
Decisive for the success of Victorian England and the young United States, according to economic historian Deirdre McCloskey, was the consolidation at the social level in those years of a bourgeois mentality that praised and honored the common man who created his fortune through work, commitment, creativity and ingenuity. Nothing probably better symbolizes the cultural victory of the productive classes of society than the statue placed in Westminster abbey in 1825 in honor of James Watt, inventor of the steam engine.
For a Libertarian HistoriographyOne can therefore see how the great intellectual and material creations that have elevated human civilization through the ages have not been the product of bureaucrats, but of producers, merchants, entrepreneurs, some of whom have been obscured, exploited, mistreated and others who have simply been forgotten. The protagonists of human development are not the emperors, kings, presidents, ministers or generals who most often appear in our conventional history books, but the farmers, artisans, entrepreneurs and merchants who improved the many arts, techniques and professions. The bravest among these have defended freedom and civilization arms in hand, refusing to be subjugated by the powers of their day.
The common thread in human history is the endless conflict between tax payers and tax consumers which brings us to the following conclusion: Libertarian scholars should narrate historical events through the lenses of those men who represented the ideas of freedom, not those of power. Civilization, ought to be remembered, has been edified by those men who have resisted power, not by those who have exercised it.
For years, special interests have called on the U.S. government to “level the playing field” in the form of duties, levies, and other antiquated measures. Democrats and Republicans alike have aired their grievances over the trade deficit, grumbling about exporters hurting American workers by flooding the market with cheap goods. These complaints are deeply misguided.
Over the last decade, China has been accused of tilting international trade in its favor. Is this true? No, it is demonstrably false, as Beijing’s subsidized exports greatly benefit American consumers far more than the Chinese population.
You can’t tell that to the U.S. government, though.
In late October, the Department of Commerce announced that China dumped aluminum foil on the U.S. market, selling the goods at “unfairly low prices.”
Trade policy under Trump hasn’t been dramatically different from his predecessors, though. Who who monitor trade deals have forgotten about President Barack Obama’s 35% tax on Chinese tires and President George W. Bush’s 20% tax on imported steel.
US Imposes Anti-Dumping DutiesBefore Trump’s stop in Beijing as part of his 12-day Asian tour, the U.S. government imposed duties ranging between 96.81% and 162.24% on Chinese aluminum foil. The preliminary report determined that China dumped nearly $400 million worth of aluminum foil imports on the U.S. market in 2016 at very low prices.
In August, the U.S. instituted preliminary duties of up to 80.97% on Chinese aluminum foil. The Commerce Department averred that state subsidies placed American products at a disadvantage.
China is not pleased by the move, describing it as “mistaken methods.” The Chinese Ministry of Commerce confirmed that it would “take necessary actions” to protect its domestic industries by filing a dispute under World Trade Organization (WTO) protocols.
Wang Hejun, an official with the ministry, said the U.S. is not only harming Chinese companies, but it is violating multilateral trade rules. He said in a statement:
“We urge the United States to earnestly fulfill its international obligations, and take real action to correct its mistaken methods.”
It looks like the U.S. will not relent. As part of the Trump administration’s mandate to shrink the trade deficit and boost exports, the Commerce Department has launched 77 anti-dumping and countervailing duty probes, up 61% from 2016, since January 20.
That said, Hejun should have taken it one step further: he should have mentioned that the U.S. is hurting American consumers.
American Consumers Will Pay the DutiesWhenever a protectionist takes a modern-day approach to mercantilism by slapping a foreign industry with duties and taxes, the media usually report that the adversary will be the victim of these levies. Incorrect. It is typically the population under the protectionist ruler that suffers.
Let’s take China’s aluminum foil, which is primarily used for culinary endeavors and industrial applications like heating and insulation, as an example.
The Chinese government likely subsidized the manufacturing of aluminum foil, causing it to be a lot cheaper in the U.S. marketplace. Unfortunately, now that the U.S. has placed an exorbitant duty on aluminum foil, it will no longer be affordable, putting a tax on American customers.
Moreover, Chinese businesses will not be the only ones to pay the duties. As happens when taxes are raised on any business, the customers will have to pay higher prices.
In May, Liberty Nation reported that the Trump administration would apply a 20% tariff on Canadian softwood lumber imports. The media continually said that Canadian lumber makers would suffer, but the president added a 20% tariff on the American people. Housing prices would jump, homebuilding would slow down, and thousands of construction workers would lose their jobs.
Duties, tariffs, and other taxes are paid largely by importing shoppers, not just by exporting firms.
China Subsidies Help American ConsumersLet’s be honest: Beijing subsidizes its exports, whether it’s through tax policy or currency manipulation. On the surface, you could have cause for concern. Once you dig a bit deeper, however, you realize that impoverished and middle-class Americans are much better off for this.
The goal in trade is to get more for your money. If you achieve this aim, then you’re better off.
This is precisely what is occurring in the U.S. today. Due to market interventions by China, millions of Americans are buying more with their greenback, raising their real incomes. The people who are paying for this are Chinese citizens, who are required to endure the taxation to subsidize industry and, as economist Don Boudreaux recently noted, “exert more sweat and to sacrifice more resources than necessary to acquire imports.”
When Trump was commemorating Made in America week this past summer, Senator Rand Paul (R-KY) made an excellent point:
“You know, I think all of us have this goal to buy American, but we have to think this thing through.
It used to be a shirt, just a regular button-up shirt, might be $20, $25, and still might be in places. And at Wal-Mart, it’s $7. And so that savings, though, allows working-class people to have savings to get a television set, to go on vacation, to buy gas for their truck. So trade is really a good thing.”
China is providing so many in the U.S. with a form of economic relief.
Stop Caring About Trade Deficits In the first nine months of 2017, the U.S.-China trade deficit sits at $405.2 billion, compared to $370.7 billion during the same time a year ago. The trade gap has been coming down since April — it widened just to under $43 billion in September.
But why do we care so much about trade deficits?
Economist Murray Rothbard suggested that “deficit” has a negative connotation (budget deficit). When someone is watching CNN, and they are being told that the U.S. had a $50 billion trade deficit with Vietnam, they will be irked by this development. A $405 billion trade deficit is far different from a $405 billion budget deficit.
Another idea is that the media and politicians present the argument as China trades with U.S. — and vice versa. Outside of cronyist trade agreements, it is people and business that trade with each other, not governments. It doesn’t matter if it has a “Made in Mexico” or “Made in Canada” tag: you’re buying from a Mexican or Canadian company.
If the U.S. is buying $400 billion more in goods from China than China is buying from the U.S., then somebody has to hold that 400 billion worth of dollars. This is being kept by foreign investors and corporations, which lifts the greenback and gives Americans more purchasing power on the international market.
In the end, we shouldn’t worry too much about the trade deficit. Think of it this way: you own a hardware store, and you frequent the grocery vendor across the street four times a month. Meanwhile, the grocery store owner only shops at your hardware store four times a year. There is a trade deficit: you’re spending more at the supermarket than the supermarket is spending at your hardware store.
Is this a bad thing? No.
Democrats and Republicans need to get over this mercantilist obsession over an imbalance of trade. Not only are Americans benefiting from subsidized cheap products, it is also a free and voluntary exchange between buyer and producer. Whenever a donkey or an elephant shrieks for leveling the playing field, you know that they want the playing field tilted in their favor and no one else’s.
Gentrification is the new monster to be fought. The term already has such bad press, that almost no one is willing to say anything in its favor — defending gentrification and defending neoliberalism are now almost interchangeable.
In this process of constant attack, gentrification has been accused of a wide array of crimes: destroying local commerce by promoting “economic monoculture,” the incomprehensible “reduction of walkability,” and betrayal of neighborhoods and residents. The enemies of free and voluntary trade, which always lack arguments, do not spare adjectives to discredit the term — which almost always comes in the vague form of “economic interests.”
What Is Gentrification?Gentrification comes from the word gentry, and Its meaning is associated with nobility or people of high birth — it also refers to the bourgeoisie.
Gentrification is thus the process by which the original residents of a sector or neighborhood — generally centric and popular—are progressively displaced by others with higher purchasing power.
Who could be in favor of gentrification? Isn’t it just another battle in the endless war between the upper classes and the disadvantaged? To shed light on this matter, let’s examine what the value of housing depends on.
What Do Housing Prices Depend On? On the Productivity of Its InhabitantsHousing — like any other capital asset — derives its value from the many uses that can be done with it. To greater and more valued uses, the higher the price of the house. When a house loses its ability to provide housing services, it loses a great deal of its value — or all of it.
The most common use for housing is to provide rooming services for the resident of a city. When the inhabitants of a city are very productive, housing is generally more expensive than in places where inhabitants are less productive. Greater wealth leads to a greater capacity to push housing prices up. More high-paid people lead to higher housing prices.
This is why larger and richer cities are the cities where most of the housing price is attributed to land values — an element that is necessarily part of every housing unit and by which only constructing taller buildings can the shortage be temporarily stalled.
This explains how cities that have little geographical space, are cities that usually have the most skyscrapers. It also explains why housing prices are so high in cities that have very tight restrictions to build skyscrapers, such as London.
In the United States we can see how the most powerful places are also those that have higher housing prices and where the price of land is a larger part of the total price of the unit.
Average householdvalue ($)Land as a %of housing valueMidwest192,00036%Southeast187,00042%Southwest179,00038%East Coast376,00064%West Coast568,00074%Source: Davis & Palumbo (2006). Data from 2004.
Land that is in areas with large populations is much more valued than land in areas with small populations—relative soil scarcity and greater wealth are the most important elements. With data from the United States, we can see how this is true.
PopulationAverage price per acre ($)Between 10,000 and 50,000inhabitants (not adjacent to a big city)3,473Between 10,000 and 50,000inhabitants (adjacent to a big city)6,681Less than 1 million inhabitants16,558More than 1 million inhabitants64,844 Source: Larson (2015). Data from 2009.
Alternate UsesProviding rooms to city dwellers is not the only use that can be given to a housing unit or building. With the help of new investment — complementary capital — the housing can be remodeled to serve new uses.
Not all housing units can be adapted to these alternative uses, however. Not every building can be easily converted into office space. The location factor of an office is important for the establishment of an office in a place that was not initially designed for that purpose (for example, the construction would be far away from a cluster of companies).
Similarly, not all housing units can be adapted to provide services to tourists. The location of the real estate is essentially important. Units that are hard to access or are far away from tourist areas will have little demand for overnight stays, and therefore their alternative use for tourism will not even be taken into account.
These are just a few illustrative examples that in no way exhaust the possible uses of real estate imagined by entrepreneurs.
The Economic Meaning of GentrificationLet’s see what happens to the inhabitants of a city — or a zone of a city — when the number of possible uses for individual dwellings increases. To this end, we will differentiate between homeowners and tenants.
HomeownersPeople who own their homes — or land and other constructions — see the prices of their houses increase. As previously mentioned, the greater the amount of possible competition for uses of homes, the greater push of those that want to make use of those housing units.A higher price of housing increases the wealth of the homeowner’s of those particular units.If the neighbors decide to continue living in the same property, they do so at a higher opportunity cost. If they were to lease or sell their property, they could make a large profit just because they were lucky enough to be in the right place, at the right time.
TenantsBy increasing the number of uses and their value, the price of housing tends to skyrocket. Those who usually complain most about gentrification are tenants who rent apartments.They claim that they are the ones being “evicted” from the homes they do not own—not the owners—because they can’t pay a higher rent. This is true. However, there is a question that analysis on gentrification usually does not address: Are there any benefits for the tenants?
The Advantages for Traditional TenantsTraditional tenants seem to be the main losers when it comes to gentrification. However, gentrification does have benefits to these tenants through other means.
New uses given housing units provide services to businesses or tourists only through the help of complementary factors, including work. The new economic activity that is competing for the uses of housing also competes for the labor of the city’s residents.
This means that the economic activities that require the rental of housing units need workers — and other productive factors — to be able to develop.
The new economic activities that are developed push up the price of rent. However, they also increase wages in the labor market — or reduce unemployment if it exists.
This means that the same process that makes residential housing more scarce also makes work scarce. This explains why the wealthiest cities are also the cities where rents tend to be higher.
Analyzing gentrification by looking at the its alleged costs in the form of higher rental prices for housing is the same as only looking at one side of a coin. Prohibiting short-term rentals or other alternative uses for housing only generates a fall in incomes complementary to those uses — such as labor — ultimately leading to the expulsion of viable and sustainable businesses and economic sectors.
Not surprisingly, de-gentrification is synonymous with low wages, unemployment, and poverty.
High Wages and Low Rents?It would seem that we have two mutually exclusive options: cities with higher wages and higher housing prices, or cities with lower wages and lower housing prices. In terms of purchasing power parity, both options are equally desirable — or undesirable. Then, are we limited between only these two options? Not really.
If the aim is to combat high rent prices, rather than prohibit economic activities — which lower economic growth and wages — it would be much easier to cover the greater demand for housing services with greater supply — more housing units.
It seems that the proposed solution for gentrification always involves restricting the demand of those obscure “economic interests.” However, this option is clearly inferior to the alternative of allowing an increase in real estate supply by lifting restrictions on construction.
The price per square meter in London is more than double that of New York’s, yet New York has a 45% higher salary than Britain’s capital.
Price per squaremeter ($)Average wages ($)London34,53147,510New York17,19168,708Source: Global Property Guide. Payscale
The difference between the two cities lies in the fact that, although both have draconian laws towards new construction, London is much stricter than New York when it comes to building skyscrapers. Regulation makes land values artificially expensive.
A deregulation in the real estate market can certainly help lower the rent prices and houses without having to restrict access to businesses and economic sectors that can bring prosperity in the areas where they are established.
Originally published by UFM's Market Trends.
Mises Institute-Peru is proud to present this English-language version of an article written by Ludwig von Mises that, until now, was only available in Spanish. The text was translated by Lucas Ghersi.
This article was first published in the Mexican journal Cuadernos Americanos, Mexico, Year 1, vol. 4, July-August 1942. According to Bettina Bien Greaves’ bibliography, an English or German version of this text is not known (Mises: An Annotated Bibliography, p. 46). It is likely that the Spanish version was translated from English, but an original draft in German cannot be ruled out.
I
We hope that one day this awful war will end and men may, once again, occupy themselves with the works of peace. Then, the production of arms and other instruments of crime will be substituted by the production of consumer goods for men, women and children. No longer will people think in annihilation and destruction but in establishing and increasing human wellbeing.
This return to peace, of course, presupposes the absolute annihilation of the totalitarian powers since, if the dictators were to prevail, the consequence of their victory would not be peace but unending warfare. In these totalitarian powers, a philosophy that proclaims war, instead of peace, is defended as the natural most desirable state for men that will provide them with joy. Their longing is not permanent peace but permanent war; thus, if they achieve triumph, the world will become a great slaughterhouse.
However, the dictators will succumb; therefore, the question is:
What must we do to close, as soon and as thoroughly as possible, the wounds opened in society during these years of fighting? This is the great problem that should worry us and that will never concern us prematurely. Even now, when the roar of battle is still being heard, statesmen and economists must think about the last day of the war. Even now they should prepare, in their spirits, what will be necessary to put in practice later.
II
Above all, it is necessary to make this idea clear: if postwar economic policy is to be successful, it must be based on measures radically different from those pursued before the outbreak of this war.
The main characteristic of policies implemented in the decade that preceded the current war, was economic nationalism; that is, an economic policy based on the belief that it is possible to promote the wellbeing of all nationals of a country, or at least of a specific group of them, through measures harmful to foreigners. It was understood that deterring or prohibiting, in an absolute way, the importation of foreign goods; restricting the immigration of aliens; or expropriating, partially or totally, the capital owned by foreigners could provide an important service to a country. This is not the appropriate place to analyze if those measures are suitable to achieve their desired end. The classical economic theory of free exchange has already proven, beyond refutation, that the final result of restrictions placed on foreign trade is the general decline of the productivity of labor and, therefore, of standards of living. In this way, production ceases to occur in places where a high return may be achieved and moves to others where, with the same investment of capital and labor, much lower returns can be obtained. The classic doctrine of free exchange of Hume, Smith and Ricardo has never been refuted. All objections to it turned out to be unfounded.
However, protectionism not only creates economic disadvantages. It also precludes peaceful cooperation between states leading to a sure war. The Society of Nations’ efforts to stop the new global conflagration, through a system of collective security, were in vain because of this environment since all states, big or small, tended to harm one another by implementing certain economic measures.
If we are unable to overcome economic nationalism, all hopes of achieving the reconstruction of our culture will prove illusory. Economic nationalism prevents industrialized States ¾ that is, all those that are compelled to import foodstuff and raw materials ¾ from gathering the necessary means to pay for their imports. How would they be able to pay if not through the exportation of their industrial products? If not permitted to export their industrial articles, these states would be fatally forced into autarchy; on the other hand, countries that possess raw materials would loose markets for the produce of their land. In industrialized states, this situation provokes the desire to dominate nations that possess raw materials through military means. We must not fool ourselves: ambitions of conquest lie behind apparently innocent claims for the equal distribution of natural sources of wealth and free access to raw materials.
In a peaceful world ruled by free trade, there would be no problems regarding raw materials. Each country would be able to buy all the raw materials it could pay for in international markets. In a world subject to protectionism things happen in a very different way: in this world the problem of raw materials cannot disappear; and for small countries, that is those that are weaker militarily, having mines or a fertile soil within their borders represents a danger.
All arguments regarding the advantages of peace, international cooperation, the creation of a society of nations and the reconstruction of the world economy are hollow words if there is the intention of preserving protectionism. If one is not willing to renounce economic nationalism, small states will lose their autonomy and become the vassals of strong militaristic states. Coalitions of Great Powers, armed to the teeth, will confront one another and take advantage of any momentary weakness of their adversaries to undertake new campaigns of conquest.
It is necessary to understand that this new World War (as well as the First World War) is not the consequence of a natural catastrophe unleashed upon innocent men; rather, it is the inevitable result of the nationalist economic policy pursued in the preceding decades. In a world were free trade prevails, despite the dynamism of Hitler or Mussolini, reaching a state of war would not have been possible. Evil men will always exist; however, it is important to create an economic order in which their power to do harm is reduced to a minimum.
In summary, without the eradication of economic nationalism, it will not be possible to return to peace and wellbeing.
III
The main problem of the postwar era will be general poverty; that is, the shortage of capital.
In the last decade, politics seemed uninterested in the problem of formation and maintenance of capital. Governments acted as if the availability of greater or lesser amounts of capital for production had no importance for the wellbeing of the people. Through their policy of taxes and public spending, these governments not only slowed down the formation of capital but also ¾ at least in recent years and in many countries ¾ caused the consumption of available capital. Thus, they did not practice a policy aimed at increasing general prosperity and raising standards of living but one aimed towards the impoverishment of the people. After the end of the current war, it will not be possible to maintain this policy unless we deliberately seek the destruction of what we nowadays call Western Civilization.
What made possible the development of this civilization, the greatest that has ever existed, was precisely, at least regarding economics, the continued accumulation of capital goods. In the days before this time of world wars and dictatorships, a greater number of people lived, including in this Western Civilization, than in the days before the Industrial Revolution; and each of these men lived much better than their ancestors a century or two before. Each year brought rising living standards for the masses; each year, new products became available for the average man, which made his life healthier, more agreeable, and more stimulating. Contemporary men would find the life of the nobility in pre-capitalist times indignant, not to mention the living conditions of the commoners.
All of these increases in living standards are due to the fact that, year after year, production exceeded consumption. The surplus was gathered and invested; that is used to develop the production apparatus. In this way, means of transportation were developed and new installations were created to achieve a better and cheaper production of all sorts of goods for consumption. The individual labor of each man yields more today because, for a given quantity of labor, there is a much greater quantity of capital goods than before. Thus, the marginal productivity of labor has been growing and, consequently, real wages have increased. If the standard of living of the masses has increased, it was because the supply of capital in the economy surpassed population growth.
But the masses did not only benefit from the increase of real wages: the modern organization of financial techniques, of systems of credit and of joint stock companies enabled these very masses to become owners of capital. Most holders of deposits in saving banks, bonds and insurance policies are even members of the working class. In a capitalist state, thrift and the formation of new capitals are not the privilege of a minority, but are generalized; and their fruits, in one way or another, benefit everyone.
Governments and politicians have refused to recognize that the increase of capital is the lifeline of economic progress; on the contrary, they made everything they could to take away people`s desire for thrift. They confiscated part of that capital through taxes and impaired small savings by means of inflation. They carried out expropriations thus eroding the stocks of capital that had been achieved.
As an example, we can mention the way Hitler acted in relation to German railroads in the Reich. A long time before the First World War, diverse German states ¾ Prussia, Bavaria, etc. ¾ bought railroads built with private capitals, paying for them with bonds. Since these bonds lost their value due to inflation, in a way, the Government acquired these railroads for free. Hitler managed this vast supply of capital, equivalent to more than 60,000 kilometers of rail, in the most irresponsible way. He did not substitute vehicles (locomotives and railcars) that had been worn out by use, nor did he maintain rails and signal equipment as it would have been convenient; he also completely unattended fixed equipment. The situation is similar in the railroads of southern and eastern Europe. When the current war is over, the greater part of the railroads of Europe will be a heap of stones and scrap metal. In this way, capital worth thousands of millions has been consumed in the strictest sense of the word.
The destruction of capital caused by the war far surpasses that which happened before the war. When the struggle is over, we will see everywhere huge installations dedicated to the production of arms and other materials for war, however these installations cannot be utilized for the production of the goods that are required in peacetime. The capital immobilized in them will be lost and, instead, there will be lack of capital where it is most necessary. Old installations meant to produce goods necessary in peacetime will be useless, either because they have been converted to serve the needs of rearmament, or because they have been ruined after several years of disuse.
IV
What could we do to alleviate this shortage of capital as quickly as possible?
There is only one solution: to produce more than what is consumed; that is, practice thrift and, in this way, form new capital. The more one produces, and the higher the proportion of that production that is invested rather than consumed, the sooner the hard times of capital shortage will be over. All those that propose solutions different from the one explained above are either fooling themselves or trying to fool others.
There are no magical financial procedures to remedy the shortage of capital. The expansion of credit cannot alleviate it and much less, suppress it. On the contrary, the boom artificially produced by the expansion of credit creates distortion and, therefore, a waste of capital by immediately promoting overconsumption; that is, the reduction of capital. Inflationist experiments will only make the ailment worse. What is necessary in this case is, precisely, a monetary and credit policy that guarantees the stability of monetary value.
Governments will have to renounce to all confiscatory measures: they will have to radically change their tax policy.
In many countries, taxes on rent and inheritance have been transformed into ill-disguised measures of confiscation. The continuity of this system is not compatible with the existence of private property and is pointless unless we wished to transit to a communist regime and make standards of living fall to the permanent state of misery that prevails among the Russian masses. Within the limits of a non-communist system, these measures only produce an effect of immobility and destruction. They stimulate the consumption of capital since; what logic is there in thrift for a man who knows that only a small part of his inheritance will go to the hands of his children?
If we wished to preserve an income tax, it would be necessary to transform it into a tax on consumed rent. Incomes that are not consumed, but saved and invested, should be exempt from all taxation since it is of public interest to form as much new capital as possible.
All large corporations are developed through the consumption of only a small part of their profits and the investment of the rest. Due to the simultaneous existence of national and local duties, the current system increased the taxation of larger incomes to rates of 100% or more. This system makes it impossible to create new industries or develop those that already exist. For the benefit of the North American people, the development of corporations that supply markets with a variety of cheap goods did not stop some years ago; however, current efforts to prevent new competitors from emerging cause harm to consumers while granting unjustified protection to the incapable heirs of existing corporations. Tax legislation, considered by its supporters to be in favor of the people, only produces the antisocial effect of hindering the supply of consumer goods.
The decrease of government revenue, as an inevitable consequence of these reforms in the tax system, must be compensated with the restriction of public spending. It is necessary to break free, once and for all, from the illusion that the State has money for everything and everyone. The State cannot give to somebody what it has previously not taken away from others. In order to plan the State’s expenses, it is necessary to carefully assess whether the profits to be obtained from the desired expense are more beneficial than the required increase in taxation and its economic consequences are harmful. It will no longer be possible to give away subsidies or issue bonds to finance the reelection of members of parliament. It will be necessary to return to the economic management of old parliaments, which understood that an ordered budget is preferable to the supposed happiness of leveled budgets.
Capital shortage will probably be less severe in the United States of America than in the British Empire and less oppressive there then in the European continent. In central, eastern and southern Europe, the situation will be completely catastrophic. The industrialized nations of Europe, the most densely populated places on earth, cannot feed their people without exporting the products of their industry, which are largely manufactured from imported raw materials. Those countries will be forced to compete in global markets with their industrialized products and this will not be done successfully unless they rebuild their apparatus of production, which was destroyed by hostile policies towards capital in the previous era and by the war itself, to the levels of capital that existed before the outbreak of the war. They will have to completely renovate their transport infrastructure and the machinery of their factories; in other words, completely address all the problems of industrial production again. But before achieving it, they will have to endure years or decades of hunger and misery.
It is clear that, in these circumstances in Europe, particularly in central and southern Europe, the activities of labor unions will not be possible for a long time. The tendency of labor unions to forcefully obtain higher wages and shorter working hours for their members, through unionist means, must be forgotten wherever capital is completely lacking. Workers will have to satisfy themselves with a job that can protect them from misery. To whom will they address their complaints in a country where there is no capital to set industry in motion? Low salaries, low standards of living, and a general decline of culture: these are the sad but inevitable consequences of the shortage of capital.
When they notice the pitiful luck of their European peers, North American workers must realize that they have effective means to remedy the situation: opening up American borders to European immigration would create a tendency to equate the level of European wages to those of the United States. However, if restrictions to immigration persist, wages in Europe, where natural conditions of production will be worst and capital shortage most acute, will be much lower than those in North America.
Thus, it is clear that, after the war, the shortage of capital will produce radical changes in domestic policy. Now we shall examine what the consequences will be regarding foreign policy.
V
The development of international markets for capital and currency during the 19th century was a great achievement of far reaching worldwide political consequence. The peoples of Western Europe, which where the first to create political and economic institutions favorable to the formation and conservation of capital, made part of their wealth available to less favored nations through a system of credit. The excess savings of Europe where invested around the world and helped the peoples of Eastern Europe and Asia overcome their state of economic backwardness; it also provided Americans and Australians with the means necessary to exploit the riches of their land. European culture provided all humanity, not only the fruits of modern technique, but also the material means to transform the economy according to the demands of modern technique. Billions poured from Europe (and later also from the United States) to all the countries of the earth and, as payment, European capitalists, men of business and thrift, received property rights and industrial values.
This international organization of credit is now in ruins; the same countries that, once, prospered because of it have destroyed it. Neither the debts’ interest nor their principals were paid either because debtors openly defaulted on their obligations or because governments cancelled the rights of creditors through inflation or currency controls. Businesses belonging to foreigners were expropriated or taxed in such a way that their owners where left with nothing but hollow legal titles. Creditors and foreign capitalists have been completely dispossessed of their rights.
In these circumstances we cannot expect that, after the war, the least ruined countries will make their capital available to the most ruined. The experience of capitalists and businessmen, regarding the concession of credit and participation in foreign ventures, is sufficiently explicit for them to feel inclined to expose themselves to the dangers of such adventures. Maybe the United States, motivated by old friendships, will invest some capital in Anglo-Saxon countries or in Mexico, as help to a neighbor. However, even this is doubtful since American trade unions tend to regard exports of capital as contrary to their interests and, therefore, demand measures aimed at preventing them. In any case, it is certain that other peoples will not expect foreign capital, to help rebuild their economies, unless the dire condition of foreign capitalists changes radically.
Energetic reforms in international law are necessary to set the international mechanisms of capital and credit in motion again. Only states willing to accept great restriction on their sovereignty can hope to obtain credit or direct investment from abroad. In all matters related to foreign capital, these states will have to renounce their autonomy in favor of the Society of Nations; that is, in all that affects monetary and credit policy as well as mercantile and fiscal powers over foreign capital, they will have to submit unconditionally to the jurisdiction of international courts and tolerate the decisions of those courts to be executed through an international coercive power.
Undoubtedly, all this may seem very strange and the leaders of most states will simply consider it unacceptable. But, above all, it is necessary to consider two things: firstly, every state will be free to submit or not to these conditions and to accept or decline the assistance of foreign capital; secondly, it is inevitable to liquidate a conception of state sovereignty that is no longer in harmony with current circumstances. In no way is it possible to accept that cases such as those of Austria, Albania or Ethiopia can repeat themselves. Great Powers must award effective protection to small states from violations such as these. The ambitions of states that secretly practice a policy of rearmament must be contained through an international police force. It will be necessary to treat governments that disturb the peace in the same way as bandits and murderers are treated within states. By establishing such a system, restrictions of sovereignty regarding financial and fiscal policy will not seem intolerable and much will have been gained.
However, we must point out that all these measures will not be able to completely remedy the shortage of capital. What may be achieved is a more equitable distribution of existing capital and with this much will have been gained.
VI
After the current war, the world will not be a paradise. Men will be poor and have to endure the spiritual and moral consequences of poverty.
Not all peoples will suffer in the same way the consequences of war. Latin American countries will probably be among the least affected ones. Thus, their backwardness in relation to Anglo-Saxon countries will be compensated in part. A new era will begin in which the handicap of Latin America will be smaller.
The supposed backwardness of Central and Southern America, that always made ordinary Cook tourists smile compassionately, was only due to the shortage of capital in those countries. Since capitalism reached Latin America two centuries late in relation to other countries, certain institutions familiar elsewhere were lacking in the region. The low level was not moral or intellectual: it was nothing else than a relatively higher shortage of capital.
But now, more or less, all countries will begin again; and, therefore, with the passing of the years, these differences may gradually fade. Through a wise economic policy, it may be possible that Latin American countries can conquer the place in the World Economy to which they are predestined by the genius and industry of their citizens and the wealth of their land.
Disagreements among economists are legendary, but they are largely of one mind on the issue of free trade. Evidence of this is a recent survey of the current and past presidents of the American Economic Association—the voice of mainstream economics. The survey found these prominent economists all strongly in favor of free trade, and concluded that “an economist who argues for restricting trade is almost as common today as a physician who favors leeching patients.”Julian Simon and Robert Crandall, “Singular Economic Response.” Washington Times, Sept. 10. 1987, p. F-I.
Mainstream economic thinking on free trade knows no ideological boundaries. Conservative economists Milton and Rose Friedman, for example, write that “ever since Adam Smith there has been virtual unanimity among economists . . . that international free trade is in the best interest of the trading countries and the world.”Milton and Rose Friedman. Free to Choose (New York: Harcourt Brace Jovanovich, 1979), p. 39. Liberal economist Paul Samuelson concurs: “Free trade promotes a mutually profitable regional division of labor, greatly enhances the potential real national product of all nations, and makes possible higher standards of living all over the globe.”Paul Samuelson. Economics (New York: Macmillan, 1976). p. 692.
The case for free trade is not based on any stylized economic theories of “perfect competition,” “general equilibrium,” or “partial equilibrium.” After all, Adam Smith is history’s most forceful and articulate defender of free trade, and he never heard of any of those theories. Rather, the case for free trade is based on the virtues of voluntary exchange, the division of labor, and individual freedom.
As long as trade is voluntary, both trading partners unequivocally benefit; otherwise they wouldn’t trade. The purchase of a shirt, for instance, demonstrates that the purchaser values the shirt more than the money spent on it. The seller, on the other hand, values the money more than the shirt. Thus, both are better off because of the sale. Moreover, it doesn’t matter whether the shirt salesman is from the United States or Hong Kong (or anywhere else). Voluntary exchange is always mutually beneficial.
Free trade expands consumer choice and gives businesses incentives to improve product quality and to cut costs. By increasing the supply of goods, international competition helps hold down prices and restrains internal monopolies. The “Big Three” auto makers, for instance, may wish to monopolize the automobile market, but they are unable to because of foreign competition. About 75 per cent of all domestic manufacturing industries now face some international competition, which helps keep their competitive feet to the fire. Thus, the case for free trade is the case for competition, higher quality goods, economic growth, and lower prices. By contrast, the case for protectionism is the case for monopoly, lower quality goods, economic stagnation, and higher prices. The costs of protectionism to consumers are enormous. According to very conservative estimates, protectionism costs American consumers over $60 billion per year—more than $1,000 annually for a family of four.Michael C. Munger, “The Costs of Protectionism,” Challenge, Jan./Feb. 1984, pp. 54-58. Thanks to protectionism, for example, it costs about $2,500 more to buy a Japanese-made car than it otherwise would.
Free trade increases the wealth (and employment opportunities) of all nations by allowing them to capitalize on their comparative advantages in production. For example, the U.S. has a comparative advantage in the production of food because of its vast, fertile land and superior agricultural technology and labor. Saudi Arabia, on the other hand, does not have land that is well suited to agriculture. Although Saudi Arabia conceivably could undertake massive irrigation to become self-sufficient in food production, it is more economical for the Saudis to sell what they do have a comparative advantage in—oil—and then purchase much of their food from the U.S. and elsewhere. Similarly, the U.S. could become self-sufficient in petroleum by squeezing more oil out of shale rock and tar sands. But that would be much more costly than if the U.S. continued to purchase some of its oil from Saudi Arabia and elsewhere. Trade between the U.S. and Saudi Arabia, or any other two countries, improves the standard of living in each.
Ethical Aspects of Free TradeProtectionism is not only economically inefficient, it is also inherently unjust. It is the equivalent of a regressive tax, placing the heaviest burden on those who can least afford it. For example, because of import restraints in the footwear industry, shoes are more expensive. This imposes a proportionately larger burden on the family that has an income of only $15,000 per year than on the family that has an income of, say, $75,000 per year. Moreover, the beneficiaries of protectionism are often more affluent than those who bear the costs. Wages in the heavily protected auto industry are about 80 per cent higher than the average wage in U.S. manufacturing. The Chairman of the Chrysler Corporation was paid $28 million in 1987, thanks partly to protectionism. And, perversely, by driving up the price of automobiles, protectionism has benefited the owners, managers, and workers of the Japanese automobile industry at the expense of American consumers. Protectionism, in other words, is welfare for the well-to-do.
Protectionism also conflicts with the humanitarian goals of foreign development aid. The U.S. government spends billions of dollars annually in foreign aid to developing countries. Many of these programs are themselves counterproductive because they simply subsidize governmental bureaucracies in the recipient countries. But what good does it do to try to assist these countries if we block them from the biggest market in the world for their goods? Protectionism stifles economic growth in the developing countries, leaving them even more dependent upon U.S. government handouts.
Why Protectionism?Despite the powerful case for free trade, both the United States and the rest of the world are highly protectionist, and always have been. This is because free trade benefits the general public, whereas protectionism benefits a relatively small group of special interests. The general public is neither well organized nor well informed politically, but the special interests are. This political imbalance was recognized by Adam Smith over 200 years ago when he wrote in The Wealth of Nations that
To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it . . . . The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.Adam Smith, The Wealth of Nations (Indianapolis: Liberty Classics, 1981), p. 471.
The political pressures to grant monopolistic privileges are so strong that even political figures who spend their careers speaking in favor of free trade quickly cave in to protectionist pressures once in office. U.S. Treasury Secretary James Baker recently boasted, for example, that “President Reagan has granted more import relief to U.S. industry than any of his predecessors in more than half a century.”Lindley Clark, “Reaganomics Reassessed,” Wall Street Journal, Sept. 24, 1987, p. 26. Unfortunately, the Democratic party is not very different. “There is no strong supporter of a free and open trading system,” complained Hobart Rowan of the Washington Post, “among the seven declared Democratic [Presidential] candidates.”Hobart Rowan, “Frae-Trade Coalition Fades,” Washington Post, Sept. 20, 1987. p. H-I.
Voters might be expected to oppose policies that stifle economic growth and redistribute income from poor to rich. But public opposition to protectionism is not very strong, explains economist Mancur Olson, because “the typical citizen is usually ‘rationally ignorant’ about public affairs.”Mancur Olson, The Rise and Decline of Nations (New Haven: Yale University Press, 1982), p. 26. That is, the typical citizen spends most of his or her time worrying about personal matters and not economic policy. To add to the confusion, much of the information that citizens do receive about public policy is self-serving and biased information disseminated by special-interest lobbyists. As economist Gordon Tullock has written:
Special interest groups normally have an interest in diminishing the information of the average voter. If they can sell him some false tale which supports their particular effort to rob the treasury, it pays. They have resources and normally make efforts to produce this kind of misinformation. But that would not work if the voter had a strong motive to learn the truth.Gordon Tullock, Welfare for the Well-to-Do (Dallas: The Fisher Institute, 1983), p. 71.
For decades monopolists and potential monopolists have crafted hundreds of myths about free trade and protectionism. The following are just a few examples of misinformation about protectionism.
Protectionist MythsMyth #1:Imports (and trade deficits) are bad; exports (and trade surpluses) are good.The international trade deficit has been of concern to Congress in recent years, and has been a primary “justification” for protection. But the notion that importing more than we export is necessarily bad ignores some elementary economic principles. First, imports are our gain from trade. The more material goods—the more trade—the better. Remember, all trade is mutually beneficial.
How trade-deficit statistics can give misleading impressions of economic health is illustrated by the analogy between domestic and international trade. Most citizens probably run a trade deficit with their grocers. But who would argue that a balance of trade between consumers and grocers is necessarily desirable? A government- mandated trade balance—whether for domestic or international trade—would make both trading partners worse off. Furthermore, the notion that, say, Taiwan, with a population of 20 million, should buy as many goods from the U.S. as 230 million American consumers purchase from Taiwan is absurd. The balance of trade argument is just another weak excuse for monopolistic trade restrictions.
Myth #2:Being a “debtor nation” is economically harmful.Being a debtor nation means that foreigners invest more in the U.S. than U.S. citizens invest abroad. Debtor nation status is not necessarily a cause for alarm, however, since foreign investment in the U.S. can be beneficial. For example, there are many obvious benefits from
Tennessee’s new Nissan plant and the 50 other Japanese companies located in that state. These new companies provide jobs, make American industry more competitive, and stimulate economic growth. The U.S. has been a debtor nation throughout most of its history, including the period from 1787 to 1920, when the nation experienced the most rapid economic growth in world history up to that time.
Alarm over becoming a debtor nation is illogical and contradictory. On the one hand, protectionists complain that too much money is leaving the country (we’re importing more than we’re exporting). Then, when the same money returns to the U.S. in the form of foreign investment, they complain that too much money is coming into the country. The protectionists cannot have it both ways. They are grasping at straws to justify monopolistic privileges.
Myth #3:Imports are destroying American jobs.Like all long-lasting myths, this one has a grain of truth. If more American consumers buy Japanese rather than American-made cars, it may threaten some American jobs. Efforts should be (and are) made to ease the transition of those who become temporarily unemployed, but protectionism would only cause even more unemployment.
Free trade creates jobs by reducing prices, leaving more money in the pockets of consumers. Increased consumer spending in turn will stimulate production and employment throughout the economy. By contrast, higher prices in a protected industry will cause consumers to cut back on their purchases, which will result in less employment in that industry.
Also, the dollars that Americans pay for foreign-made goods eventually are respent in the U.S., which creates even more jobs. Foreigners have no use for dollars per se. They must either spend them in the U.S. or sell them to someone who will.
Protectionism may temporarily “save” jobs in one industry, but it usually destroys even more jobs elsewhere. For example, because of protectionism in the steel industry, American automakers are estimated to pay as much as $500 more per car for steel than Japanese auto-makers. Higher prices for American-made cars will cost domestic automakers business and cause them to lay off workers. Thus, protectionism in the steel industry creates unemployment in steel-using industries.
It is particularly telling that in recent years, as the trade deficit has grown, so has employment in the U.S. economy. More than 13 million new jobs were created between 1982 and 1988 as the unemployment rate dropped from nearly 11 per cent to less than 6 per cent of the labor force. In contrast, we had a trade surplus throughout the 1970s when unemployment rose steadily.
Myth #4:Because of international competition, the U.S. manufacturing sector is declining.Protectionists have claimed that the U.S. economy is “deindustrializing” because of the alleged failure of American manufacturers to compete on international markets. But the deindustrialization theory is a hoax. Manufacturing output as a percentage of GNP is about 24 per cent today, compared to 25 per cent in 1950.See U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the U.S. (Washington, D.C.: U.S. Govern-mere Printing Office, various yearn). Moreover, manufacturing output and employment are at their highest levels ever. The composition of employment and output has changed, as it always does in a dynamic, growing economy. Economic growth always creates many dislocations. Overall, however, the U.S. manufacturing sector is not “deindus-trializing.”
Myth #5:Because of international competition, many newly-created jobs are low-paying, “dead-end” jobs.A Congressman recently claimed that “50 per cent of the 13 million new jobs [created between 1982 and 1987] are dead-end—paying $7,400 a year or less. We’re trading good manufacturing jobs for low-pay service jobs.” Warren Brookes, “The Myth That Won’t Die,” Washington Times, Sept. 7, 1987, p. D-I.The Congressman asserted that international trade is “impoverishing America,” and has introduced protectionist legislation to thwart this perceived trend.
The U.S. Department of Labor recently examined these claims in great detail and found the reality to be much different from the Congressman’s rhetoric. Of the 13 million new jobs created between 1982 and 1987, 59 per cent were in the highest-wage category as classified by the Labor Department. Only 7 per cent of the new jobs were minimum-wage jobs paying $7,400 per year or less.Ibid.
Myth #6:Cheap foreign labor is an unfair advantage.It is often said that if, say, textile workers in Singapore are paid only $1 per hour, American industry cannot possibly compete, given that American textile workers are paid more than $10 per hour. Protection is supposedly needed if the domestic textile industry is to survive.
This argument may appear compelling at first, but it ignores several important facts. First, if the productivity of American workers is ten times as high as in Singapore (because of superior capital, technology, and training), then higher American wages are not a disadvantage.
Second, the idea that low wages “explain” international trade patterns is illogical. If it were true, the U.S. would export almost nothing, since U.S. wages are higher than almost everywhere else in the world across the board. What determines a nation’s comparative advantage in international trade is the total amount of resources it must use to produce a given product, not just the labor. Many low-wage countries import U.S. goods because we have a comparative advantage in producing those goods despite our higher wages. Moreover, low-wage countries must eventually import goods from the U.S. because there is nothing else they can do with the dollars they receive from their American sales.
Finally, it isn’t clear why it is “unfair” for American consumers to enjoy lower-priced and/or higher-quality goods produced overseas by low-wage (or other) countries.
Myth #7:Protection is necessary to counteract “dumping.”So-called dumping occurs when foreign manufacturers sell products in the U.S. that supposedly are priced below the price at which they are sold in the home market. There are numerous laws that prohibit dumping on the grounds that it is unfair competition.
But there are also sound economic reasons for such business practices. Temporarily charging prices that are below cost is a common competitive business practice. For example, newly-established pizza parlors typically offer “two for the price of one” specials as an inducement to consumers to try out their product. The losses incurred during the sales are considered an investment that will yield future sales by generating a clientele. Lower prices always benefit consumers, but we seldom charge the local pizza parlor with “dumping.” Perhaps this is because consumers can plainly see the benefits of such competition.
In November 1987, the U.S. Commerce Department ruled that “Japanese companies violated international trade laws by failing to increase their prices to match the sharp rise in the value of the yen.”Stuart Auerbach. “Japanese Companies Violated Trade Laws,” Washington Post, Nov. 20, 1987, p. D-1.With the rise in the value of the yen, Japanese goods sold in the U.S. became relatively more expensive. The Japanese producers responded by cutting their costs, prices, and profit margins to remain competitive, to the great satisfaction of American consumers. According to the Commerce Department, Japanese export prices declined by 23 per cent between 1985 and 1987. Unfortunately, the protectionist Reagan administration is opposed to such price cutting.
Dumping is often said to occur because foreign governments subsidize some of their manufacturers, which allows the companies to underprice American firms. These policies may be misguided, but there is no reason why American consumers should be punished for the short-sighted policies of foreign governments. Such subsidies constitute a “gift” from foreign taxpayers to American consumers and may be thought of as foreign aid in reverse. Moreover, the extent to which this subsidization takes place has been greatly exaggerated. In Japan, for instance, the amount of assistance given to Japanese manufacturers by the Japan Development Bank has amounted to less than one per cent of gross domestic investment, and most of that has gone into the agricultural sector.
Dumping is also objected to on the grounds that it is a means of monopolizing American industries by driving out the competition with low prices. There have been no documented examples of such monopolization, however, and for good reason. Any manufacturer who charged monopolistic prices would face fierce international (and domestic) competition that would quickly dissipate any monopoly power. Businesses that charge their international competitors with dumping are simply unwilling to charge prices that are as low as their rivals’.
Myth #8:Temporary protection is needed to “buy time” and adjust to the competition.Temporary trade relief is like being a little bit pregnant. The textile industry, for example, was given “temporary” trade relief 25 years ago and is still being “relieved.” This rationale admits that protectionism is a bad idea, which is why it is labeled as only temporary. However, it is bound to make things worse for the industry, not better.
By reducing competitive pressures, protectionism tends to stifle innovation. Businesses are less prone to invest in engineering and technology when profits can be earned just as easily by lobbying for protection.
There is much evidence, moreover, that “temporary” protection does not revitalize industries, and probably is even counterproductive. The federal government’s Congressional Budget Office studied protectionism in the textile, steel, footwear, and automobile industries, and concluded that “in none of the cases studied did protection . . . revitalize the affected industry . . . . Protection has not substantially improved the ability of domestic firms to compete with foreign producers.”Congressional Budget Office, Has Trade Protection Revitalized Domestic Industries? (Washington, D.C.: CBO, Nov. 1986). p. 97. The study showed that investment often declines during periods of protection, which causes the protected industries to fall even farther behind the competition. Such evidence explains why a closely related protectionist argument-the military might argument—is also fiction. Specifically, if an industry is important to national defense, it supposedly should be protected from international competition. But since protection saps incentives for innovation, resulting in lower-quality and higher-priced goods, it will weaken the national defense by weakening industries that the military relies upon.
Myth #9:We should restore a “level playing field” by erecting trade barriers against countries that have trade barriers against us.This is a “cutting off our nose to spite our face” strategy. If foreign governments are foolish enough to harm their own Citizens by erecting trade barriers, it is unfortunate for those citizens. But there are no sound reasons why American consumers should be penalized for the ill-conceived trade policies of foreign governments.
Furthermore, trade retaliation would be hypocritical, since American trade restrictions on foreign imports are often much greater than foreign restrictions on American imports. The American auto parts supply industry, for example, is currently lobbying for protection on the grounds of “unfair competition” from Japanese auto parts suppliers. The hypocrisy of this claim stems from the fact that there are no Japanese government-imposed barriers to importing American auto parts into Japan, but Japanese parts producers must pay American tariffs when exporting to the U.S.
Trade retaliation can be a very dangerous political game. The Smoot-Hawley tariff of 1930 spawned an international trade war that helped precipitate the Great Depression. Dozens of countries responded to the Smoot-Hawley tariff by erecting trade barriers for American-made goods. Consequently, the value of imports in the 75 most active trading countries fell from over $3 billion in 1929 to about $1 billion by 1932, driving the world economy into a depression.Robert Bartley, “1929 and All That,” Wall Street Journal. Nov. 24, 1987. p. 28.
Trade retaliation is inherently counterproductive. By reducing the flow of dollars from the U.S., foreigners will have fewer dollars to spend in the U.S., which eventually will harm American export industries. American exports generally fall once imports are reduced. Consequently, employment in export-related industries, which account for as much as one-fifth of all employment in the U.S., will fall.“Export-Dependent Manufacturing Employment,” Washington, D.C.: U.S. Trade Representative, 1984.
Myth #10:Protectionism benefits union members.This is probably true in the short run, but certainly not in the long run. Because of protectionism in such industries as steel, automobiles, textiles, and footwear, unions once prospered by imposing featherbedding rules and by bargaining for supra-competitive wages. As long as international competition was not very effective, raising wages while reducing productivity was feasible. However, international competition eventually seeped in, as it inevitably does, and American industries found themselves at a severe competitive disadvantage. They lost market share, laid off thousands of workers, and union membership declined dramatically. Thus, protectionism may have helped unions in the short run, but is a main cause of their current malaise. It is no coincidence that some of America’s most lethargic unionized industries—steel, automobiles, footwear, rubber, textiles—are also among the most heavily protected.
ConclusionsIn sum, a dynamic economy is essential for economic growth and job creation, and protectionism only hinders the necessary adaptations to economic change. As Nobel Laureate Friedrich Hayek has written, the benefits of competition and economic growth
are the results of such changes, and will be maintained only if the changes are allowed to continue. But every change of this kind will hurt some organized interests; and the preservation of the market order will therefore depend on those interests not being able to prevent what they dislike . . . . this general interest will be satisfied only if the principle is recognized that each has to submit to changes when circumstances nobody can control determine that he is the one who is placed under such a necessity.F. A. Hayek, Law, Legislation. and Liberty. vol. 3 (Chicago: Univ. of Chicago Press, 1976), p. 94.
Protectionism may provide some short-term benefits to a small number of special interests, but at much greater costs to the rest of society. Restraints on international trade are inefficient, inequitable, and counterproductive, and should not be imposed.
Originally published in The Freeman July 1988 Vol. 38 No.7
After years of delay and endless debates over the long-term relationship between the EU and the UK, Brexit is finally done. At least, it’s done for now. The EU and the UK appear to have struck a trade deal and a deal over the general relationship between them.
When it was fully part of the EU, the UK was limited in efforts to unilaterally strike trade deals with countries that weren’t part of the EU. UK trade had to be approved by EU bureaucrats.
But that’s no longer the case, the UK is now more free to look beyond Europe for building up global trade.
As Brexit became more of a reality, the UK began negotiations with Australia, New Zealand, and Canada in hopes of expanding trade with these nations. The UK has now already signed a new trade deal with Canada, which went into effect on January 1 of this year.
The US shouldn’t wait for the UK in forming a bilateral deal. As I suggested in a December 2019 article, the US should embrace unilateral free trade with the UK right now.
But I was too timid in that suggestion. The US should really embrace unilateral free trade with all of these nations—we might call them the “CANZUK” countries—with which the UK is trying to expand trade.I'm borrowing the term "CANZUK" from an existing movement to forge a loose confederation of Canada, Australia, New Zealand, and the UK. Supporters (which include the head of the Conservative Party in Canada) propose varying degrees of unity among the potential member states for purposes of free movement of residents, free trade, and military alliances. None of these supporters, however, have included the US in these plans. These countries are free to reciprocate by lowering their own trade barriers with the US at any time, but it's not necessary that they do so for Americans to reap the benefits of free trade.
Politically speaking, free trade with countries like the UK, Canada, and Australia is low-hanging fruit for advocates of freedom and free markets.
Of course, truly free trade is a good thing with all nations. But its benefits are downright obvious when applied to other nations of similar economic and cultural background, as in the case of the CANZUK countries. In other words, free trade with these nations would be a good place to begin overcoming the usual tired old objections to free trade.
Low Foreign Wages and the “Giant Sucking Sound” One of the biggest objections of the protectionists is their claim that free trade will lead to a flight of capital.
Presidential candidate Ross Perot once famously claimed that if trade barriers between the US and Mexico were lowered, the US would hear a “giant sucking sound” as US companies relocated to Mexico in order to take advantage of the fact that wages are much lower in Mexico. The idea is that these companies would take advantage of free trade to leave the US and then import the same goods they used to make with American workers in the US.
This isn’t actually a problem in any case. Were a company to do this, it would only lower the costs of living and doing business for US households and businesses. Less expensive goods would be imported into the US, and households could then spend on other goods and services. Businesses would expand and hire more workers, increasing the overall opportunities for employment.
But we need not even debate this issue when it comes to trade with the CANZUK countries. The fact is these countries do not have cheap labor or an especially low cost of doing business. Indeed, these countries often have a more rigorous regulatory environment than the US. There would be no “sucking sound” of any kind.
Rather the benefits of free trade would be immediately obvious. For example, pharmaceuticals and medical products are a big part of UK and Canadian exports. If both tariff and nontariff barriers were eliminated, American pharmaceutical and medical supply companies with higher prices wouldn’t be able to compete with Canadian and British ones. The American companies would have to lower their prices or go out of business. This isn’t a bad thing. It doesn’t take a whole lot of imagination to see how lower-priced pharmaceuticals would be an obvious boon for Americans.
At the same time, there is no reservoir of cheap laborers in Canada or the UK, and American pharmaceutical companies could not simply move to these countries to take advantage of “cheap labor.”
The protectionists, of course, might complain: “But those American pharmaceutical workers will then have to get jobs in other industries!” Fine. After all, their employment in the pharmaceutical industry was premised on the idea that all Americans should be forced to pay more for medicine. This protectionist view only helps illustrate what a twisted worldview the protectionists have. They believe sick people should be subsidizing jobs for pharmaceutical workers. The same is true of other industries, of course. The protectionist view is that a small family-owned home-building business—and its working-class employees—should be forced to pay more for lumber and construction supplies in order to prop up domestic industries. Abolishing trade barriers on, say, Canadian lumber would clearly benefit small businesses and their employees, not to mention their customers.
The Geopolitical Argument for Protectionism When protectionists fail to be convincing on the economic arguments—which is often—they turn instead to political arguments. It is then possible to say “yes, well, free trade may indeed reduce the real cost of living for ordinary people, but if we have free trade, the Chinese [or some other foreign bogeyman] will use free trade to destroy us!”
The idea here is that if, say, the United States regime allowed free trade in steel, then the domestic steel industry would whither in the face of cheaper Chinese steel. Then, once the US steel industry was dead, the Chinese would cut the US off from all steel.
In essence, the claim here is that economics must be subverted in the name of geopolitical considerations and the US steel industry must be subsidized and protected for military reasons. In terms of the specific China claims, this isn’t a problem. Not even the Pentagon is concerned about it. Nor does the claim hold water in general, as shown here by Robert Murphy.
But when discussing free trade with the CANZUK countries, the issue need not even be addressed.
Obviously, free trade with Canada, or the UK, or the rest of CANZUK is not going to lead to any of these countries cutting off the American regime from essential military supplies. They are not geopolitical threats or competitors. These countries have all been at peace with the United States for more than two hundred years and have been part of a formal military alliance with the US (the UKUSA Agreement) since 1946.In the case of Canada, Australia, and New Zealand, these countries have always been at peace with the US, since these countries did not have foreign policy independent of the UK until the twentieth century.
In other words, if the US were to become dependent on the CANZUK countries for basic raw materials such as food, iron, or fuel, this would not be a military problem.
A Free Trade Union Indeed, any continued US opposition to free trade with these CANZUK nations—and with all similar ones—must be looked upon as nothing more than crude special-interest politics. Some industries don’t want to expand trade with these nations, because a small number of special interests don’t like the idea. They want the larger American population to pay more in terms of basic goods and services for the benefit of a handful of protected industries.
This ongoing special pleading should be regarded with the same contempt with which we would treat an argument that free trade between California and Colorado must be ended in order to “help” domestic Colorado industries. Imagine if a group of Colorado farmers claimed California farmers were “flooding” the Colorado market with cheap agricultural products. “Something must be done!” would be their refrain. “Colorado farmers can’t get a foothold in the market!” Obviously, this “argument” should be laughed out of the room. Everyone knows that food imports from California are a boon to average Coloradans, even if it means Colorado farmers can’t compete.
The same would be true if people in Colorado were able to freely import goods from Canada, the UK, Australia, or New Zealand. Ordinary people in the US would be paying less to cover their basic daily needs.
But if this were accomplished through unilateral free trade, the protectionists would complain: “But those Australians could still slap trade barriers on Colorado goods!” The answer to this is “so what?” It would be morally reprehensible to hold Colorado consumers hostage and force them to pay higher prices for necessary goods until the Australians (or whoever) agree to lower tariffs for Colorado goods. There’s no guarantee that Australians would even want to buy anything Colorado has to offer. After all, Colorado consumers continue to benefit from California-Colorado trade even if Californians purchase very little from Colorado (which appears to be the case). The benefits for average Coloradans would be immediate and obvious even in case of unilateral free trade.
The time has come for US protectionists to stop pretending that some benefit is gained from continued "protection" from imports from the rest of the world. A good place to start would be in the Anglosphere, where no plausible claim can be made for geopolitical danger or a flight of capital. This could be done tomorrow, but, unfortunately, protectionists will continue to mobilize their armies of lobbyists against it.
“Brewed according to the German Purity Law,” a Hobräu München hefeweizen bottle proudly declares. This brewery is not alone. Other German and even American brewers brag about how their beer adheres to the 1516 Bavarian Reinheitsgebot, which originally limited beer’s ingredients to water, barley, and hops.
The pride in this law is strange—in 2013 the German Brewers Association tried to get UNESCO to designate it an intangible cultural heritage and its five hundredth “anniversary”The law is not actually five hundred years old. It predates German unification, when new laws were established, though these did not govern the whole realm. Only 1906 did such a law finally apply to the whole country. See “German Beer: 500 Years of ‘Reinheitsgebot’ Rules,” BBC News, Apr. 22, 2016; and Günther Thömmes, “Das deutsche bzw. bayerische Reinheitsgebot für Bier,” neubierig.de, July 7, 2013. in 2016 was widely celebrated and written about. The law was very restrictive—so much so that exceptions had to be made so that some drinks, such as wheat beers, could continue to be produced. Today, of course, most beer is bittered with hops, and the plant is integral to beer’s identity in the United States and Europe, if not the world.
Few know that beer used to be flavored and preserved with a variety of different herbs (bog myrtle and wild rosemary especially), resins, fruit, and animal products. The additives varied widely across northwestern Europe, but the mixture of ingredients, whatever it may have contained, was called gruit. Gruited beer was called ale in England and ael in the Low Countries—Holland, Flanders, Brabant, and Liège—while hopped beer was called beer (bier), but today people broadly refer to unhopped beer as gruit.
There is a small minority in the world of homebrewing and craft beer who are interested in making gruit. They have brought attention to its history, and in doing so they usually blame the Reinheitsgebot for the near-total extinction of the gruit tradition. In these histories, earlier laws related to gruit are mentioned, but usually vaguely and fleetingly.
The reality is that, hopped or unhopped, beer’s past is riddled with protectionist restrictions that hindered creativity and innovation for the benefit of sovereign authorities. Taking a look at this regulatory past takes the spotlight off hops and the Reinheitsgebot in particular, revealing government privileges and control in general as the haunting issue.
It’s true that in the Middle Ages brewing was decentralized and resulted in a great plurality of beers. Brewing was part of running a household, and women made beer for their families; talented brewers also sold beer out of their homes. Monasteries, manors, and other estates also produced their own beer. But this decentralization does not mean that there was freedom in brewing. The many local authorities of the Middle Ages asserted something called gruitrecht, the right to sell a gruit mixture exclusively in the area they controlled. Gruitrecht’s origins lie in the centralization that took place under the Holy Roman Empire, where it surfaced as an imperial right. As the eminent medievalist Richard W. Unger explains, “In the Latin Christian empire created by Charlemagne [c. 747–814], the ruler was able to establish a royal right to power over unexploited lands and it was uncultivated land from which bog myrtle [the most prominent herb in gruit] came.”Richard W. Unger, Beer in the Middle Ages and the Renaissance (Philadelphia: University of Pennsylvania Press, 2004), pp. 30–32 (quote on p. 32).
Charlemagne’s successors assumed the gruitrecht imperial monopoly, but rather than keep it to themselves, they dispersed it across the land, with crony grants to bishops, monasteries, towns, and counts, dukes, and other elite laymen between roughly 950 and 1250. These benefactors, who could keep the proceeds of the gruit sales (gruitgeld) then made gruitrecht a hereditary right.Unger, Beer in the Middle Ages and the Renaissance, pp. 32–33; and Susan Verberg, “The Rise and Fall of Gruit,” Brewery History 174 (2018): 46–79, esp. 46–47.
This de facto tax on beer was hard to avoid. In some places, people had to bring their malted grain to a gruithouse (gruithuis or gruthuse, where the mixture was made and/or sold), where the gruiter (a tax farmer) would inspect it and then mix the prescribed amount of gruit into it. In other places, brewers just purchased the mixture, which was sold in proportion to how much brew was being made. Sometimes the gruit recipe was kept a secret or the gruit was otherwise disbursed such that it was difficult to replicate surreptitiously.Unger, Beer in the Middle Ages and the Renaissance, pp. 44–45; and Verberg, “The Rise and Fall of Gruit,” pp. 65–66. And if beer was brewed with something else, word could get out and result in punishment.
Over the twelfth and thirteenth centuries, urban governments gradually bought up the gruitrechten, seeing this right as a potentially large moneymaker and a source of authority.Unger, Beer in the Middle Ages and the Renaissance, p. 43. Moving to a different jurisdiction was not always much of an option either, as by 1300, gruit taxes “were a common feature of life in towns throughout the Netherlands as well as up the Rhine Valley.”Unger, Beer in the Middle Ages and the Renaissance, p. 45.
The gruitrecht was no small thing. Forcing people to use an official gruit in their beer that could only be bought from the gruiter, as opposed to allowing them to freely gather and mix their own components, gave the gruitrecht holders control over the character of their region’s beer (in addition to siphoning money from locals and raising the cost of brewing). All the beer made in an area would be more similar than might otherwise have been the case. After all, the official gruit was the only legal additive and therefore a common denominator, as, of course, was the amount used in a batch, which determined how much had to be purchased and thus the tax. In places where the grain had to be inspected, moreover, the grain bill (the mix of grains making up the beer’s sweet base [wort], which could be varying combinations of barley, wheat, rye, oats, and other cereals) and the amount of grain in the recipe were also being controlled by extension (if other laws did not do this already). The tax on gruit very slowly became an excise tax on beer, however, and by 1400 brewers in many, but not all, towns in the Low Countries could control what went into their gruit.Unger, Beer in the Middle Ages and the Renaissance, p. 46.
Although hops were used in brewing as early as the 800s, it was not until the thirteenth century that hopped beer began to give gruited beer a run for its money.Unger, Beer in the Middle Ages and the Renaissance, pp. 53–55; and Verberg, “The Rise and Fall of Gruit,” p. 47. Increasing urbanization and accumulated technical knowledge of brewing with hops combined to give rise to a market in hopped beer for export in Hanseatic cities in what is now northern Germany, particularly Hamburg.Unger, Beer in the Middle Ages and the Renaissance, pp. 55–58. Hopped beer was very different from gruit—much less sweet and thinner, because it didn’t need to have such a high alcohol content to be safe to drink.Unger, Beer in the Middle Ages and the Renaissance, p. 55. It took time for the medieval palate to come to prefer the bitter beer, but its long shelf life gave it a leg up.
Towns throughout northwestern Europe began importing hopped beer. But this beer was expensive due to tariffs, shipping costs, and increasing regulation of the Hanse brewing industries over the eleventh and twelfth centuries by the greedy city governments, who wanted to keep the gravy train going through “quality control” measures such as licensing requirements and recipe controls; price controls at all stages of production; taxes on capital goods such as copper brew kettles; restrictions on the times of year when beer could be brewed; and other insane and cumbersome measures.Unger, Beer in the Middle Ages and the Renaissance, pp. 68–73. So, many urbanites continued to drink local beer for some time, and in the countryside domestic production continued unhindered even as the Hanse brewing industry prospered.
However, the fourteenth and fifteenth centuries saw importing markets wise up and start trying their hand at making their own hopped beer. Hops were initially out of reach of the gruitrecht monopolies, and they also grew wild in rural areas, allowing country folks to produce hopped beer as well.Unger, Beer in the Middle Ages and the Renaissance, p. 87.
At this point local commercial brewers and governments in the Low Countries and England felt threatened and conspired against innovation. Some localities banned brewing with hops; some limited imports or banned them outright; some imposed tariffs; and some converted the gruitgeld into a hop(pe)geld (hop tax) or just excises on all beer production and purchases.Unger, Beer in the Middle Ages and the Renaissance, pp. 81–85, 90–96, and 99–100. The bans were usually temporary, but the burden of taxes remained.
As what is now southern Germany and the western Czech Republic—the Rhineland, Bavaria, and Bohemia—originally a wine region, became a beer-drinking and -making area over the fifteenth century, the earliest version of the Reinheitsgebot was decreed in 1487 by Duke Albert IV (r. 1467–1508, Bavaria-Munich, and 1503–08, Bavaria-Landshut). It required that Munich beer be made with only barley, water, yeast, and hops. Duke William IV (r. 1508–50, Bavaria) reissued the edict in 1516. This time, all Bavarian beer had to be made with only barley, water, and hops (yeast was clearly implied, having been mentioned in the last decree and being a fundamental and known brewing ingredient, harvested from previous batches). The rule was repeated again in 1553 and 1616 for the entire duchy.Unger, Beer in the Middle Ages and the Renaissance, pp. 108–09. More local Bavarian purity laws predated these, however: Augsburg (1156), Munich (1363), Nuremberg (1393), Weißensee/Thuringia (1434), Regensburg (1447), Landshut (1493), and Ingolstadt (1516) all had their own purity laws.
The Reinheitsgebot’s many iterations were meant to “protect” the Bavarian public from their preference for gruited beer, since many allegedly undesired “impurities,” toxins, and intoxicants allegedly made it into much of the local beer; unsurprisingly, the law also likely helped funnel tax revenue to the local governments more easilyUnger, Beer in the Middle Ages and the Renaissance, p. 109. and may have also been an effort to direct the region’s relatively young brewing industry in hopes of a more fruitful tax harvest. In terms of grain, the goal was to control the supply of grain centrally so that there would be enough of each cereal for its most common uses, particularly wheat for breadmaking.Unger, Beer in the Middle Ages and the Renaissance, p. 158. He discusses grain-related restrictions in other places on pp. 156–58. The conceit was that fluctuations in the supply and thus the price of grains caused by weather and pests could be undone and the market response improved on by governments. These kinds of laws were adopted throughout southern Germany over time, but with the consolidation of power under the German Empire in 1871, they became more widespread, and finally, in 1906 an iteration of the purity law was codified in all of now unified Germany.
By the sixteenth century, hops were the most common additive in beer throughout the Low Countries and what is now Germany (England would get there by the 1580s).Unger, Beer in the Middle Ages and the Renaissance, p. 151. In Holland, taxes on gruit had mostly disappeared over the previous century, though some jurisdictions simply expanded them to include hops and extracted less and less from gruit as production fell.Unger, Beer in the Middle Ages and the Renaissance, pp. 82–83.
It would be false to say that purity laws in one region stamped out gruited beer. Clearly, hopped beer successfully fought its way into earlier markets in spite of widespread resistance. This was due to its longer shelf life and superior quality in general (its rise was accompanied by other technological improvements in brewing, as Unger notes).
The purity laws did help stamp out gruit in the late-blooming holdout area where they came into force, however. And the challenges that the early hopped beer industry faced, and its increasing regulation and professionalization over time, rippling outward from the Hanseatic League, mean that the story of innovation, creativity, freedom, and simple pleasure stifled by government interference and legitimized theft still holds true in beer as in almost every industry under the state.
The fact is that beer industries around the world continue to be stifled by all kinds of regulations and definitions of what constitutes beer, such as ingredients and alcohol content, and Germany remains a prime example. Many brewers have complained that commercial brewing is fettered by a narrow definition of beer, which as recently as 2016 limited beer to malted grains, hops, water and yeast. Unfortunately, the solution often seems to be to broaden what legally constitutes beer, at the very least sentencing the unforeseeable innovations of the future to a vicious hazing before entering the market, if not barring them and perhaps even their conception altogether.
What the world really needs is to repeal all beer-related regulations, excises, and tariffs (at least). The open markets and free entry—no more talented homebrewers out of reach of a thirsty world—would likely lead to increased variety and brews at price points that could meet more people’s budgets and tastes. They would also aid the exchange of ideas and the rise and spread of improvements in industry practices at all orders of production. Most importantly, the competition engendered by the wider variety of options available and the lack of sequestered local markets would likely tend to keep the quality of beers as high as their consumer bases want it.
Politicians should leave the brewing to brewers and the quality control to vendors and drinkers. Free the gruit, free the hops, free the grains, free the (home)brewers, free the bar owners and restaurateurs, free the beer merchants and distributors, free the people!
The Biden administration’s decision this week to raise import duties on some Canadian lumber has US trade policy back in the headlines. Since taking office President Biden has moved to end a pair of trade spats with the European Union, while simultaneously leaving in place the Trump administration’s tariffs on Chinese exports. Despite the wide-ranging applause Biden received for his transatlantic deal making, this freeing up of trade has been an exception to the general trend. Indeed, since taking office Biden has tended to follow his predecessor’s protectionist bent, even while polls show that a majority of Americans still support free trade, though it has suffered a sharp decline of late. While there are several factors to be considered when measuring the benefits of free trade versus protectionism, on the whole, free trade comes out ahead.
First, protectionism always creates one clear loser: consumers. Whether as individuals or as firms, they pay more than a free market would dictate. Consider the results of the four principal tools of protectionism as experienced by consumers. Tariffs, by taxing the incoming import, raise the price paid by consumers for that good. Import quotas cap the amount of a given good that can be imported, protecting the ability of domestic firms to charge higher prices, again, paid by consumers. Export subsidies are tax dollars given to private firms so they can afford to sell their products more cheaply abroad than they do domestically. Lastly, individual or industry subsidies are devoted to encouraging the production of a good or service the government deems desirable—that is, of course, when they aren’t simply being doled out as favors to politically connected favorites.
Indeed, in virtually every instance the motivating impetus for the adoption of protectionist legislation is to be found in a core group of constituents who benefit from it. They are an example of what happens when the benefits of a policy are concentrated while the costs are diffused. A dollar here and a dollar there from every single citizen in the country over the course of years or even decades likely goes unnoticed by them, even though it adds up quickly, making the recipients eager to see the policy continued, whatever its public cost. Concentrating their focus and resources, small groups of wealthy beneficiaries effectively capture billions to split between themselves in this way.
It is a pernicious problem, and no industry is immune to the moral hazard of profitability by government welfare, through protection or subsidy rather than by working to improve products, methods, or management. Once entrenched, these policies are difficult to reverse. Consider the decades-long subsidy of mohair. Passed in 1954 in the name of national security, mohair being the key ingredient in US military fabrics, it was rendered irrelevant a decade later by the adoption of synthetic fibers. Still on the books in 1998, the subsidy was costing nearly $200 million dollars each year, over half of which went to the top 1 percent of producers. It continues in modified form to the present day.
The inefficiencies of protectionism are well known, and are part of why free trade results in greater economic growth than alternative protectionist regimes. If it can be gotten for less elsewhere, competing US producers should shift capital toward increasing productivity in order to compete or else steer their capital into other profitable ventures; labor will follow, acquiring any new or necessary skills required to continue their employment should they choose. This is to say that the cost of free market efficiency and its higher standard of living is the occasional temporary dislocation of both capital and labor. If these processes are not artificially hindered by government policy, however, they will not come as sudden shocks, but will rather take place gradually over time. Firms seeking survival and profit maximization will take steps as necessary to adapt to changing conditions. Subsidies, tariffs, and quotas offer domestic firms an easy alternative to the work of proper management. And though they lead to an overall lower economic outcome, for the firm or industry in question the difference is irrelevant.
The Buy American campaigns of Presidents Biden and Trump have grabbed headlines over the past five years, but behind the scenes the US has been moving steadily away from free trade since the early 2000s. Part of this was a reaction to the North American Free Trade Agreement. Despite its impacts having been a net positive in terms of trade, it was rosily oversold and seriously disappointed and angered many, particularly those employed in certain manufacturing industries where job losses were concentrated. All told, it is estimated that NAFTA cost the US about six hundred thousand manufacturing jobs, but a far bigger contributor to American manufacturing job losses was China’s accession to the World Trade Organization in 2001, which cost an estimated 3.7 million manufacturing jobs over roughly the same period.
The personal costs imposed on those dislocated by the competitive pressures of free trade are worthy of our personal sympathies, but the costs of protectionism far outweigh the narrow benefits it provides recipients. Free trade reduces inefficiency by forcing firms to constantly compete to the benefit of consumers; it reduces moral hazard, results in higher economic output, lower prices, a smaller state, lower taxes, and higher standards of living. No free trade deal will ever be perfect, and there will always be winners and losers, but good free trade deals result in winners and losers dictated by market forces rather than government favoritism.
The motives of net neutrality advocates differ. But the common thread among them is a general belief that internet service providers (ISPs) face no serious competition, and therefore overcharge both their supply-side (i.e., Netflix) and demand-side (internet users) customers and generally treat customers poorly.
In other words, ISPs have “natural monopolies” that allow them to rake in profits without improving service to customers or dealing with different customer-types in an equitable manner.
This perspective gave rise to “net neutrality,” which the Trump administration soundly condemned last week. This measure would have essentially transformed the internet into a public utility by regulating ISPs like other utilities (electricity, water, etc.). For convoluted reasons, regulators believe this will ensure internet service is distributed equitably among all who are willing to pay the going rate — no more up-charging big bandwidth-eaters (like Netflix), even at mutually-agreeable prices.
Underlying this perspective is the belief that we can decipher, in some way, the level of service that ought to be offered on the ISP market. To implement net neutrality, regulators would allegedly examine the ISP market and decide, on some grounds, that what exists ought to be different, and that such a change can only come about through government regulation.
But by what standard are regulators judging ISPs to be acting unfairly? Who can say they are making too much or offering too little? Sure, internet service, as the technology has evolved, bears some similarity to public utilities like water and electricity. But it is not the same service.
More specifically, how can we know what ISPs ought to charge?
Some argue that ISPs have obtained special regulatory favors in the past that positioned them to build unfair monopolies in the present. That’s another argument entirely that, frankly, isn’t often made by regulators. But even if that were true, is the solution to end the market for internet service altogether, and opt instead for a pseudo-market whose bounds and limits are controlled, ultimately, by government regulators?
This brings to mind an aspect of the socialist calculation debate, whereby Austrian economists (among others) revealed the self-destructive nature of socialism. One pillar of their argument — Mises’s specifically — is that without a market to study and observe, central planners will not know what prices to mandate for what quantities of goods. The result will be over- or under-production of regulated goods — distortive resource misallocations that ripple throughout the economy and cause excess supply and/or demand. Further, such regulations stifle investment and innovation in targeted industries, most often by indirectly capping profits.
It is not hard to see how this applies to net neutrality and regulating ISPs. By arbitrarily changing existing markets for internet service, regulators risk corrupting the fragile preconditions necessary for firms and consumers to calculate rationally, and the incentives necessary to lure investment and risk-laden innovative enterprises. The result could be excess demand in the market for internet service if regulations force prices too low, excess supply if regulations force prices too high, or stilted innovation in ISP technology altogether. Tech icon Marc Andreesen explains:
A pure net neutrality view is difficult to sustain if you also want to have continued investment in broadband networks. … If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment — which means you’ll stop investing in the network. And I would not want to be sitting here 10 or 20 years from now with the same broadband speeds we’re getting today.
This is not a complex point, but it’s important in this particular context, given the importance of internet service in modern economies. A subtler but equally applicable point regards the nature of change in a dynamic world. In a sense, this is a more formal restatement of the problem with comparing market conditions to some model rooted in a concept of the economy as rotating in some static equilibrium. Economist Peter Boettke explains:
Mises [explained] how the static conditions of equilibrium only solved the problem of economic calculation by hypothesis, and that the real problem was one of calculation within the dynamic world of change, in which the lure of pure profit and the penalty of loss would serve a vital error detection and correction role in the economic process.
In the context of the issue at hand, this is particularly consequential. The market for internet service is brand new and growing and evolving quickly. To decide, in a market as young and dynamic as this, that current market prices are not fair reveals a great degree of confidence in mere “hypotheses,” as Boettke puts it, about what the ideal market for internet service should look like.
One of the hottest sectors in the U.S. today is energy. The shale revolution brought to you by hydraulic fracturing, or fracking, has produced a historic boom period in the oil and gas industry. Thousands of jobs are being created every month, regulations are coming down, the U.S. is not beholden to the Paris Accord any longer, and domestic output has topped 10 million barrels per day (bpd).
These impressive conditions have enabled the U.S. to become energy independent, surpassing Saudi Arabia. It has also brought the Organization of the Petroleum Exporting Countries (OPEC) to its knees.
A key campaign objective for President Donald Trump was to facilitate the dominance of America’s oil sector. But he is inadvertently placing a significant roadblock on the industry’s path to toppling Russia from the black gold throne: tariffs.
When President Trump announced that he would institute tariffs on steel and aluminum imports, there was a collective sigh of relief emanating from the Middle East.
President Trump did face a lot of pushback from Republicans, oil executives, conservative activists, and free-market think tanks. But he also received a ton of adulation from several groups like the steel industry, unions, Democrats, and the 12-nation cartel.
Hindering America's Energy RenaissanceToday, the U.S. imports four times as much steel as it exports. This has allowed companies that manufacture goods with steel to save a lot of money, resulting in job creation and savings passed down to the consumer. It has been a win-win situation for the country.
An important factor in the resuscitation of U.S. energy is cheap steel.
The domestic sector depends on imported steel for refineries, drilling equipment, pipelines, liquefied natural gas (LNG) terminals, and much more. With Trump’s 25% levy on the element, it is going to become a lot more expensive to complete energy projects, and the industry is already sounding the alarm.
Soon after the White House announcement, a representative of the Interstate Natural Gas Association of America noted that the tariff could create serious issues since the types of pipes and steel used in their pipelines are difficult to source domestically.
The Center for Liquified Natural Gas, a trade organization, stated that LNG export initiatives utilize specific steel components that are not manufactured in the U.S.
Andy Black, CEO of the Association of Oil Pipe Lines (AOPL), warned that constructing arteries to carry petroleum would inevitably rise because specialized foreign steel is needed. His group released a study last year that found a 25% jump in pipeline costs would boost the budget for the average project by $76 million.
It is estimated that oil producers need the international price for a barrel of crude to be $45 to $50 to break even and turn a profit – some reports peg it at as low as $35. This could be affected if operating costs increase from import taxes.
It’s evident that steel may be the key beneficiary of tariffs, but other sectors are already feeling the pinch.
Will a Trade War Hurt US Energy? In a trade war, countries retaliate. This was witnessed following former President George W. Bush’s steel tariffs. This was seen after former President Barack Obama’s tire levies. This is currently unfolding in the wake of President Trump’s myriad of mercantilist approaches to international trade.
The big fear for oil-producing states is that foreign jurisdictions will react negatively.
Senator Daniel Sullivan (R-AK) told IHS Markit’s annual CERAWeek energy conference earlier this month:
“There’s a way to do it that focuses on the problem — the real problem — which is China, and do it in a way that we align ourselves with our allies, not alienate them, and I worry that this approach right now could have the opposite effect.”
He is concerned that nations could punish his state by imposing tariffs on energy products, as well as other crucial exports like seafood.
But the sky may not be falling yet.
The International Energy Agency (IEA) forecasts that the U.S. will account for 80% of global oil growth over the next three to five years. Fatih Birol, IEA executive director, does believe it is too premature to determine if the tariffs will impact American oil. She does say, however, that output is so immense the industry will adapt to the changes and crude exports will remain strong.
So, U.S. energy won’t be harmed by the bullets in a trade war? Not quite.
When prices crashed in 2014, investments in new infrastructure were quite minimal. The IEA wrote in a report that these businesses need to begin spending again to prevent crude shortages after 2020. If the costs are too much to bear, will the industry invest in new infrastructure? Only time will tell.
Make Oil Great Again?It is a great time to be in Texas Tea. West Texas Intermediate (WTI) futures are stabilized at above $60 a barrel, shares of oil companies are climbing, and the U.S. does not need to bow down to OPEC. There are multiple contributing factors to this domestic boom, and one of them is foreign steel. President Trump’s desire for the U.S. to become the world’s largest crude producer is coming to fruition. But unnecessarily placing a costly and substantial hurdle for energy to overcome risks undoing its success.
Originally published by Liberty Nation.
When Donald Trump raised taxes on steel and aluminum in the form of a large tariff hike, virtually no one in Washington seemed much perturbed by the fact that the president raised taxes without so much as a debate in Congress.
In the grade-school version of American politics, of course, children are taught that Congress controls government taxation and spending. Tax increases must be subject to a vote in Congress in order to become law. Or so we're told.
The principle of the legislature controlling government revenues goes back centuries, at least as far back as the times of conflict between English King Charles I and Parliament. Among backers of Parliament, it was believed that kings — including Charles, of course — were prone to waste tax money on wars. Thus kings were forced to go to Parliament to raise funds for the wars they wished to wage.
In modern America, however, we no longer waste time on such antiquated formalities. Nowadays, the president, who in the words of Barack Obama has "a pen and a phone" can simply raise taxes whenever he wants via executive order. He need only call the tax hike a new tariff, and claim it's all for the sake of national security.
The Parliament-backers of old, of course, were too smart to fall for that "national security" trick. Even war expenditures had to win Parliament's approval. America's Congress, though, long ago abdicated its control over taxes, and created a huge tariff loophole in which any president can raise taxes if he says it's a matter of military necessity.
If we read Trump's executive orders, we find they pay lip service to the national security line. The texts of the executive orders raising tariffs on steel and aluminum both state that the lack of tariffs "threaten to impair the national security of the United States."
No evidence that this is true is actually presented. And, indeed, the secretary of Defense has specifically stated that tariffs are not necessary for national security:
... the US military requirements for steel and aluminum each only represent about three percent of US production. Therefore, DoD does not believe that the finds in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.
[RELATED: "Not Even the Pentagon Thinks Tariffs Are Needed for National Defense"]
But, merely invoking the phrase acts like a magic talisman that removes the need for any debate or vote in Congress on a tax hike.
Given our apparently lackadaisical attitude over such matters, it's hard to image what all that fuss was about during the English Civil War and the fight for Parliamentary independence in England. Those Englishmen of old apparently lacked the insight of modern Americans which is that the Executive ought to be allowed to raise taxes whenever he wants, provided he utters a few words about "national security."
Trump's Fondness for Executive Action Tax hikes aren't the only topic on which Donald Trump likes to rule by decree.
On matters of gun control, too, Trump seems enthusiastic about doing an end run around Congress.
“As I promised, today the Department of Justice will issue the rule banning BUMP STOCKS with a mandated comment period,” Trump said on Twitter as the announcement was made. “We will BAN all devices that turn legal weapons into illegal machine guns.”
Ignoring the fact that bump stocks most certainly do not turn legal weapons into "machine guns," we can nevertheless see how this administration — and most others over the past century — have viewed the process of lawmaking in the United States.
Want to ban something? Just have a government department issue a "rule." No need for legislation, debate, votes, or any of that other outdated "democracy" stuff! And if you violate one of these new "rules?" Well, you may be looking at a lengthy prison sentence.
Of course, there's no indication that Trump plans at stopping with bump stocks. As he so enthusiastically has informed us, he's not terribly fond of the due process involved in making law with public input. That's all so tedious, which is why when it comes to guns, Trump wants to “Take the guns first, go through due process second.”
Not that Trump is unique in his presidential disdain for due process. He's just willing to say so out loud.
Trump does appear to be especially fond of unilaterally issuing his own laws, as it seems that Trump is on pace to sign more executive orders than any other president in the past 50 years.
Admittedly, this metric alone isn't a very good one for measuring just how bad a president is. A year into his presidency, George W. Bush was signing off on the liberty-eviscerating USA Patriot Act, and calling for large scale invasions of various foreign countries — countries that could not be shown to be any threat to the United States. He had Congress's approval on that — unfortunately.
But coupled with Trump's clearly stated disdain for due process and his willingness to cynically employ the "national security" ruse to raise taxes on Americans, it's not a promising trend.
While most of the headlines the Trump administration has made on foreign policy have tended to focus on Syria and North Korea, the President’s approach to Iran may end up being the most important. The appointment of infamous hawk John Bolton, whose career goal has been to spark regime change in Tehran, is understandably seen as an indicator that Trump may abandon his campaign rhetoric opposing regime change in the Middle East in the case of the Ayatollah. As does Trump’s blossoming bromance with Saudi Crown Prince Mohammed bin Salman, who recently said the supreme leader of Iran “makes Hitler look good.”
As the decision of whether or not the US should continue to honor the Iran Deal has re-emerged in the news, it’s worth looking back to 2001 to re-evaluate an overlooked moment of US-Iranian relations: the brief period of time where Iran became a military ally to the United States.
When criticizing the foreign policy of the United States in the age of the war on terror, Ron Paul would often discuss the concept of blowback. One of the greatest examples of this was obviously the Iranian Revolution, when secular Iranians joined with Islamic fundamentalists in rising up against the Shah regime after years of intervention by the US on behalf of the Pahlavi dynasty. In the aftermath, the secular liberals of Iran were overwhelmed by the Islamic theocrats led by Ayatollah Khomeini. The result is the Islamic Republic of Iran that exists today.
As a direct revolt to a western-backed regime, revolutionary Iran was inherently hostile to the United States. The Iran hostage crisis helped bring down the presidency of Jimmy Carter and led to America’s support of Saddam Hussein in the Iran-Iraq War in the 1980s. It also imposed sanctions again the country, though that didn’t stop members of the US government from selling missiles to Iran during that time. While some attempts were made to de-thaw relations between the two countries during the H.W. Bush Administration, all progress was wiped away when the Clinton Administration ordered a full embargo of Iran in 1995.
Then 9/11 happened.
The Iranian government condemned the attacks, while citizens of the country took to streets with candles to remember the victims. Then the Iran government offered military assistance to the United States in their efforts against Afghanistan and al Qaeda.
In the words of James Dobbins, the Bush administration's chief negotiator on Afghanistan, the Iranian’s were "comprehensively helpful", sharing intel and helping organize regional allies for action against the Taliban — including putting American forces in contact with the Northern Alliance.
For a moment, it looked like 9/11 could have been the catalyst for a new era of relations between the US and Iran.
Then in 2002, David Frum was asked by President George W. Bush to write his State of the Union address. In the eyes of Frum and fellow Neoconservatives in the Bush Administration, Iran’s vital assistance to the US in the “War on Terror” did not excuse their continued hostility to Israel. As such, Iran was bundled together with their rival Iraq and the regime of North Korea as “the Axis of Evil.” The Bush Administration made Iran out to be allies to the same foe the two sides had been working against for the past five months — to the joy of the Saudi Arabia royal family that assisted the 9/11 hijackers.
While this decision was a bad look for the reliability of doing business to the United States, the consequences within Iran itself were significant. The biggest losers in Bush’s speech were anti-cleric moderates within the country. Those three words eliminated all hopes of Iran benefiting from improved economic relations with the US, which would have given them a political advantage within the country.
With outreach to the West now dead, the Iranian government sought to consolidate support from within by stoking anti-US sentiment and appealing to Islamic hardliners within the country. They picked an engineer from a small village in Northern Iran who had risen to the ranks of mayor of Tehran — Mahmoud Ahmadinejad. As Valir Nasr describes in his book, The Rise of Islamic Capitalism, the clerics considered him "the perfect vehicle for stirring up the populist and revolutionary fervor of the lower classes and beating back a rising tide of reformist sentiment.”
Ahmadinejad did what he was expected to do. He was a populist champion for Iranian fundamentalists who despised the West and wanted to see Israel wiped off the map. In response to both his rhetoric and re-commitment to Iran’s nuclear program, the UN imposed new sanctions on the country. The US followed up with attacks on Iran’s banking system.
Interestingly, by the time Ahmadinejad’s presidency came to the end, he had managed to lose the favor of the Ayatollah. Key supporters of Ahmadinejad were arrested, government censors attacked his websites, and his chief of staff, Esfandiar Rahim Mashaei, has been barred from seeking the presidency.
Unfortunately these moves towards moderation have had little impact on the desire of neoconservative policy makers to demand Iranian regime change. Just as they destroyed an opportunity to solidly relations under Bush, John Bolton and his allies seek to prevent peace from happening under Trump. We have already seen the administration escalate sanctions on the country.
As Mises wrote in Omnipotent Government, “Modern war is not a war of royal armies. It is a war of the peoples, a total war.” This is as true in Iran as anywhere else.
While the rhetoric against Iran is usually directed towards the country’s theocratic government, it must be understood that it is the people of the country that have suffered most from the actions taken against them. Beyond the obvious inevitable collateral damage of a US led military operation against Iran, it has been innocent people — those most opposed to Ahmadinejad and Iranian fundamentalism — who have paid the dearest price for America’s long lasting economic war on the country.
If the Trump administration wants to serve the best interest of both America and anti-cleric forces in Iran, he should end US sanctions and re-open trade with the Persian economy.
Or he can act on the desires of John Bolton and the neoconservative doctrine, and continue to destroy Iran at the expense of the US.
Let it be known though that it didn’t have to be this way.
The list of countries with the largest trade surplus with the United States is led by China, which exports $375 billion more than it imports. It is followed, distantly, by Mexico ($ 71 bn), Japan (69 bn), Germany (65 bn), Vietnam (38 bn), Ireland (38 bn) and Italy (31 bn). If we do the exercise of putting aside the 2018 report of the USTR (Office of the US Trade Representative 2018 National Trade Estimate), the markets that have the more protectionist measures against the United States are China, the European Union, Japan, Mexico and India. What a surprise.
These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron or any of the leaders gathered there.
During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess … to the United States.
Steel and aluminum, like the automobile industry, are clear examples of building unnecessary capacity and subsidizing it, country by country, hoping that it will be somebody else who closes its inefficient factories while, at the same time, hoping to export more.
Meanwhile, barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The United States’ complaints in the World Trade Organization fell on deaf ears.
And then Trump arrived. The requirement of the Trump administration in the G7 to eliminate all tariffs and barriers, rejected by the rest, has shown that the hat trick of accusing the US of protectionism was simply a PR stunt. Every time the Trump administration has pressed its trading partners with tariffs, we learned of hidden barriers from the so-called “free trade leaders” in China and the European Union. In six months we have seen an important list of tariffs and barriers against the United States that many of us simply thought did not exist.
Trump’s strategy is obvious. He tries to dismantle the trick of imposing hidden barriers inside, with a smile, and at the same time try to export more to the United States.
The German car manufacturers themselves have asked the European Union to reduce tariffs on US cars, the Chinese have agreed to reduce barriers to the imports of US agricultural and industrial products, and so on. Even the European Union recognized that the “Made In China 2025” plan, which the United States denounced, was a conscious objective of limiting foreign trade.
It had to explode. If all countries subsidize their excess capacity and try to export to the United States while using peregrine excuses to limit imports from the world leader, it ends up breaking the deck.
And the “free-market-disguised protectionism” strategy of some of the G7 leaders collapsed when Trump said “they have taken advantage of the United States for decades” and called for the elimination of all tariffs and tariffs completely. Interestingly, those who presented themselves as defenders of free trade refused.
The game is over. But careful with the consequences.
The United States may win. On the one hand, it exports very little. About12% of GDP. On the other hand, everyone wants to sell in the US because the conditions of market openings, competition, and opportunities are greater. Additionally, without its huge trade surplus, the European Union and China cannot sustain their growth.
And the debt? I have explained it a thousand times. China has $ 1.3 trillion of United States debt. That does not reach 6.2% of the total. It is neither the largest holder of US debt nor a threat. As shown throughout 2018, the demand for US bonds is much higher than the supply on all issuances and the US debt funds would absorb these Chinese bonds in a few days. Also, China cannot sell them. For China, these bonds are reserves of foreign currency. If sold, the Yuan would suffer enormous volatility, especially when its currency is used in less than 4% of global transactions and its value is more than questioned by the imposition of capital control.
It has been very easy for the European Union and China to support their GDP growth thanks to an external sector and a surplus that hid huge barriers under different subterfuges. From brutal bureaucratic barriers, hidden taxes, lack of intellectual property protection, disproportionate subsidies to obsolete sectors to try to export their excesses, or invented environmental excuses, it is over. If they want to sell to the United States, all countries have to adopt measures that really increase free trade, not disguise our protectionism with a mask of openness.
Be Careful What You Wish For However, be careful what you wish for. Tariffs are the worst way to combat protectionism. They give governments the excuse to impose higher barriers to trade and blame the external enemy, not to lift the existing ones.
Beware of the more than optimistic expectations of global growth.
The G7 summit shows another yellow card to the complacency of the markets.
The failure of this summit should, at least, alert us to overly optimistic estimates of global growth. The United States has found an unexpected ace card in its “fist on the table” negotiation tactic. The evident slowdown in European growth. The data on industrial production, GDP, consumption and credit point to a much poorer growth than estimated. The European Union is exiting its monetary stimulus with a very important drop of all indicators of economic surprise.
Let’s be careful. Protectionism only protects governments. All of us lose. The United States is carrying out an aggressive negotiation tactic, but it can go wrong, because politicians often prefer things to get worse than lose control, and that is a relevant risk with China and Europe.
Trump knows that tariffs hurt inside as well. In 2001, Bush Jr. introduced tariffs on aluminum that destroyed thousands of jobs, and Obama’s constant protectionist measures led the country to the worst external sector growth data in decades. Putting the fist on the table and demanding that everyone remove their barriers can end up in everyone blaming their barriers to trade on the outside enemy. On the “evil” US, and vice versa. Those who will suffer the most will be the consumers all over the world.
Originally published at DLacalle.com
In a recent essay, I noted that the US Constitution, by making the United States a free trade area, increased Americans’ living standards considerably. The story changes when it comes to international trade. Indeed, with the benefit of hindsight (which includes economic insights subsequent to 1787), it turns out that the Founding Fathers’ treatment of US trade with other countries was rife with landmines. Given that this treatment was, in part, the product of compromises between northern and southern delegates at the 1787 convention, its explanation is not as straightforward as the constitutional prohibition on inter-state tariffs.
First, by permitting duties on imports, it guaranteed that the United States was not to be a free trade nation. This is understandable, however, as import tariffs were to be an important source of federal government revenue. Indeed, in only one year between 1789 and 1860 was tariff revenue not the most important source of federal government revenue. Tariff revenue continued an important source of federal revenues until the constitution was amended in 1912 to make the income tax constitutional.
Left untouched by the Founders was the fact that any amount of tariff revenue (except maximum revenue) can be obtained with a “low” tariff or a “high” tariff. This is one of the lessons of Laffer curve analysis. Does it make any difference? You bet. The “higher” tariff moves the country further away from free trade and toward a lower living standard.
Interestingly, the tariff-enabling clause in the constitution of the Confederate States of America had language mandating that only the “lower” tariff was acceptable, the only constitution to my knowledge to have ever done so. This is significant because some scholars regard the Confederacy’s constitution as a revision of the 1787 constitution in the light of historical experience. (For a detailed discussion of this point see Robert A. McGuire and my article “The Confederate Constitution, Tariffs, and the Laffer Relationship,” in the March 2002 issue of Economic Inquiry.)
The other tariff landmine relates to the constitution’s prohibition of export tariffs (Article 1, Section 9 Clause 5). This was part of the compromise between northern and southern delegates. At the time of the compromise, delegates had agreed on requiring a 2/3 vote on all tax legislation. Southern delegates ceded a simple majority for tax legislation in exchange for a prohibition on export tariffs and a 20-year moratorium on federal interference in the slave trade (except for what turned out to be a never-imposed $10 dollar import duty per slave).
At the time of the compromise, however, the 13 states had or shortly would have their own slave import restrictions. Thomas Jefferson signed federal legislation prohibiting slave imports effective 1808. The 20-year moratorium was at best a hollow one for southern delegates.
More interesting from an economic perspective is the prohibition on export tariffs. This was also a hollow gain. The reason is that an import tariff is analytically equivalent to an export tariff. Equivalence does not turn on explicit tariff retaliation by trading partners, nor does it turn on a shortfall in foreign exchange earnings by trading partners. It is, rather, a relative price proposition. Abba Lerner is widely credited for this insight in a 1936 article which explains the equivalence using the international economist’s offer curve pyrotechnics. Robert McGuire and I later offered a less obtuse, though by no means simple, explanation in “A Supply and Demand Exposition of a Constitutional Tax Loophole: The Case of Tariff Symmetry.”See Constitutional Political Economy 14, no 1 (2003).
For my money, however, John C. Calhoun deserves at least partial credit for the insight. In the midst of the turmoil over the 1828 “tariff of abominations,” Calhoun’s Exposition and Protest noted:
We export in order to import. The object is an exchange Of the fruits of our labor for those of other countries. ... To the growers of cotton, flax, and tobacco, it is the same, whether the Government takes one-third of what they raise for the liberty of sending the other two-thirds abroad, or one-third of the iron, salt, sugar, coffee, cloth, and other articles they may need in exchange, for the liberty of bringing them home. In both cases he gets a third less than he ought. A third of his labor is taken; yet the one is an import duty, and the other an export.Quoted in Union and Liberty: the Political Philosophy of John C. Calhoun, Ross M. Lence, ed. (Indianapolis: Liberty Fund, 1992), p. 317.
The hollowness of this export tariff prohibition proved particularly telling in the years leading up to the US Civil War. Upward of 50 percent of US exports were comprised of cotton and tobacco, crops raised in the south. US import tariffs at this time acted, in part, as export tariffs on southern exports. That southern delegates to the 1787 Constitutional Convention thought they were insulating their constituents from the possibility of export tariffs with the prohibition surely counts as a major economic miscalculation. Not only did a simple majority voting rule make it easier to impose import tariffs, but the import tariffs were themselves de facto export tariffs.
Failure to recognize this equivalency between import and export tariffs persists to this day. As President Trump continues to announce import duties, media types wait with baited breath what import duties foreigners will impose on US goods. Beyond the publicity associated with supposed foreign retaliation, the workings of retaliation would have worked its way through the international marketplace.
Following President Trump’s imposition of 25% tariffs on all Chinese imports, it is time to assesses the consequences. Already, we have seen a contraction in US-China trade of 20% in the first three months of 2019 compared with the same quarter last year, and also compared with the average outturn for the whole of 2018. This contraction was worse than that which followed the Lehman crisis.
In assessing the extent of the impact of Trump’s tariffs on the US economy, we must take into account a number of inter-related factors. Clearly, higher prices to US consumers will hit Chinese imports, which explains why they have dropped 20% so far, and why they will likely drop even more. Interestingly, US exports to China fell by the same percentage, though they are about one quarter of China’s exports to the US.
These inter-related factors are, but not limited to:
The effect of the new tariff increases on trade volumesThe effect on US consumer pricesThe effect on US production costs of tariffs on imported Chinese componentsThe consequences of retaliatory action on US exports to ChinaThe recessionary impact of all the above on GDPThe consequences for the US budget deficit, allowing for likely tariff income to the US Treasury. These are only first-order effects in what becomes an iterative process, and will be accompanied and followed by:
Reassessment of business plans in the light of market informationA tendency for bank credit to contract as banks anticipate heightened lending riskLiquidation of financial assets held by banks as collateralForeign liquidation of USD assets and depositsThe government’s borrowing requirement increasing unexpectedlyBond yields rising to discount increasing price inflationBanks facing increasing difficulties and the re-emergence of systemic risk. We can expect two stages. The first will be characterized by monetary expansion will little apparent effect on price inflation. Putting aside statistical manipulation of price indices, this is the current situation and has been since the Lehman crisis. It will be followed by a second phase, following an acceleration of currency debasement. It will be characterized by increasing price inflation, and ultimately the collapse of purchasing power for unbacked fiat currencies.
Unintended Consequences Obviously, being a tax on imports, tariffs benefit the Treasury’s finances; a fact which President Trump continually boasts about. To be precise, a 25% tariff on all Chinese imports in the remaining five months of the current fiscal year (based on the first quarter of 2019) can be expected to raise $45bn, which reduces the Office of Management’s budget deficit estimate of $1,092bnBudget of the US Government Fiscal Year 2020, Table S-1 (page 107) for fiscal 2019 to $1,047bn. The tax benefit is therefore relatively minor, and likely to be more than offset by the recessionary consequences of higher tariffs on government tax revenues and welfare costs. This article will go into more detail why this is so.
If, for a moment, we assume there will be a limited impact on consumer demand from increased tariffs, the effect on prices at the margin would be to drive them sharply higher for all consumer goods in the product categories where Chinese supply is a factor, with some spill-over into others. Price inflation would simply begin to escalate. But given the indebtedness of the average American consumer, the ability to pay higher prices is obviously restricted, suggesting that overall demand must suffer, not just for imported Chinese goods, but for domestically-produced goods as well. It is therefore likely there will be both an impact on price inflation and a fall in consumer demand.
Besides the effect on consumers, manufacturers relying on part-manufactured Chinese imports and processed commodities now face cost pressures from tariffs which they may or may not be able to pass on to consumers. The cost pressures on manufacturers are bound to lead to a reassessment of their business models. This will be communicated to their bankers as increased lending risk, and they in turn will almost certainly restrict credit availability. The credit cycle would then move rapidly into a contractionary phase as both businesses and their bankers take fright.
Anyone who has analyzed post-war credit cycles will be familiar with these dynamics. We are probably not there yet, despite the warning shot from financial markets in the fourth quarter of 2018. For now, the initial softening of consumer demand has led to a general assumption that monetary policy will ease sufficiently to prevent little more than a mild recession, benefiting capital values. Government bond yields have eased, and arbitrage across bond markets has ensured investment grade corporate bond yields have declined as well. Since end-November when the central banks began to ease monetary policy, the effective yield on investment grade corporate bonds, reported by Bank of America Merrill Lynch, has fallen from 4.8% to 4%. This is hardly an assessment of increasing lending risk.
As well as bond markets, equity markets are also expecting monetary easing, instead of a gathering crisis, and have rallied along with bonds. Clearly, financial markets have not noted the seriousness of trade protectionism, having become complacent while trade restrictions have generally eased in recent decades. However, market historians will note that this brief recovery phase was also the pattern in stock markets between October 1929, when the Smoot-Hawley Tariff Act was passed by Congress, and April 1930, two months before President Hoover signed it into law. If the correlation with that period continues, equities could be in for a substantial fall (in 1929-32 it was 88% top to bottom).
In the Wall Street Crash, equities fell as collateral was liquidated into falling markets. Non-financial assets, such as property, similarly lost value and productive assets (plant, machinery etc.) failed to generate anticipated cash flows. This nightmare was famously described by Irving Fisher, and has continued to frighten economists ever since.
While debt was a problem in 1929, it was generally confined to corporate borrowers and speculators. Today’s context of Fisher’s nightmare is in record levels of government, corporate and consumer debt. The potential disruption from the unwinding of the credit cycle is therefore worse today. Trump’s trade protectionism so far is targeted at one country, unlike Smoot-Hawley which was across the board. At first glance, Smoot Hawley was more dangerous, but it is the lethal combination of tariffs and the end of the expansionary phase of the credit cycle which should concern us.
Even before Trump officially declared his presidential aspirations, trade was the cornerstone of Trumponomics, and he lambasted global partners who ostensibly had taken the American people to the cleaners through the means of unfair trading practices, currency manipulations, and efforts to undermine US industry. One product his administration targeted was steel, and it applied 25 percent tariffs on imports from multiple countries and pledged an industrial resuscitation.
Has the president fulfilled his promise? Let’s just say that economics has reared its ugly head again.
A Dive into the Numbers Recently it was reported that 80 employees at an NLMK steel plant in Pennsylvania were being let go. The leadership blamed tariffs for layoffs, calling it a failed policy. This comes about a month after US Steel Corp. confirmed that it was suspending operations of blast furnaces in Michigan, Indiana, and Europe until “market conditions improve.” Then there are the dozens of steel-consuming companies that have trimmed their workforce, such as American Keg and Element Electronics, which laid off ten and 134 employees respectively.
What a difference a year makes. This bearish and sour sentiment contradicts the ebullient consensus that cronyism and protectionism were going to open new plants, rejuvenate idled ones, stimulate output, and bring back steel jobs. Industry leaders gave speeches and appeared on business news networks, telling the world that American steel just needed businesses and consumers to pay roughly $900,000 for every steel job created or saved by the tariffs.
US steel-related stocks have been tumbling since touching highs when the import levies were applied. US Steel shares plunged from a 52-week high of $38.89 to a 52-week low of $11.67, and Nucor has declined from $69.84 to $55 per share. The New York Stock Exchange’s American Steel Index has slipped 12 percent over the last 12 months. The VanEck Vectors Steel Exchange Traded Fund (ETF) is down 13 percent in the same time period. Publicly traded firms are revising downward their profit expectations amid lower-than-expected demand levels.
As William Shakespeare wrote in Macbeth, “Oh what a tangled web we weave when at first we start to deceive.”
So what the heck is happening? It is an issue of economics.
The Economics of Steel Tariffs In the immediate aftermath of the Trump tariffs, steel prices surged and US companies enjoyed a brief advantage over their foreign competitors, posting some of their best profits in years. The administration, Middle America, and the handful of pro-Trump media outlets took a victory lap — a premature one. Then reality set in. When prices skyrocketed, domestic demand for the material reduced, primarily from businesses that rely on this component for their products.
Producers have adapted to the shifting market trends, curtailing output. The latest American Iron and Steel Institute (AISI) data suggests that overall production has fallen to its lowest level of 2019. Without enough demand, US companies contribute to the global supply glut and bring down prices even further. It is true that production has recovered admirably since cratering to an all-time low back in 2009, and output is at an eight-year high. But these figures can be attributed to factories investing in automation and other technologies that replace human hands-on labor; it used to take ten man-hours to produce one ton of this material, but now it requires only 90 man-minutes. While an impressive feat for the second-largest manufacturing industry in the world, it is superfluous in 2019 when there is not enough of a market.
Steel Talk The worst thing about this entire ordeal is that it was anticipated by many conservatives and libertarians. You did not need to refer to the Mises Institute, economics textbooks, or the 1930s to prognosticate what was going to happen. You could have looked back to 2002 when then-President George W. Bush imposed tariffs on steel imports only to scrap those levies nine months later because they were wreaking havoc on the US economy.
The lesson from protectionism is that the country that partakes in this nineteenth-century practice is made worse off on net and endures the pain of net job losses.
President Trump famously tweeted that “if you don’t have steel, you don’t have a country.” This can be debated on multiple fronts, but the US economy had done remarkably well by residing in the top five of steel-producing nations — just behind India and ahead of Russia. Steel-consuming firms have depended on cheaper steel imports for years, allowing them to rein in operating costs, sell cheaper products, pad their bottom lines, and innovate products. This is not a bad thing at all, especially when considering that about 40 Americans work in industries that consume steel or aluminum for every one worker who produces these durable goods.
Are steel jobs coming back? Let’s put it this way: Total payrolls will not be what they were in 1943 or 1963. The industry has changed. You do not need dozens of employees earning $65,000 a year plus benefits to produce a few tons. This might have been the personification of middle-class life during the heyday of Leave It to Beaver and Father Knows Best, but because the US economy is so dynamic, we now have a different view of what middle-class employment looks like. It isn’t operating heavy machinery, but rather it is assisting senior citizens, running restaurants, and phlebotomy.
Will US steel be great again? It already is — the sector just looks different.
Originally published by Liberty Nation.
An article published this month by Chad Bown and Douglas Irwin (the latter one of the more consistent and effective defenders of free trade in academia) provides a rather disappointing view of the free trade ideal in scholarly circles. Their discussion highlights the confusion (or perhaps hypocrisy) that surrounds such debates at present. The recent article, published in Foreign Affairs (2019), builds on a 2018 Peterson Institute policy brief by the same authors. Both contributions discuss the effects of Trump’s approach to trade, of the potential U.S. withdrawal from the WTO, and of Trump’s overall economic nationalism—and are a disappointing display of misguided assumptions and a lot of handwringing.
In the policy brief, Bown and Irwin (2018, 2) base their analysis of the effects of U.S. leaving the WTO system on the following statement: “It would thus make sense to withdraw [from the WTO] only if the United States intended to raise tariffs against countries.” While this is likely true in this particular case, the statement purports to make the more general point that free trade can only be accomplished within a multilateral trade system. We have discussed this issue before many times, and showed that the WTO negotiation system has been highly ineffective, and indeed detrimental to global trade. In fact, almost 70% of overall trade liberalization since the 1980s has been unilateral (Sally 2008, 151), and studies show that unilateral reduction of trade barriers may actually beget reciprocal liberalization to a much greater extent than multilateral or bilateral negotiations (Bhagwati 2002).
Bown and Douglas follow up their earlier argument with the warning that “[the Trump administration] has taken deliberate steps to weaken the WTO—some of which will permanently damage the multilateral trading system” (Bown and Irwin, 2019, 125). Personally, I do not doubt that this is indeed Trump’s long game, as his administration thinks such a result will prove its courage and determination in foreign affairs. However, one wonders what is there left to damage of the WTO. To what are Bown and Irwin still clinging?
The first surprising aspect they seem persuaded by is the thin layer of propaganda covering the U.S. government’s commitment to free trade. This is unexpected for Irwin, whose two best-selling books (Free Trade Under Fire and Against the Tide) do a brilliant job of unmasking the true effects and the real reasons for governments’ centuries-old assault on free trade. Yet the authors balk at Trump openly using trade as a weapon if possible and caring nothing for the ensuing economic effects. Bown and Irwin (2019, 127) are shocked to hear that “The Trump administration recently stood alongside Russia to argue that merely invoking national security is enough to defeat any WTO challenge to a trade barrier.” They add: “This runs counter to 75 years of practice as well as to what U.S. negotiators argued when they created the global trading system in the 1940s.”
Irwin’s own research from before the Trump era (e.g. Peddling Protectionism) shows that that "the years of practice" and the promises made by the U.S. since 1940 did not represent a principled framework guiding government trade policy, but simply a pragmatic calculation of the way in which the U.S. could manipulate global trade more easily. Trump’s view is that it can be done now directly from the Oval Office. In either case, the goal of all U.S. administrations has never been free trade, nor "leading by example," but managing trade to the benefit of their particular interest groups and larger political goals. Why Bown and Irwin are baffled by this is baffling to me in turn, and quite disappointing.
Secondly, they still regard the WTO dispute settlement system as a forum which “countries big and small, rich and poor have relied on to prevent trade skirmishes from turning into trade wars”. While the dispute settlement “is not perfect” (2009, 131), it can be salvaged. Yet mountains of evidence point to a WTO dispute settlement that has been used precisely to inflict more damage than a simple trade skirmish would have produced. Some have actually suggested that through this system, China’s lack of cooperation with the WTO can be punished with legitimate, WTO-approved retaliatory tariffs. Yet only last week Beijing began “seeking $2.4 billion in retaliatory sanctions against Washington for non-compliance with a WTO ruling in a tariff dispute against the US tracing back in the Obama era” (Forbes, Oct 22). A system run by governments to solve government-created problems in global commerce never had any chance of being effective—nor was it intended to do anything else but provide another lever for protectionist measures.
Bown and Irwin’s wishful thinking becomes unbearable when they bemoan the fact that through Trump’s tariffs on steel, “the administration jeopardized the welfare of 3.2 million American farmers to help 140,000 U.S. steelworkers” (Bown and Irwin 2019, 128). This is again true, but could we not rewrite every trade policy, save for free unhampered trade, in exactly such terms? Every multilateral trade agreement, signed especially since the beginning of the Doha Round, resulted in increasing the welfare of a select group of producers while slapping non-tariffs barriers on a host of other market participants. Every time a government interfered in world trade (or the domestic economy, for that matter), it diminished the welfare of one group of the population to the benefit of a small interest group.
Lastly, the two authors argue that trade deficits and the loss of certain industries — key issues Trump worries about—have little to do with specific trade agreements and more to do with some underlying economic cause. They remain vague on this point, but regardless, their proposal is to maintain the trade agreements — fearing, if not, “substituting government intervention for market forces” (2019, 130). They also recommend tackling the underlying causes of such outcomes domestically. How? Of course, by substituting government intervention for domestic market forces. The inconsistency in their arguments is most evident in this case.
As a disappointed reader, I find I can only exclaim: Let the WTO and all its agreements go already! We cannot salvage something that was built broken. And it’s time to stop gasping and shaking our heads in disbelief when one president or other goes on to do something outrageous when it comes to free trade. Let us instead talk about our only way out: how do we keep governments out of global trade altogether?
The European Commission has unveiled its “European Green Deal,” after taking hints on denomination from its American counterpart, the “Green New Deal.” While the legislation introduced in the US Congress remains fiction under a Republican executive and senate, the Brussels initiative will become law unless there is considerable opposition from EU member states.
Back in May, I had the pleasure to be a guest at an Austrian Economic Center event in Vienna, in which we discussed the policy outlook prior to the European elections. My prediction back then: more greens, more ecstatic green policies to come. The newly elected commission president Ursula von der Leyen has attempted to appease green forces in the European Parliament by dedicating herself to the environmentalist agenda, and as a result is now pursuing ambitious policy goals that she laid out in her candidature speech in Strasbourg.
The New Green Deal contains major implications for industry and consumers, including higher energy taxation, higher levies on shipping and aviation, higher road emissions duties, forcing companies to rethink recycling and repairing electronics, and making free trade deals more difficult to conclude. These measures all deserve op-eds of their own, but for the sake of this one, let’s narrow it down.
Three takeaways from the proposed package of executive and legislative measures are important:
The Commission wants to introduce a carbon border tax.The Commission wants to update the emissions targets for 2030.The Commission wants to spend more money in an effort to “reinvest” (or to buy off member states). The Carbon Border Tax The main objective of this “border adjustment” is to prevent the relocation of carbon-intensive production to non-EU countries, a problem known as “carbon leakage.” When companies outsource production to avoid carbon costs, they shift their emissions abroad. That, claims the EU, reduces the effectiveness of EU climate policies. This is of exceptional concern to Brussels, as non-EU countries, such as those in the Balkans, as well as Moldova, Belarus, and Ukraine, could come to rival EU producers as a result. The logic is very European: first we curb our own business efficiency through regulation, then we call other countries unfair competitors.
This is hardly the first time that European leaders have restricted trade due to environmental concerns. It was the most notable reason why the Obama-era free trade agreement, the Transatlantic Trade and Investment Partnership (TTIP), was laid on ice, and why the bloc still does not have a free trade relationship with China. French president Emmanuel Macron is even threatening to block a trade arrangement with South American countries (called Mercosur) in the case that Brazil leaves the 2015 Paris Climate Accord.
Worse than politicizing its trade deals, von der Leyen will now extend its climate policy to non-EU members, effectively bullying the entire continent into zealous emissions targets. Especially for eastern European countries such as Ukraine, this is a true nightmare.
As expected, Europe’s journalists are sticking with the Commission’s rhetoric by calling it a carbon border tax. For my part, I call it politicized European protectionism.
Target Update Brussels is reportedly looking at a climate law that would set a target date of 2050 to achieve net-zero emissions, and a plan to boost the bloc’s 2030 target for emissions cuts from a reduction of at least 40 percent to between 50 and 55 percent compared to 1990 levels. The Commission plans to present it by March 2020. The target update is only an argument for legitimizing harsher legislative measures. Once passed, you’ll the European Parliament say that new and costly emissions restrictions are “in line with EU climate targets.”
The good news for the Commission is that its climate law will not require unanimity voting in the European Council but only a qualified majority. That said, Poland, Hungary, and the Czech Republic are currently withholding their consent.
Increasing ambitions to a 55 percent emissions cut will likely find a majority in the Parliament, and in the Council eight countries have said they support that target. The question is whether opponents can rally a workable opposition.
That leads us to the crux of the issue.
The Climate Cash Grab Commission president von der Leyen has already proposed a financial package called the Just Transition Fund, which will support regions in their transition away from fossil fuels. However, the current climate targets already necessitate€260 billion in additional annual investment, meaning that the updated targets will need even more funding. At the moment, the Just Transition Fund is rumored to be included in the EU budget for 2021–27 and is expected to raise €100 billion in investments. It remains a mystery who exactly will privately invest (at their own risk) in inefficient windmills and solar panels.
One thing is certain: a cash grab of this size can certainly attract the interests of central European nations that are currently hesitant to join in. That said, Germany and the Netherlands are favoring limited budgetary ambitions.
It is the ultimate mix of climate ideology and spending extravaganza. Since Brussels has a tendency to get the answer wrong every time, I am confident that we’ll get the worst of both.
Originally published by the Austrian Economics Center.
In his State of the Union Address—February 4, 2020—President Trump outlined his reasons for punishing nations that manipulate their economies in order to achieve some internal policy goal, such as China. The president claimed that such manipulation was unfair and harmful to its trading partners. His main concern is that by manipulating its economy China "steals" jobs. It does this in several ways:
By keeping the yuan at a lower exchange rate against other currencies—meaning that the People's Bank of China gives more yuan for each dollar than would occur in a free currency market—Chinese goods are cheaper in terms of foreign currency than they would be otherwise.By subsidizing its industries, Chinese goods can be offered at a lower price.By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise. The president claimed that his policies were working, that manufacturing jobs were returning to the US and have created a "Blue Collar Boom," with unemployment statistics at very low levels for many politically sensitive segments of the labor market.
I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead, I would follow the Barron maxim of "minding our own business and setting a good example." I would point out the following consequences of Chinese economic interventions:
China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference, which increases our wealth. The Chinese people pay high taxes or higher prices. China's subsidies to business distort the Chinese economy away from producing more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce the supply of them within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.This is good for Americans, so why should we complain? That Chinese economic interventions are good for Americans is true in the short run, but what about the long run? By intervening in its economy, China weakens its productive capital base. It is this capital base that will pump out the many things that Americans will desire in the future. Anything that weakens a trading partner's capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run. No one has ever explained this phenomenon better than Frederic Bastiat in his classic essay "That Which Is Seen, and That Which Is Not Seen." Henry Hazlitt brought Bastiat's insights up to date in Economics in One Lesson. There are actually two lessons: the first is that one must consider the consequences of an economic act not only for those who will benefit but also those for who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt's second lesson is that one must look not only to the short-term benefit of an economic act but also to its long-term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short-term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. We can conclude through economic logic that steel prices, quality, and/or service will deteriorate with the restrictions in place, harming Americans in the long run.
Conclusion The president measures economic progress in terms of increase in employment (or decrease in unemployment) rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.
The greater China's capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies so that we would have access to cheaper, better, and more varied products and services. China's integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let's lead the world by setting a good example and look forward to a world of peace and prosperity.
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When politicians and pundits tackle international trade matters, discussions inevitably end up focusing on whether Americans get the short end of the stick when they trade with foreigners. The consensus among these folks is that they do. The evidence: Americans buy more goods and services from foreigners than they sell to them.
That this buy and sell ledger might trace normal market forces and actually describe something favorable about the US economy is never considered. Instead, the shortfall is attributed to clandestine policy interventions by foreign governments that tilt the international economic playing field in foreigners’ favor.
The problem here is that the politicians and pundits have a blind spot when it comes to international economic transactions. They ignore a portion of trade! In particular, they ignore trade in claims on future income—that is, stocks and bonds. When this latter trade is included in the discussion, all bets are off when it comes to the short end of the stick contention. Indeed, Americans buying more goods and services from foreigners than foreigners buy from Americans can be the result of American economic success. Ignoring or excluding relevant information makes a difference—a big difference!
Dollars and Foreign Currencies When foreigners sell things to Americans, foreigners want to be paid in their currency. Americans are no different. They want to be paid in dollars for what they sell to foreigners. The result? Markets in currencies exist. Foreigners buy dollars with their currencies. Americans buy foreign currencies with dollars. In other words, foreigners demand dollars and supply their own currencies. Americans demand foreign currencies and supply dollars.
As with any other market, prices of currencies will gravitate toward where the quantity of dollars demanded by foreigners equals the quantity of dollars supplied by Americans. Ditto for the quantities of foreign currencies demanded and supplied.
Telling the Whole Story So it follows that the price of the dollar will gravitate toward where the quantity of dollars demanded and supplied for trade in current goods and services and for claims on future goods and services will be the same. There is no reason that each component of the quantity of dollars demanded must equal its supplied counterpart. None whatsoever.
Suppose that relative to the rest of the world the United States is a better place to hold wealth. Reasons might be 1) property rights are more secure, 2) there are fewer exceptions to the rule of law, 3) tax rates are lower, and/or 4) safety against foreign aggression is much greater. Such factors will lead wealth holders (including those in the United States) to desire to hold a disproportionate share of their wealth—existing wealth as well as additions to it—in the United States.
In other words, foreigners will be demanding more dollars to buy US stocks and bonds compared to what Americans are supplying to buy foreign stocks and bonds. It necessarily follows that the equilibrium price of the dollar will be such that Americans buy more goods and services from foreigners than they buy from Americans by an amount that offsets the US trade surplus in stocks and bonds. Otherwise, the market in dollars will not clear.
Nothing could be further from the truth than to conclude that the US deficit in current goods and services means that Americans get the short end of the stick. Indeed, the truth is quite the opposite. Americans have a successful economy, so successful, in fact, that foreigners want to buy their way into it. What’s wrong with that?
Given this, any pundit or politician’s policy proposal to get rid of this deficit must undermine the ingredients of US success. For example, make property rights less secure. That will do it, and then Americans will get a stick that’s actually shorter, not one that is the result of pundit and politician blind spots.
Further Thoughts Notwithstanding the above, I submit that there is an additional factor explaining the short end of the stick assertion. Namely that exports are widely regarded as intrinsically “good,” just as imports are seen as intrinsically “bad.” Who hasn’t heard that exports “create jobs” and imports “destroy jobs.” Likewise for imports being “dumped” on Americans? Or imports being likened to “invading foreign armies”? Or imports being traced to “tilted economic playing fields”?
Unable or unwilling to incorporate the implications of trade in stocks and bonds into their thinking, pundits and politicians fall back on these decidedly negative characterizations of imports: if there is a deficit in US trade in current goods and services, then the “bad” coming in exceeds the”good” going out. Translation: Americans are getting the short end of the stick.
The irony here is that none of the pundits and politicians organize their households based on this mindset. Pundits’ and politicians’ incomes measure the value of what they export to their fellow citizens. It is these exports which enable pundits and politicians to import housing, food, clothing, etc. Take away these imports, and our pundits and politicians would be ill housed, ill fed, ill clothed, if not dead. That is, pundits and politicians export in order to import when it comes to their own affairs. Yet they ask the opposite of the national household. Alas.
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The European Union, at least in theory, is designed to allow residents to avail themselves of what are traditionally known as the “Four Fundamental Freedoms.” These are usually defined as the freedom of movement of goods, labor, services, and capital within and among member states of the trade bloc. Preserving economic freedoms promotes peace and prosperity, an enlightened sentiment held over from the rebuilding of the European continent after the horrors of the Second World War.
Though the body of legal literature discussing the fundamental freedoms nowadays tends to broaden them in definition and scope—such as by expanding the importance of the freedom of establishment or by discussing when a good becomes a service in digital markets—the premise of preserving economic freedom and movement remains. While undoubtedly this base notion is a desirable end, there are a great many complications and issues that arise from the politics behind it all.
On the one hand, the preservation of economic freedoms as an integrated trade bloc comes with benefits for the citizens as individuals and even the member states as a whole. These come in the form of ease in seeking legal solutions to disputes over individual property rights and ownership. Another advantage is increased trade through more more easily accessible markets with established historical and cultural ties. On the other hand, the European Union has also faced a great many challenges and crises over the years in the political arena, such as issues regarding debt and migration. It now struggles to hold credibility as a political project in consequence.
Andrew Moran wrote an insightful article about how different European nations are currently coping with rising populism, a political movement commonly depicted as antiestablishment, radical, or undesirable by prointegration media. If European integration and these economic freedoms are such great advantages, then one probably wonders why there is so much negativity and criticism surrounding the European Union after all. Should Europe not embrace more integration at every turn? In reality, the problem might well be that while the economic ends are desirable in the eyes of many Europeans, the political ends are not.
One argument against the European Union hinges on the fact that it is not merely an economic union, but a political one. Nigel Farage summarized the sentiment well in a speech at the European Parliament, when he said that the European Union is a “political experiment that the British frankly have never been very happy with” and then continued, “My mother and father signed up to … a common market, not to a political union, not to flags, anthems, presidents … and now you even want your own army!” Indeed, the difficulty is that while people could agree on the undeniable benefits of economic freedoms being protected, the reach and power of the political machine backing them up became unacceptable to many, ultimately culminating in dramatic events like the United Kingdom actually leaving the bloc via Brexit.
Merging Economics and Politics Is a Bad Idea An isolationist or protectionist economic policy for the United Kingdom, or any other country in the world today, is quite economically undesirable. However, understanding the motivations of people who are positive about leaving the European Union adds depth to an issue that is extremely polarized. It should not be painted as a simple issue of independent nationalist policies versus a trade-promoting supranational entity.
It is a case of state sovereignty and economic interdependence becoming linked together, forcing a debate on just how much integration is really needed to truly maximize economic freedom. While the European Union often does work internally in lowering regulatory barriers that hinder the fundamental freedoms, the planning of policies that affect other areas in the lives of its citizens may be called into question. People want to have economic freedom, but not necessarily with the level of centralization that policymakers often insist need to go with it.
Trade Bloc or Protectionist Bloc? Another objection is that while the internal market might enjoy such freedoms among its own citizens and member states, that does not mean that the rest of the world gets the same treatment. Lipton Matthews argues that regional free trade agreements are also a polite form of protectionism, meaning that the integration of the European Union’s internal market certainly does not mean that it has an equally open policy with all other countries outside of it.
A deeper commitment to economic integration within the continent is a good thing, all else being equal. But if this integration occurs alongside an exclusion of goods from outside the bloc, this is problematic, to say the least. Without that, the same system that enforces the preservation of freedom through the bloc also becomes a power tool for states vying to increase their bargaining strength and political influence on the world stage.
Anti-market pundits and politicians have long claimed that unregulated markets are damaging to communities, and therefore must be regulated, restrained, and made to fit our policy preferences.
“Market capitalism is a tool, like a staple gun or a toaster,” conservative talk show host Tucker Carlson declared last January. The implication being that markets can be directed by government to do what Carlson wants them to do.
Pat Buchanan has expressed similar sentiments, asserting in 1998 that the "economy exists for the people. ... it is the market that must be harnessed to work for man – and not the other way around."
And in describing a new and much-applauded book by New York Times editor Binyamin Appelbaum, Vox columnist Jared Bernstein champions Appelbaum's position that “Communities can decide what they want from markets.”
In all three cases, these pundits are addressing a problem in which they see policymakers as far too laissez-faire when it comes to markets. Buchanan and Carlson even allege that scholars and policymakers "worship" markets. Appelbaum, for his part, contends that Americans have, for far too long, been in the thrall of the economists who allegedly insist that markets must be left alone and left unregulated.
The solution, we are told, lies in abandoning the idea that consumers and producers ought to be allowed to buy and sell what they want, when they want. That is, "we" must take charge of markets and instead use government coercion to force market participants to do "the right thing."
Who Decides? But who is this "we," we keep hearing about? Who exactly is "the community" or "the people"?
In practice, of course, when a pundit says "communities can decide," what he really means is politicians shall decide in accordance with one or more pressure groups and which portion of a population shall be favored at the expense of another portion.
When Pat Buchanan says the economy must be regulated (and taxes raised) to benefit "the people," what he really means is he wants to benefit certain people he likes — at the expense of other people.
Benefit Some at the Expense of Others In the case of steel tariffs, for example, there's no denying many firms that make steel benefit from a tax on foreign steel. This will also benefit certain employees who may then receive higher salaries as a result of working for the firms that benefit from government favors.
At the same time, however, firms that use steel products will have to pay more for steel. Auto manufacturers, for instance, or small businesses that rely on steel products in producing their own products and services. As a result, businesses other than steel-producing firms will see their already razor-thin profit margins evaporate. They will go out of business. Small business owners will lose their livelihood and their investments in their businesses. Their employees will be laid off.
Moreover, support for laws that protect certain industries are likely to vary with geography. States and regions that have traditionally relied on the steel industry may be heavily invested in supporting laws that favor the steel industry. Other regions, though, may only experience the downside.
A similar situation arises from immigration restrictions. The economic argument is largely the same as with tariffs. But even if we ignore that argument, we can still see a fundamental conflict between different factions of the population. Some portions of the population are untroubled by the presence of immigrants for cultural reasons. Other portions find it disruptive for their own cultural reasons.
Attitudes toward immigrants vary wildly from place to place. In some states, a large majority of the population is indifferent. In some states, the population is overwhelmingly against.
Obviously, then, when a politician or pundit claims he's just doing what "the people" want, he's only describing a certain number of people in a certain region. Many people in other regions may feel very differently.
Another issue is mandatory "public accommodation" that overrides the religious views of private business owners. Perhaps the most famous example of this in recent years is the Masterpiece Cake Shop case in which federal appeals courts determined it was unlawful for the Christian baker to refuse to produce a cake for a gay wedding based on his religious views. Indeed, "civil rights" workers in this particular case openly declared that attempts to invoke religious views at all are "despicable" acts.
Advocates for these sorts of anti-discrimination laws insist that "we" have decided that business owners must not be allowed to use their property in ways that comport to their value systems. This is to be done, we are told, in the name of "equality."
But who exactly has decided this? Certainly, many people have contempt for the views — and for the freedom — of Christians like the cake shop's owner. These people likely support laws that prohibit the exercise of religious freedom in this way. For many others, however, forcing a property owner to perform services against his will involves an unacceptable attack on personal freedom.
Moreover, as with tariffs and immigration restrictions, support for laws restricting the exercise of religion are likely to vary by region and demographics.
The Bigger the Community, the Less "the People" Agree For the sake of argument, however, let's say that widespread approval for a policy — but not necessarily universal consensus — is sufficient to justify a new government tax or regulation.
For policies like immigration control and tariffs, one is unlikely to encounter a widespread consensus of any type across a jurisdiction as large as the United States. Culture, politics, and economic realities differ greatly across geographical areas and demographic groups.
Thus, the idea that "the community" can agree on what policies benefit "the people" becomes less convincing to the point of total implausibility once a community becomes sufficiently large. There is no doubt that some communities of Americans believe that protectionism benefits them. But even if a majority of Americans believed protectionism is good (which does not appear to be the case) is there a nationwide consensus as to what form that protectionism should take? What goods and services should be taxed? And to what extent? The idea that a "community" composed of 320 million people can agree on such things is absurd.
Theoretically, this problem could be mitigated through decentralization. That is, it would be easier to claim a working consensus if trade policy, immigration policy, and public accommodation policy were decided at a more local level. The regions with a lopsided majority that wants more immigration control could adopt their own policies. Those areas that want less control could have their own policies as well.
But, of course, we rarely hear calls for decentralization from those who want more active government control of the marketplace. From conservatives like Buchanan, to leftists like Appelbaum, the cry is always for more national policy. We are told these issues are decisions "we" must make as a nation. From the right, this anti-localist approach is justified with platitudes about patriotism, the constitution, and national unity. From the left, we're told that we can't let the rubes in flyover country decide for themselves because they'll decide wrongly. But whatever the justification, the centralist approach ensures that declarations about what "the community" or "the people" want is generally nonsense and wishful thinking.
At this point, some readers may insist "but McMaken, you're just pushing your own preferred policies! You want to force your free-market dogmatism on the rest of us!"
There is, of course, a key difference here. The laissez-faire position doesn't attempt to foist a new tax or a new regulation on anyone. It seeks only to remove the government policies that forcibly transfer wealth and economic advantage from one group to another. It is a policy of leaving people to decide for themselves. After all, in the absence of coercive state policies, consumers are still free to refuse to buy foreign goods. They're free to refuse to employ foreigners. They're free to boycott and drive out of business entrepreneurs who don't want to "bake the cake."
On the other hand, using government policy as a "tool" to obtain what "the people" supposedly want from markets requires government force. This is force necessary to implement and enforce government policy based on taxing and regulating all members of a society — including those who just want to be left alone.
Those who want these policies nonetheless continue to appeal to the false notion that "the people" or the "community" just want what everyone can see if they employ common sense. Such as "protecting jobs." Or equality. This may sound all very civilized and humanitarian, but its really just more government force employed against one group for the benefit of another. By portraying such policies as merely the benign wish of an invisible will of the community, advocates for such policies indulge in a very fanciful idea of the state.
Boris Johnson's Conservatives won an outright majority in yesterday's general election, pushing the Tories to an 80-strong Commons majority in what The Daily Mail called a "staggering election landslide."
Given that the Conservatives employed an election slogan of "Get Brexit Done," it appears the election was largely a referendum on Brexit. The Conservative victory suggests Johnson will now move forward much more quickly on putting a UK-EU agreement in place for UK withdrawal.
With the issue of UK independence from the EU, the issue of trade between the UK and the outside world beyond Europe now appears to be much more of an urgent reality.
Trade with the EU has long been a hobby horse of the Remainers, who claim that the UK must remain inside the EU or the UK's exporters will be cut off from outside markets.
This has never been a very plausible argument because if the EU were to simply cut the UK out of European trade, the cost of living for people in EU member states would go up considerably. It can't be assumed the UK would have no leverage in such a case. Moreover, as Peter Lilley, former Secreatry of State for Trade and Industry pointed out, it is likely that paying an EU tariff would be less costly to the UK than continuing the pay the enormous sums required of British taxpayers to remain EU members.
Moreover, because membership in the EU requires member states adhere to the EU's trade restrictions on non-EU states, the UK is restricted in its own trade with outsiders, such as the US, China. That is, EU membership means Parliament is not free to unilaterally lower trade barriers with the US, Canada, or South American states (for example).
This, of course, raises the real cost of EU membership very high indeed.
Failed Arguments Against Free Trade With the 2019 election out of the way, and with the UK heading toward Brexit, now is the time to lower all trade barriers between the UK and the US.
The US should lead by example and implement unilateral free trade immediately.
Yesterday, as it became clear the Conservatives would sail to victory, Donald Trump hinted he'd pursue a new "trade deal" with the UK:
Congratulations to Boris Johnson on his great WIN! Britain and the United States will now be free to strike a massive new Trade Deal after BREXIT. This deal has the potential to be far bigger and more lucrative than any deal that could be made with the E.U. Celebrate Boris!
— Donald J. Trump (@realDonaldTrump) December 13, 2019 Trump announced, "Britain and the United States will now be free to strike a massive new Trade Deal after BREXIT. This deal has the potential to be far bigger and more lucrative than any deal that could be made with the E.U."
Trump's tweets are often little more than gaslighting and posturing, so it one can't say what the actual significance of this announcement is.
But the fact is that the United States government doesn't need a trade "deal" with the United Kingdom. Nor does it need the president to negotiate with the UK government or issue any executive orders. All that needs to happen is for the Congress to pass legislation stating there will be no tariffs, quotas, or other restrictions imposed on imports from the UK. The end.
After all, what is the argument against this?
We can consider all the usual "arguments" against free trade in this case:
One: The "giant sucking sound." This is phrase once used by presidential candidate Ross Perot in his claim that NAFTA — not at all a real "free trade" deal, by the way — would result in US jobs being sucked into Mexico.
Even if this claim were true — and it's not — it is premised on the fact wages are much lower in Mexico than in the United States. This claim, however, doesn't apply at all to the UK. UK wages are "rich country wages." The idea that a Georgia manufacturer would move a factory to the UK — where government taxes and regulations are in many cases higher than in the US — has little basis in reality.
Two: The British will "exploit Americans!" The idea here is that if the US were to enact unilateral trade, the British would slap big tariffs on US imports while freely exporting British goods to the US. The answer to this is "so what?"
By giving Americans free access to all exported British goods and services, this only helps American businesses and consumers better manage their own budgets and needs.
The UK, for instance is a large exporter of pharmaceuticals. It's hard to imagine how giving Americans more access to medication "exploits" Americans. The British also export large amounts of automobiles, aircraft parts, auto parts, and hard liquor. All of these items would help improve the bottom lines for American business owners, leading to more employment and more production in the United States.
Some protectionists may complain: "but importing car parts" — for example — "will put American auto-part makers out of business!" It's unclear how this would occur. It is not the case that the British can manufacture all types of car parts more economically than American manufacturers. They surely can in some areas and not in others. Moreover, inexpensive auto parts mean a better situation for auto repair shops, auto-parts retailers, and American auto manufacturers who rely on those parts. More inexpensive parts are good for a wide variety of industries. But what protectionists are claiming in this case is that taxes on Americans ought to be raised to protect a single industry — the auto parts industry.
The geopolitical benefits of such an arrangement are important as well. Were the UK to be tied into such a valuable trade relationship with the US, this would improve US-UK relations all the more.At this point, protectionists could still raise the "rule of origin" problem of free trade. That is, it is argued that third countries could use the UK as an intermediary to funnel cheap goods from low-wage countries into the US using the UK's free trade status. In this case, political realities intervene yet again. The UK's regime has no reason to stockpile and reship foreign goods without first taking its own cut from the third party seeking to import goods into the UK. This in itself reducing the ability of the third party to import goods into the US at levels well below US manufacturing costs. The issue would not be eliminated, but, as we've shown, imported inexpensive goods is beneficial to American entrepreneurs who use those goods to expand production and employment. Geopolitical concerns from the UK's perspective would also limit the extent to which this would be employed.
Three: The British will put "strategic industries" out of business!
This is the national-defense argument. The claim is that if free trade is allowed, the Chinese (for example) will export so much steel, they'll put all American steel producers out of the business. And then the US can be cut off from steel and rendered impotent militarily.
Robert Murphy has explained how this claim doesn't even work on a theoretical level:
This argument fails to appreciate that the free market is entirely capable of handling disruptions in supply. If the protectionist citizen who writes Letters to the Editor is capable of foreseeing an interruption in steel imports during a major war, so too can the tycoons and speculators in the steel industry itself. After all, they stand to make or lose billions of dollars depending on the accuracy of their forecasts.
Consider the worst-case scenario where the U.S. imports all of its steel from foreign countries, and there is a large probability that there will be a major war in one year, and that if this happens every single one of our suppliers will cut off shipment of steel. What will be the market's response? Will steel continue to sell at its usual price, and will people in the steel industry focus merely on tomorrow's stock prices?
Of course not. If the supply of steel should be completely cut off, the market price of steel would skyrocket (assuming the government does not take steps to prevent "gouging" and "profiteering"). Because of this possibility, speculators today will buy and stockpile huge quantities of steel at the current low prices. (After all, even if the war never comes, they can simply resell the steel at its original price, losing only the costs of storage. Steel is not perishable like milk or tomatoes.)
But even if the claim held some water in theory, it still wouldn't apply to a free-trade situation between the UK and the US.
First of all, it's exceedingly unlikely that the UK could somehow overwhelm the US with cheap steel. Steel isn't a major export item for the UK. But even if the US could become reliant on UK steel somehow, once the US is the UK's biggest export market, what motivation would the UK have to start a war with the US? Would the UK then send its relatively tiny navy over the Atlantic to shell New York?
Protectionists like to accuse free traders of being "naïve" but the idea that the UK would use free trade with the US to make it London's geopolitical stooge should strike one as paranoia on a grand scale.
It is entirely possible, of course, that no protectionists actually believe free trade with the UK is a geopolitical problem. And if that's the case, then what reason can they give for not supporting immediate unilateral free trade with the UK?
We've already shown the usual claims made by protectionists don't apply. The UK won't suck jobs out of the US, and UK goods won't bring a wave of failed American businesses.
Similar to Trade Between US States Free trade with the UK would offer more business to American workers and American entrepreneurs. Indeed, free trade with the UK — even if one-way — would have effects similar to that of free trade between US states. Just as free trade between Idaho and California is beneficial for both states, so would be trade between the UK and, say, Massachusetts.
After all, it's a safe bet that California exports far more goods and services to Idaho — especially when measured in dollar amounts — than the other way around. Yet no one claims free trade with California "exploits Idahoans." It would, of course, not improve the Idaho economy were Idaho to begin charging its citizens a ten-percent tariff on items imported from California.
The fact there is a lopsided relationship here — more exports flowing one way than the other — is not an actual problem.
We ought to think of trade between US states and the UK in the same way.
Yes, it may take some time for the Brits to figure out that unilateral free trade with the US from their end would also be to their advantage. But that's of little concern since Americans would certainly benefit in the mean time.
Ever since the early days of Donald Trump's campaign, his immigration policy has been centered around spending big bucks on immigration enforcement. From his famous border wall to stepped-up federal deportation operations, few would describe Trump's policies as laissez-faire, and most involve increasing the size and scope of government.
But, there are other ways of addressing concerns around immigration, however, and they don't all require spending taxpayer money.
Here are four ways to improve immigration policy that don't make government any bigger or more intrusive in our lives:
One: Free Trade, Always One of the oddest and most counter-productive positions often taken by anti-immigration activists is opposition to free trade.
What these economic nationalists fail to realize is that free trade, which increases prosperity for all countries involved, helps to reduce the incentive for migration in the first place.
The economic benefits of free trade are apparent. Countries that liberalize their trade grow richer — and countries that restrict their trade impoverish their citizens.
But there are sociological benefits to free trade as well. By engaging in trade, persons and communities can gain access to the capital, products, and services offered by others in other nations. In the context of US-Mexico relations, for example, this means that Mexican workers and consumers can benefit from Americans capital and entrepreneurial know-how without having to uproot their lives, move far away from family, and learn a new culture.
In the context of foreign relations, free-trade advocates have long noted that if "goods don't cross borders, armies will." This is all the more true in the context of migration: "if goods and services don't cross borders, migrants will." And a wall won't be enough to stop it.
Unfortunately, many opponents of immigration don't understand how trade works, and think it's a zero-sum game in which one side gains at the expense of the other. Even worse, when opponents of immigration and trade succeed in their efforts to punish and prohibit trade, they succeed only in impoverishing all parties involved, while also creating the impetus for even greater flows of migration in the future.
See also:
"If You Don't Like Immigration, You Should Love Free Trade""The Case for Free Trade"Two: Restrict Welfare ProgramsLast week, The Washington Post reported the Trump administration was planning changes to immigration policies which would penalize immigrants that receive government-funded benefits:
Current rules penalize immigrants who receive cash welfare payments, considering them a “public charge.” But the proposed changes from the Department of Homeland Security would widen the government’s definition of benefits to include the widely used Earned Income Tax Credit as well as health insurance subsidies and other “non-cash public benefits.”
Given that a sizable portion of taxpayer-funded benefits come in the form of non-cash benefits in the United States, this is a significant change. It's also important to note that this is for legal immigrants, and not for illegal immigrants who are already technically barred from receiving most benefits.
For legal immigrants collecting both cash and non-cash benefits, the proposed changes means welfare recipients will have a harder time maintaining legal residency in the US.
Advocates for more immigration often point out that the proportion of immigrants that receive government benefits is not higher than the native-born population. That's fair enough, but why subsidize immigrants at all?
The Trump policy could be improved, though, by providing a way for immigrants to simply opt out of all government welfare programs. Moreover, any potential migrant who does agree to renounce all government benefits should be fast tracked to legal residency. Similarly, private families, firms, and non-profits groups need the flexibility to "sponsor" immigrants, and to guarantee that the immigrants in question will not collect government benefits.
See also:
"Switzerland Bans Welfare Recipients From Obtaining Citizenship.""Private Sponsorship of Immigrants Is a Viable Alternative""A Private Solution to the Syrian Refugee Crisis"Three: Don't Confuse Citizenship with ImmigrationOne problematic aspect of the immigration debate is that it is often assumed that legal residents must also become citizens quickly.
This is a bad assumption, and it does not follow that, just because a person lives in a country, that he or she must also be granted citizenship in that country. After all, citizenship is not a "right" in the way private property is, but is a type of administrative status that allows a person to more greatly influence the political system. Citizens, of course, can legally vote.
Lessening this connection between residency and citizenship would also lessen political pressure to use the power of the state to further curtail migration of workers. After all, much of the fear behind mass-migration situations — both in the US and elsewhere — stems from the fact that native-born residents realize it is exceptionally easy in many cases for new residents of the obtain citizenship — and thus voting rights. For most legal immigrants in the US, for example, five years of residency is all that is required. In some cases, such as for immigrants married to citizens, only three years of residency is required.
Rather than seeking to expand citizenship, states ought to look to expand private property rights for migrants so that citizenship becomes largely irrelevant. Besides, a migrant who is secure in his employment and possessions has much less motivation to participate in the political process. As Ludwig von Mises noted in his own commentary on immigration, the more laissez-faire a political system is, the less relevant politics becomes to our daily lives.
See also:
"Immigrants Aren’t the Only Ones Who Shouldn’t Be Voting""For the Dreamers: No Deportation, No Citizenship" Four: Recognize that Government Enforcement Is a Mess When it comes to enforcing immigration laws and regulations, the US government acts with all the precision and competence it does in veterans' health care and mail delivery.
In what Lew Rockwell has called "the tragedy of immigration enforcement" federal immigration regulation often takes the form of federal agents raiding private businesses, seizing private property, and regulating private contracts between employers and employers. Agents also threaten entrepreneurs with draconian fines and jail terms.
The end result is the destruction of capital and a disincentive for employers to hire anyone. As Rockwell notes, this only encourages more criminality:
If mainstream employers are afraid of lifetime jail terms, they will not hire. And that leaves only marginal employers to pick up the slack. These include drug operations, fly-by-night underground businesses, gray markets, prostitution rings, and other things from the seedier side of life.
Or the result could be no employment at all, which means turning to crime itself. In other words, these efforts attempt to stop the best part of immigration and enhance the worst. For this we can thank the government.
Moreover, the immigration quotas set by federal policymakers are purely arbitrary numbers pulled out of the air. Federal planners have no idea what the correct number of immigrants is, or what kind of immigrants are best suited for the work force. Only private employers and entrepreneurs can know this.
Even worse are current efforts to implement "E-Verify" as an anti-immigration measure. As a sort of governmental "permission to live" database, E-Verify can be used to deny private-sector employment and housing to persons who don't receive the proper government "OK" for private contracts and transactions. Needless to say, the potential for abuse is alarming.
Increasing Federal power to centrally plan the activities of workers, employers, and others will bring with them all the downsides we've come to expect from government regulation.
See also:
"Only the Private Sector Can Determine the "Correct" Number of Immigrants" "E-Verify Threatens Us All" Ultimately, a good question to ask ourselves is whether or not a proposed immigration-related policy increases the power of the state, or shrinks it.
All too often, the assumed "answers" lie in more government spending, more government agents, more laws, more rules, and more regulation. In fact, there are numerous options that can be implemented in the process of lessening the power of the state. And that is a good thing in itself.
As the trade war between China and the United States heats up, some worry about a potential rise in Chinese nationalism which would then lead to protectionism. The Sino-American tension may stir up the patriotic sentiment of Chinese people, hence driving the Chinese government to close its door for world trade as well as foreign investment. However, I argue that Chinese nationalism is always guided by economic pragmatism. While Chinese nationalists celebrate for China’s list of tariffs against American soybeans, ginseng, cars, whiskey etc., and while they look much forward to fight off Western Imperialism, China does not has much bargaining power in this trade war. Losing the US as its trading partner would hamper the economic growth of the country. Hence, as a rational move, the Chinese government may channel the patriotism of the angry populace, and the public concern with the rise of Chinese nationalism/protectionism is unnecessary.
In the historian and sociological studies of Chinese nationalism, it is well established that the state and the populace share a different nationalistic understanding. In 2012, Chinese nationalists wrecked Japanese stores and car dealerships and boycotted Japanese cars because of the territorial dispute of Diaoyu/Senkaku Islands. Gustafsson (2014) investigated the patriotic sentiment of these nationalists and found that actually their destructive acts were condemned by the Chinese government. The state-controlled newspaper, China Youth Daily, criticized that it was necessary for the demonstrators to exercise ‘cool-headed restraint’ and ‘stay rational’. It further pinpointed, ‘sometimes there is only a single step between loving the country and harming the country’; a ‘healthy’ patriotism must not harm the Sino-Japanese friendship. The government then successfully softened the anti-Japanese sentiment of the nationalists. During that time, the government was seeking economic cooperation with Japan and such ‘patriotically’ hostile acts were not idealDetailed analyses can be found in Gustafsson, K. (2014). Is patriotism distinct from nationalism? The meaning of ‘patriotism’ in China in the 2000s.Sweden: Centre for East and South-East Asian Studies, Lund University.. Not only Gustafsson, in general researchers in the field have agreed that Chinese nationalism is rational and pragmatic, that it would not sacrifice the materialistic interest of China for the symbolic ‘national pride’/‘national emotion’Economic pragmatism has been identified as one of the major characteristics of Chinese nationalism, which involves elements of Marxism. More discussions can be found in Zheng, Y. (1999). Discovering Chinese nationalism in China: Modernization, identity, and international relations. Cambridge: Cambridge University Press.. By definition, pragmatism is behavior disciplined neither by a set of values or established principles, but the actual benefits and needs (Zhao, 2004)The definition comes from Zhang, S. (2004). A Nation-state by Construction: Dynamics of Modern Chinese Nationalism. Stanford: Stanford University Press..
On top of the rational character of Chinese nationalism, China is more vulnerable to the trade war than it admits.
First, China has fewer goods to tariff than the US does. Trump started the trade war not because he is a crazy man but because he is a businessman. The trade war is expected to increase the freedom of the Chinese market. More precisely, in my understanding, it is a combat to minimize the trade deficit between China and the US. Therefore, as a matter of fact, China does not have an import value from the US that is comparable to the US import value from China. In 2016, the US good trade with China totaled US$578.2 billion. The US goods export to China were US$115.6 billion while China’s goods export to the US were $462.6 billionThe numbers come from the Office of the United States Trade Representative. Available at https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china. Of no surprise, fighting back with an equal size of trade value is an unavailable option to China.
Second, China needs American goods more than the US needs Chinese goods. If we look at the lists of tariffed items of the two countries in details, we can see that China mainly taxes agricultural and food goods as well as manufactured goods which require no advanced tech for production, while the US taxes metals, machinery, agricultural equipment, and tech goods. The US is tariffing the goods that China has yet known how to make, and this is disastrous to the development of electronic and tech industry of China. For instance, when American tech companies were banned from selling semiconductors to the Chinese telecom giant ZTE; the market now expects ZTE to bankrupt in daysA news report on the potential bankruptcy of ZTE is available at https://www.forbes.com/sites/jeanbaptiste/2018/04/17/how-the-u-s-export-ban-effectively-bankrupts-chinas-telecom-giant-zte/#4721950f720c. The American developers such as Qualcomm, Intel etc. are truly on the top of the tech game, and we all know the ‘made-in-China’ stuff often involves copying and even stealing the tech of others. Unfortunately, the manufacturing and service sectors always need the support of the electronics and tech for growth; so, the trade war would limit the economic prospect of China. On the contrary, the impact of China’s tariffs on American goods is moderate. Take soybean as an example: When China announced a tariff on American soybeans, the price of the beans immediately went down. However, the beans then became cheaper than that offered by Brazil, the biggest soybean exporter in the world; so buyers turned from Brazil to the US. The price and transaction volume of American soybeans were scooped up again A news report on the change in price of American soybean is available at https://finance.yahoo.com/news/u-china-trade-tariff-barbs-120814218.html. In short, the global electronics and tech market is an oligarchy but the global agricultural/manufacturing market is close to complete competition. As the two superpowers are competing in different markets, they are not battling on an equal ground.
One may say—OK, China can still shame America by selling US treasury bonds. The problem is, after selling the bonds, what China would do with the money? China will probably buy RMB for domestic spending. Hence, the price of RMB will increase, and this is exactly what I would like to see if I were Trump. If RMB becomes more expensive, the trade deficit will decrease.
Hence, no matter China ‘avenges’ with trade or bond, the US still wins. After all, paradoxically, Trump started the trade war for facilitating free trade with China. The tariffs are a temporary measure in a long game for the ‘greater good’ of the free market. Above all, the seemingly strong attitude of China in face of the trade war challenge can be considered as a necessary political gesture. A trade war is not only about economics but politics—China has to present to its people that their government and country are unbreakable and proud. In my view, patriotism is unlikely to take over China’s determination for modernization and prosperity as economic pragmatism is elementary of Chinese nationalism. Under-table negotiations between the two world powers can be expected.
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries.
Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each state of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by inefficient, high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa. Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by inefficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, interstate tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum wage law is to impose a protectionist device against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R,NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms (and the workers struck by unemployment) hardest hit by an increased minimum wage will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe." If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose-fortunately not fulfilled-to prohibit all "imports" from outside of Detroit, and citizens were exhorted to "buy only Detroit." If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e. "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade-such as protectionism-cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
Excerpted from Protectionism and the Destruction of Prosperity, Published in The Free Market Reader
As long as I've known him, my father has always been the entrepreneurial type. Even now, in his seventies, he picks up side jobs both to keep busy and to have a little extra spending money.
Throughout my childhood and youth, he had always been an independent insurance broker and salesman. He often employed one or two people to help with the phones and the paperwork. But also often just worked alone.
Growing up, the idea of going to work for a big company for 30 or 40 years, and then retiring to a golf course or rocking chair somewhere, was something completely alien to me. People my age nowadays mostly expect to work full time until age 75 or more. We can forget about pensions and Social Security. But even when a multi-decade retirement seemed like a viable option in the old days, that wasn't something to aspire to in my house.
In short, Dad has always been part of a small minority group in America: people who make their living from running their own business. It is estimated that only about 10 percent of Americans actually make their living from businesses they own. The numbers are higher if we look at people who have some small-business income on the side. But when we're talking about people whose main source of income is their own business, the numbers are smaller.
Not surprisingly, people who are in this minority group have a different way of looking at the world.
For them, there's no boss or manager to complain about when your income isn't as high as you like. If there's not enough money to make payroll at the end of the month, business owners stare failure in the face, and they know they may even be taking some other families down with them. Ultimately, the most important question is always this: How can I get more customers to voluntarily give me their money? A failure to answer this question leads to the failure of one's business.
This may seem like a very simple observation, but for those who are daily forced to ask the question, it leads to a world view that can be quite distinct from millions of other workers who work for wages.
Thinking back on things Dad taught me about business — whether explicitly or by accident — there are three main lessons I was able to learn:
One: Increasing Income Requires More than Just Raising Prices Business owners hate to raise prices. After all, raising prices alienates customers and annoys them. Higher prices mean fewer sales. Sticker shock may be unpleasant for the customer, but it's often even worse for the business owner — who wants to make the sale just as much as the customer wants the product or service.
So how to avoid raising prices? The answer lies in lowering costs of doing business. A business owner can lower costs by finding ways to more cheaply produce the goods and services one sells for a living. This can include finding a cheaper office to lease, or finding lower-cost labor. It might mean finding less expensive delivery trucks or a less expensive healthcare plan for employees.
In the end, if these costs can be brought down, the business owner may be able to lower his prices and out-compete his competition. This will lead to more sales, and higher incomes. Lower costs mean higher net revenues. It also means he can deliver more goods and services to his customers — which enriches everyone.
Some wage earners, of course, often take a different view. For them, getting a higher income often just means hanging around long enough to get a higher salary through seniority. Or they might advocate for a "raise" through government mandated increases on health care spending, or mandated family leave, or a minimum wage.
The larger effects of these latter "strategies," of course, are unemployment and lower real incomes. But wage earners who think they benefit from intervention don't see it this way.
Two: Politicians Only Drive Up Costs This brings us to another important lesson one can learn from business owners: "the government won't help you."
Oh sure, government can help in the very short term if one can convince lawmakers to pass laws that help one's specific business or industry. But such laws don't exist in isolation. Those same legislators are also busy passing laws that benefit the competition and hurt profitability in other ways.
Given the rapid spread of costly government regulations against business in recent years, it's a safe bet that the overall effect of lobbying government for "favors," won't end well.
Overall, government intervention have the result of driving up costs. And then we're back having to raise prices again.
Thanks to labor regulations, environmental regulations, alleged "consumer protection" laws, taxes, tariffs, and a host of other government interventions, business owners are faced with constant upward pressure on the cost of doing business. This leads to declining net revenues, and declining income. It means being able to hire fewer people, and it means less profit available to re-invest in the business.
Wage earners enamored with government intervention, on the other hand, don't care about keeping costs down. They want higher prices — at least for the goods and services in their industry. This is why they like tariffs, immigration controls, and minimum wages. In truth, of course, all of these things just drive up the cost of doing business, leading to fewer hires, and putting downward pressure on wages. But all many wage earners see is the "protection" they receive from an immigration mandate or a higher tariff.
When the government raises tariffs on, say, steel, this raises the prices of delivery vehicles that a business owner must buy to run his business. This means less business growth and fewer hires. The wage earner who favors government intervention, on the other hand, only sees fewer steel imports and more local steel production. "We've saved jobs," the wage earner then says. "Score one for the working man!" In truth, the "working man" now has fewer jobs to choose from overall.
Similarly, our interventionist wage earner doesn't want any new migrant labor to enter the country. As far as they're concerned, there's no need for it. Workers have a tendency to overestimate their own value, and think "those business owners don't need any migrant labor. We're doing a wonderful job!" Many business owners would beg to differ, of course. Many wage earners like to console themselves with a myth that business owners like migrants because they'll work for below-market wages. This is not the case. The fact is that many business owners like migrant labor because they're better workers. After all, many of the native workers can't even pass a drug test.
Again, at the heart of it all is the question business owners must ask themselves daily: how can I convince the customer to voluntarily give me his money?
The focus is on the customer and the public at large, and on contributing to society by delivering a good or service at a price people want. The business owner can't afford to wait around until the locally-born workers sober up enough to become efficient workers. He can't afford to pay more for steel-based products because steel workers can't be bothered with learning skills that are more in-demand.
But tariffs, and immigration controls, and so-called "pro-labor" legislation forces this on the business owners. His customers, however, don't care. They want the same products at the same prices. Or lower ones. The business owner then finds himself constantly trapped between the government's efforts to drive up wages and the cost of doing business — and the demands of the customer.
The business owner, naturally, just wants to please the customer. But governments make this harder every step of the way.
Three: The World Is Changing All the Time And this brings us to the last lesson Dad taught me: "the world is changing all the time, and you'd better figure out how to deal with the change."
For many workers, of course, an ideal employment situation looks something like this: learn some skills, find a nice employer to work for, and then do the same thing for a few decades. Then retire. Maybe in the past some workers even managed to do this.
But it's not the Old Days anymore, and this model of employment simply doesn't work. The worker must be entrepreneurial minded. He must ask himself: how can I deliver something to the customer in a way that makes me valuable?
Moreover, producing value as a worker might be inconvenient. One might have to move to another city to make a living. After all, there's no such thing as a "right" to an employer within a 20-minute commute of where one already lives. If one worked in the West Virginia coal mines for many years — but now the coal mines have become unprofitable thanks to cheap oil and natural gas — it's time to move on. Sitting around and popping painkillers won't solve the problem.
Yes, moving around to find work can be extremely unpleasant. Residential mobility has its downside. But so does poverty and unemployment.
It would be nice if we could return to a time — one that almost certainly never existed — when earning a living required little more than just showing up. But that world has definitely never existed for business owners and entrepreneurs. They've long understood that driving up the cost of living in order to pander to certain groups of wage earners has never made America "great." Unfortunately, these entrepreneurs are very much in the minority, and thus democracy is not on their side.
The increasingly erratic trade tensions between the United States and China does not appear to be ending anytime soon. The US president affirms that the deficit in the current-account between the two countries will soon come to an end and attributes the deficit to the Chinese competing unfairly.
Along these lines, supposedly private conversations that have been leaked in recent months suggest that Xi Jinping’s government has a plan, consistent with Trump’s rhetoric, to reallocate the composition and flow of transactions of goods, services, and other components that make up the trade balance between the two countries by the year 2024.
The trade war sent global equities to the steepest losses of the year and just got a lot bigger after both sides announced more tariffs. This exchange of “fire” wiped out more than $1 trillion from stock values this weekThis paragraph was added on May 14..
The obvious question is whether China possesses the flexibility for an undertaking of this magnitude. Apart from the fact that China’s trade surplus with the world is decreasing and the trade surplus with the United States is increasing (according to both countries’ accounting), there is a corporate-debt bomb and a real estate pricing bubble in China. As if that were not enough, the US federal budget deficit for the 2020 fiscal year is $1.1 trillion.The 2020 fiscal year runs from October 1, 2019, to September 30, 2020. The deficit reflects that US government spending reached $4.7 trillion and revenues totaled $3.6 trillion. This is 1 percent more than the deficit of the previous period.
This amounts to an unfavorable situation in which ever-increasing public debt in both economies and a fruitless exchange of rhetoric between leaders have done nothing but inject a dose of volatility into financial markets. This exchange has also given the impression that the two leaders are ignoring the accounting principles of the accounts that make up a country’s balance of payments.
Why Does a Trade Deficit Matter So Much? A trade deficit is simply an accounting expression that reflects that a country imports more than it exports—nothing more. The opposite is a surplus. Later on, we will analyze the components of the current account and briefly discuss the capital account to explain why surpluses and deficits reflect only the different positions of participants in the global economy. Participants can be either creditors or debtors. Being a creditor does not imply economic growth, nor does being a debtor imply economic contraction.
According to the United States, the US trade deficit with China is $382 billion.This figure is the amount accumulated in the first eleven months of 2018, updated at the beginning of February according to data from the Department of Commerce. To put this in context, this deficit is almost five times greater than the United States’ second-largest deficit, which is with Mexico.
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Source: Prepared by the author with data from the US Census Bureau Although Trump emphasized his “desire” to reduce the trade gap with China in his 2019 State of the Union speech, it does not seem that it will shrink in the short term. It increased 10.9 percent in the first eleven months of 2018 compared with the same period in 2017 ($37.6 billion in total). During the first year of the Trump administration (2017), the deficit increased by $28.6 billion—a record amount and especially striking if compared with the $20.3 billion reduction in the gap in 2016. The annual deficit has almost doubled since 2011. However, this figure does not include data from December 2018, which the Department of Commerce has yet to publish.
The question is how to correct the deficit. There are two options for China, neither of which is viable in the short term. One is less senseless than the other. The first option is for China to increase imports from the US by a factor of almost three on the condition that the flow of exports remains constant. The second is to increase the imports even more so that exports can continue at the current growth rate.
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Source: Prepared by the author with data from the US Census Bureau Chinese sources claim China has promised $600 billion in annual imports from the US in 2024. This figure is not trivial and reversing a trend that has lasted years is not a simple matter. The previous graph demonstrates how volatile the movement of the current account’s components can be from month to month, particularly with a trade war that affects the timetable and quantity of imports and exports between both nations.
Although the increase in imports is technically possible, the level of implicit sacrifices renders the proposal less feasible. If we closely analyze the most recent public data, it is evident that the US deficit is reaching historic proportions. Small contractions in the trade deficit are due to mere seasonal situations. The imposition of tariffs on imported washing machines and solar panels in January of last year was the first evidence that China’s dominance over the global supply chain is a problem for President Trump’s agenda.It is important to note that the majority of imports to the US of these durable consumer goods did not come from (nor do they currently come from) China.
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Source: Prepared by the author with data from the US Census Bureau This was only the prelude to the approval of a new tax on March 9 of last year, this time on steel and aluminum coming from any countryChina included., days after the deficit began to expand at a fast pace. On March 23, 2018, China responded with a tax on $3 billion of US imports including fruit, wine, dried fruit, and pork; later, on April 4 it introduced an additional 25 percent to the existing tax on 106 imported US products (soy, automobiles, chemical compounds, aircraft, and others). Besides, Beijing had offered only days earlier to cut the bilateral trade deficit by $50 billion. The reality is that China has a much narrower negotiating margin than the United States.
Figures in Context and Trade Instability The possibility of new sanctions and the general uncertainty surrounding Trump’s apparently erratic decisions are affecting the negotiating climate of both countries. This is most striking in China. The general level of revenues from consumption taxes rapidly deteriorated throughout 2018. In November, they reached a historic low of 17 billion yuan ($2.5 billion).
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Source: Prepared by the author with data from Bloomberg Of course, not all of this is due to Trump. Other factors have contributed to the trends. For example, China’s household savings rate peaked in 2018, at a remarkable 31.8 percent.
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Source: Prepared by the author with data from Bloomberg China has a trade surplus with the world. The Asian country reported a surplus with the US of approximately $93 billion less than what the US has reported. Although the Chinese surplus is growing in both reports, it has contracted slightly since the end of the first quarter of 2018. It does not seem that this practice of ceding to Trump’s geopolitical pressure is likely to last long, as it undermines the Chinese growth policy of promoting exports. It ignores the premise of comparative advantage in the production of goods and the provision of services, repatriation of income, and the trend of both countries regarding unilateral transfers.
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Source: Prepared by the author with data from Bloomberg and the US Census Bureau The reality is that US consumers and companies continue purchasing Chinese goods; in fact, US imports grew by 7 percent in the first eleven months of 2018 compared to the same period in 2017. The pressure in the markets has also led to an accumulation of inventories, which in turn is another cause of increases in purchases from China.
China’s Current-Account Balance We can examine China’s current account (which, along with the capital account, forms a country’s balance of payments) to form a more accurate idea of the country’s economic activity in its industries and capital markets. The current account is defined as net exports plus the sum of net income and net current transfers.
The current account includes four basic components: goods, services, returns on capital, and current transfers. The first two elements usually command almost all of the attention in discussions of the state of this account, but the other two components deserve the same consideration if we want to understand where the trade deficits or surpluses come from and how they are related to direct foreign investment and other forms of investment from abroad, which are recorded in the capital account.
A country’s return on capital is its incoming flows (credits) and outgoing flows (debits) in the form of dividend payments, salaries, direct investments, and other forms of investment. The reality is that although this topic has been absent from the zigzagging speeches of the US president, the yields on capital investments are as important as transactions of goods and services (the trade balance) because they are real resources that are transferred from one country to another.
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Source: Prepared by the author with data from Bloomberg Analyzing these components is key to understanding why, in practice, the current account is not equal to zero. Surpluses and deficits do not by definition imply that a country is doing well or not, despite what Trump and those who echo his mercantilist rhetoric may argue. An analysis of the Chinese current account only suggests that in the years prior to the 2008 crisis, the Asian country was strengthening its position as a net creditor to the rest of the world. China, in effect, provided an abundance of resources and accumulated a large amount of accounts receivable.
China and Its Attempt to Open Itself to the World Trump also seems to forget that China has financed a large part of the US deficit. China’s current account has continued to approach zero since 2015, so it has stopped strengthening its position as creditor to the rest of the world. The fact that the current account is approaching zero can be explained by the continuous increases of foreign investment in China, which are recorded in the capital account.
The capital balance includes foreign investment, both direct and indirect incoming and outgoing financing. The fruits of this invested capital are the repatriation of capital gains, which are accounted for in the primary balance of the current account. China’s famous deficit in the current account in the first quarter of 2018 was due more to a fall in the level of exports of goods ($51.7 billion) compared to the same period in the previous year ($82.31 billion) than to the repatriation of capital (−$9.7 billion in Q1 in 2018 and −$400 million in Q1 of 2017).
However, the Chinese congress recently approved a law to promote foreign investment, which will take effect, in theory, on January 1, 2020. It will guarantee an adequate economic environment for attracting foreign capital.
The other main reason for the end of China’s positive current-account balance is the decline in its stock of foreign currency reserves. The reasons are varied, ranging from the expectation of greater outflows of capital to the depreciation of the yuan. In 2018, the volume of reserves fell many times. However, none were especially significant (the largest was a fall of $22.69 billion in September, according to the People’s Bank of China). The outflows are relatively small, especially if you consider that the total volume of reserves of the Asian giant ($3.09 trillion in March 2019) is the largest in the world and that the general level of reserves has remained relatively stable since the last quarter of 2015.
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Source: Prepared by the author with data from Bloomberg Approximately one-fifth of total US imports come from China. The US deficit has widened in aerospace technology and electronic products. Purchases of these capital goods increased by almost $6 billion during the first eleven months of 2018, reaching a total of $160.1 billion. This phenomenon has been one of Trump’s arguments when talking about an “assault on American technology and IP,” in addition to other ruminations that are improper for a position that demands ever more diplomacy and restraint in all forms.
Conclusion If China wants to reverse the natural commercial order of a balance of payments that reflects the perspicacity of thousands of entrepreneurs, it will have to not only divert its purchases from other countries, but also assume the risk of becoming a captive to US producers. For example, it will have to reallocate almost the entirety of the $160 billion that the US imports in petroleum or the almost $80 billion in agricultural products (less than a quarter comes from the US). In addition, it will have to increase the purchase of aircrafts from the US ($16 billion) as well as industrial machinery, vehicles, grain, and seeds ($13 billion), among other items. Would China be inclined to compromise its growth rate by assigning greater importance to imports from the United States? Are US producers ready to confront this artificial reconfiguration of the allocation of scarce resources?
Originally published by UFM's Market Trends
Before coronavirus and impeachment, the Sino-American trade war stubbornly remained on the mainstream news circuit while largely governing the direction of financial markets. With each rumor of concession or tweet of condemnation, stocks gyrated and bonds jittered. Each round of negotiation was matched by salvos of tariffs, export controls, lawsuits, complaints, declarations, and threats. At its peak, the US imposed tariffs on $550 billion of Chinese imports while China retaliated with tariffs on $185 billion of U.S. goods.Dorcas Wong and Alexander Koty, “The U.S.-China Trade War: A Timeline,” China Briefing, Feb. 7, 2020, https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/.
With its early 2018 inception, many mainstream pundits and commentators agreed with President Trump that the trade war would be beneficial (or at least benign) and short (otherwise it would not be “easy to win”).Donald Trump (@realDonaldTrump), Twitter, Mar. 2, 2018. But the trade war, albeit in fits and starts, continued, escalated, and now largely sits in stalemate—despite the “Phase One” agreement—with no resolution clearly visible. Even with the recent reprieve, the trade war will likely continue for the foreseeable future with great risk to economies and financial markets.
Why Trump Will Likely Continue the Trade War Some argue that President Trump is actually in favor of free trade but wishes to renegotiate various trade treaties. That is, by embracing protectionist policies, free trade can later be broadened on more “appropriate” terms. For example, some of the stated NAFTA renegotiation objectives included the elimination of “unfair subsidies, market-distorting practices by state owned enterprises, and burdensome restrictions on intellectual property.”Office of the United States Trade Representative, Executive Office of the President, Summary of Objectives for the NAFTA Renegotiation, July 17, 2017, introduction, https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf. But this interpretation is contrary to significant evidence that indicts Trump as a devoted protectionist.
Trump’s overall political philosophy is revealed by his pre-presidential talk show confessions. The future president hit the talk show circuit extensively in the 1980s and 1990s, appearing on the shows of David Letterman, Oprah Winfrey, Phil Donahue, and Larry King. These interviews provide an insightful look into his core beliefs. Consistently, his most passionate commentary concerned foreign nations “taking advantage” of the US—either by failing to contribute more to their own national defense or by running significant trade surpluses (so, US trade deficits). In these interviews Trump usually directed his ire over trade surpluses at Japan given the time. Today the target is China.
Trump clearly views trade in a zero-sum, mercantilist manner, with the country possessing a deficit “losing” and “down.” In mid-2019, the president tweeted the following:
When a country…is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good…when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy.Donald Trump (@realDonaldTrump), Twitter, Mar. 2, 2018.
Four other facts buttress President Trump’s position as an ardent protectionist. First, protectionism is theoretically consistent with his immigration position. If one believes that immigrants take away American jobs, then logically one would also fear cheaper foreign goods which destroy the profitability of American companies—and by extension cost US workers their jobs.
Second, although the protectionist measures enacted so far have been focused on China, they have also, to a lesser extent, been levied against allies (e.g., Canada, Europe, etc.). This is why, when signing the new US-Mexico-Canada Agreement in January, President Trump noted that the agreement was “finally ending the NAFTA nightmare.”Jeff Mason and Andrea Shalal, “Trump Signs USMCA, ‘Ending the NAFTA Nightmare’; Key Democrats Not Invited,” Reuters, Jan. 29, 2020, https://www.reuters.com/article/us-usa-trade-usmca/trump-signs-usmca-ending-the-nafta-nightmare-key-democrats-not-invited-idUSKBN1ZS0I5.
Third, President Trump, almost immediately upon taking office, pulled out of the Trans-Pacific Partnership negotiations. While one could easily argue that this agreement actually hindered free trade given its excessively burdensome and complex rules and regulations, the rationale he gave for withdrawing was protectionist: the preservation of American manufacturing."Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement," Jan. 23, 2017, https://www.whitehouse.gov/presidential-actions/presidential-memorandum-regarding-withdrawal-united-states-trans-pacific-partnership-negotiations-agreement/.
Fourth, he has surrounded himself with advisors notorious for their protectionist policy advocacy. Most notable among them are economist Peter Navarro, who authored the book Death by China and Secretary of Commerce Wilbur Ross.
Today’s political climate only serves to facilitate Trump’s protectionist philosophy. In addition to this year’s election and the likely need to secure Rust Belt electoral votes, anti-China rhetoric and positioning are popular with both political parties and the deep state.
Why China May Wait for the 2020—or Perhaps 2024—Election As any future trade agreement will decrease free trade (at least compared to the pre–trade war environment), any likely agreement will be, by definition and on the whole, deleterious to both countries to the advantage of certain industries, businesses, and/or occupations (including political offices). China singularly understands the benefits of free trade and stands to lose its prosperity as well as to be burdened by any ancillary labor, intellectual property, or environmental provisions. It is in its interest to delay and forestall any agreement.
This strategy coincides nicely with two Chinese concepts: “saving face” and a “holistic” negotiating style. The concept of “face” refers, loosely, to the Sino-cultural understanding of respect, honor, and social standing. President Trump, with bombastic boasts and brash bargaining, only forces President Xi and the Chinese leadership into steadfast positions. It is culturally, and thus politically, difficult for any agreement that appears to be an American victory to have a bright prospect. This applies to both intraregime circles (leadership struggles) and to the government vis-à-vis the populace. The former is exacerbated by the pageantry and intrigue of next year’s communist party centenary. The latter is intensified by leadership’s keen sensitivity to Chinese society’s long-held belief in the “Mandate of Heaven” (the loss of which is frequently signaled by heaven through such natural disasters as epidemics—especially untimely given both the onset of coronavirus and the perception of an inept government response).
The holistic negotiating style, or zhengti guannian, is a well-known and often frustrating exercise for any Westerner having done business in China. As described in a Harvard Business Review article,
the Chinese think in terms of the whole while Americans think sequentially and individualistically, breaking up complex negotiation tasks into a series of smaller issues: price, quantity, warranty, delivery, and so forth. Chinese negotiators tend to talk about those issues all at once, skipping among them, and, from the Americans’ point of view, seemingly never settling anything.John Graham and Mark Lam, “The Chinese Negotiation,” Harvard Business Review, Oct. 1, 2003, https://hbr.org/2003/10/the-chinese-negotiation.
This concept has already manifested itself in the trade war; it is not uncommon for the US to believe an agreement has been reached only to be met by silence or denials from the Chinese.
Will the Trade War Cause a Recession? If the trade war escalates, can it directly cause a US economic recession? Many mainstream pundits, citing the infamous Smoot-Hawley Act of 1930, warn as much (which is odd, especially since the Great Depression was well underway before it was enacted, let alone took effect).
But tariffs may indirectly cause a recession. Since recessions are caused by malinvestment (investments unjustified by the natural interest rate) encouraged by artificially suppressed interest rates, rising rates may expose this malinvestment and force its liquidation (e.g., business closures, layoffs, bankruptcies, etc.)—also known as a recession.
Currently, US Treasury debt held by China approximates $1.1 trillion.Treasury International Capital (TIC) System, US Department of the Treasury, Feb. 17, 2020, https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx. Curtailing future purchases and/or programmatically selling these holdings may increase interest rates dramatically (above what they would otherwise be, all things being equal). Many pundits assert the unlikelihood of this, noting that such sales would decrease bond prices and thus the value of China’s own US Treasury holdings. But the impact on US interest rates does not need to come from a wholesale “liquidation” by China; rather, since all prices are determined at the margin, decreased demand or increased supply (sales) from China, even if seemingly insignificant, may raise rates.
If the trade war turns to financial warfare tactics, both sides are more likely to receive recession than resolution.
The false notion that the US has eliminated virtually all of its barriers to foreign imports has been repeated more and more in recent years. The claim is made both by advocates for free trade and by its critics. For instance, Patrick Buchanan has claimed that only American elites "are beneficiaries to free trade," implying that the US either has free trade or something close to it. Rather than insulate US companies from global competition, Buchanan insists, the US practices "globalism" and has all but erased the US border when it comes to foreign goods.
Meanwhile, in many articles on tariffs, readers may encounter a graph like this one, which suggests that trade barriers have almost vanished:
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But things are not nearly as free as they seem. Indeed, the idea that the United States embraces unconditional free trade—while being victimized by foreign protectionists—is based largely on fantasy.
Nevertheless, a common narrative persists in which protectionism disappeared in the US thanks to a bipartisan consensus in favor of free trade following the Second World War. In the olden days, the story goes, the US protected American workers with high tariffs rates, but now that tariffs are low jobs have been sucked out of the US by this near total absence of protectionism.
But tariffs and protectionism are not the same thing. Many researchers treat tariffs as a reliable proxy for protectionism, but the rising prevalence of nontariff barriers in recent decades suggests that looking only at tariffs is a mistake.
Although the US did indeed cut tariffs and other trade barriers—often unilaterally—during the 1940s, "enthusiasm for further tariff cuts waned after 1950. The U.S. government made limited tariff reductions in the four rounds that followed the inaugural GATT [the General Agreement on Tariffs and Trade] conference in 1947."Kerry Chase, Trading Blocs: States, Firms, and Regions in the World Economy (Ann Arbor, MI: University of Michigan Press, 2005), p. 110
Although it is true that tariffs did not significantly rise again in response to mounting opposition to lowered trade barriers, other forms of protectionism did. What were these nontariff barriers? They include a wide variety of policies that include, among others:
Subsidizing US industries so as to help them outcompete foreign goods.Requiring government procurement of domestic products only (known as "public procurement" policies).Placing quotas on imports."Rules of origin" preventing "transshipment" of goods from third parties through countries with "free trade" access."Sanitary and phytosanitary measures," which are controls on the importation of foods affected by substances such as beef hormones and "genetically modified organisms."Regulatory requirements on the production of foreign goods, including mandates on foreign wages, labor unions, and environmental regulations.Requirements for packaging, labeling, and product standards. Since the 1950s, these barriers have been increasingly used by the US government and other governments to reduce imports, and "[n]ontariff barriers [have] spread to substitute for the tariffs previously bargained away. Pressure began to surface for retaliation to punish trade partners for unfair trade barriers and unreciprocated tariff cuts. All of this was a prelude to the changes that would overtake U.S. trade policy in [the 1960s."Ibid., p. 110.
As political scientist Kerry Chase notes, by the 1980s "pillars of US trade policy crumbled," including "the commitment to trade liberalization, as pressure for nontariff barriers erupted in the 1970s."Ibid., p. 181.
These strategies were applied for the same reasons that tariffs were raised in the past: to protect domestic industries in response to pressure from constituents and lobbying groups. From the late 1960s to the late 1980s,
Domestic producers in certain vulnerable industries, particularly labor-intensive manufacturers, pushed for legislation against imports….Those domestic producers in favor of restricting trade were initially successful in reducing imports from a limited number of countries via quota-based agreements or voluntary export restraints (VERs)….These practices were gradually applied to other vulnerable industries, as well as to a broader set of countries. The effect was a significant loss of momentum in the reduction of trade barriers and an increase in trade barriers in certain areas.United States International Trade Commission, The Economic Effects of Significant U.S. Import Restraints (Washington, DC, 2009), pp. 70–71, https://www.usitc.gov/publications/332/pub4094.pdf.
Indeed, the total proportion of imports affected by nontariff measures increased from 25 percent in 1966 to 48 percent in 1986.United States International Trade Commission, The Economic Effects of Significant U.S. Import Restraints, p. 101. Data from Sam Laird and Alexander Yeats, “Nontariff Barriers of Developed Countries, 1966–86,” Finance & Development (March 1989).
By 1990, trade liberalization again began to gain ground, and this helped drive political support for the North American Free Trade Agreement (NAFTA), which went into effect in 1994.
Yet, it is doubtful that NAFTA approaches what can really be referred to as "free trade." Both NAFTA and its successor agreement USMCA include numerous nontariff barriers around rules of origin, labor requirements, and environmental regulations.
Since the financial crisis of 2008, many nations have embraced larger numbers of nontariff barriers as a means of increasing protectionism. The US has most certainly not been immune. In fact, in a ranking of regimes based on the implementation of new barriers since 2009, economists Erdal Yalcin, Gabriel Felbermayr, and Luisa Kinziusthe rank the US first:
The United States implemented by far the largest number of non-tariff barriers. With close to 800 non-tariff barriers the US government implemented twice as much protectionist policies as the Indian government, which ranks second.Erdal Yalcin, Gabriel Felbermayr, Luisa Kinzius, Hidden Protectionism: Non-Tariff Barriers and Implications for International Trade (Munich, Leibniz Institute for Economic Research, 2017), p. 13.
By this measure the US is indeed the "by far most protectionist country," and since 2009
The United States made extensive use of discriminatory state aid measures and subsidies as well as public procurement policies. It accounted for more than 70% of all worldwide implemented public procurement policies and about 25% of all subsidies and state aid barriers.Ibid., pp. 13–18
Among developed countries, tariffs now account for only a small amount of the trade barrier strategies employed by regimes. All of these new nontariff measures, of course, are piled on top of what nontariff barriers already remained from earlier periods of protectionism. Thus, through a complex system of mandates, rules of origin, domestic subsidies, anti-dumping laws, and other barriers, the US has erected a wide variety of impediments to trade that are significant for a wide variety of trade partners. (Yalcin, et al. suggest that were it not for its nontariff barriers the US would export $48 billion more in goods and import $74 billion more.)
Not surprisingly, comparisons with other countries' trade policies today does not reveal a United States that is a world leader in trade freedom. According to economist Agnieszka Gehringer:
The United States has the highest non-ad-valorem average duty rate of 8.7%, the third highest maximum duty rate of 350% and offers a duty-free rate only to a moderate share of its imports (45.9%, compared with 75.8% in Canada, 53% in Japan and 50.1% in Mexico)….The U.S. appears to be the most intensive user of non-tariff barriers in general and in their main categories….This is true when looking at the total count of measures applied and at the number of product lines…to which such measures apply.
Total Count and Number of Product Categories of Nontariff Barriers in Place at the End of December 2016
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Source: Agnieszka Gehringer, Flossbach von Storch Research Institute This strongly suggests that the picture of US trade policy often painted by protectionists—namely that the US naively pursues free trade at all costs and is thus victimized by more protectionist regimes—is highly inaccurate.
The US government employs a wide variety of trade controls, but it prefers tools other than tariffs. Thus, attempting to compare US trade policy with the policies of other regimes based solely on tariff rates is misleading at best.
Unfortunately, there is very limited information as to how trade policies across nations compare when both tariff and nontariff barriers are combined. This stems largely from the fact that nontariff barriers are extremely difficult to quantify. Tariffs, of course, are easy to observe and to compare across regimes. Nearly all governments compile and openly publish this information. Nontariff barriers, on the other hand, are extremely diverse and vary in their impact. There is not even agreement among researches as to which policies even constitute nontariff barriers.
This also means we are unable to answer a key question: given that tariff rates are not in themselves a complete picture of the nation's level of protectionism, how does protectionism in the United States today compare to protectionism in the past? Even granting that protectionism is less now than in the past, how much more liberal is trade policy today? This is a difficult question to answer.
While the US had haphazardly used nontariff barriers in the nineteenth century, they were nothing like what we encounter today in the enormous trade bureaucracy we now have. Moreover, we can't measure liberalization in terms of trade. Although there is no doubt that international trade has increased for most countries in recent decades, it remains unclear whether this is due primarily to liberalization or to many other factors that have been shown to increase international trade.Other factors beyond liberalization include higher rates of productivity in tradables, falling transport costs, regional trade associations, converging tastes, the shift from primary products toward manufacturing and services, and growing international liquidity. For more, see Andrew K. Rose, "Do We Really Know that the WTO Increases Trade?" (working paper, National Bureau of Economic Research (NBER) Working Paper Series, Cambridge, MA, October 2002), https://www.nber.org/papers/w9273.pdf. See also: "Why Has International Trade Increased So Much?," On the Economy (blog), Federal Reserve Bank of St. Louis, Apr. 27, 2015, https://www.stlouisfed.org/on-the-economy/2015/april/why-has-international-trade-increased-so-much.
Even if liberalization has been sizable, the fact remains that most protectionists greatly overstate the extent to which US import controls have been abolished. We cannot assume that increases in international trade and increased competitiveness for domestic US firms has been simply a function of liberalization. Nor can we accurately portray global US trade efforts as ones in which the US dogmatically embraces free trade. Yes, many tariff rates are now very low. But in many cases those low tariffs are contingent on meeting a large number of requirements imposed by US policymakers.
Those who fail to meet these requirements, of course, will see their goods refused at the border, or subject to much higher tariffs. Those on the American side of the border who trade with non-government-approved foreigners in a non-government-approved way will ultimately be subject to fines and imprisonment. This, of course, is the end game of all protectionists: enforcement requires that Americans be locked in cages for violating US trade law. And there are many trade laws indeed.
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Listen to the Audio Mises Wire version of this article. Since mid-March, the French people have been coping with one of the strictest lockdowns in Europe. Large gatherings have been banned, and schools, bars, restaurants, and all shops (except for grocery stores) have been closed. Only “essential” trips outside home are allowed, and most businesses and factories have shut down. The enforcement of rules has been heavy-handed: police made 13.5 million checks and issued more than eight hundred thousand fines in just the first month of confinement.
On April 13, President Macron announced a thirty-day prolongation of the lockdown, followed by a very gradual reopening of activity, subject to strict social distancing rules. As if this were not bad enough for a nose-diving economy,Real GDP is expected to shrink by about 8 percent and public debt to jump by about 15 percent of GDP this year. Macron also unveiled a stunning vision about the postcoronavirus world. In this new world, France would regain independence over its agriculture, industry, health, and technology sectors while reinventing itself ideologically. Thus, President Macron embraced the antiglobalist and protectionist agenda of the fast-rising populist parties. What may seem like just a shrewd political maneuver is actually a desperate attempt to save France’s inefficient welfare model at any cost.
Decades-Long Economic Decline Hampered by massive government intervention, the French economy has not been able to maintain a competitive edge in the euro area or in the world. The annual growth rate of GDP per capita has slowed to below 1 percent on average in the last two decades, lagging behind those of the US, Germany, and the euro area (Graph 1). This is a stark decline from average annual growth rates of 3 percent in the 1970s and 2 percent in the 1980s. As a parallel, labor productivity growth declined to about 0.5 percent in 2018, below German and US rates (OECD 2019), due to a sharp deceleration of both capital accumulation and technological progress (Graph 2).
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For the past twenty years, French living standards have risen more slowly than the euro area average, while high market inequality has been alleviated by hefty income redistribution (IMF 2019). Average wages fell further behind US and German levels (Graph 3) but were still growing above labor productivity (Graph 4). Given France’s dismal growth performance, the evolution of wages and incomes would have been even more sluggish if they had not been propped up by a steady increase in both public and private indebtedness. Since 1995, France’s total debt has increased by a whopping 150 percent of GDP to reach a historic high of about 365 percent of GDP in 2018. The private sector originated about two-thirds of the increase and is now much more indebted than its counterparts in the US and Germany.
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Dwindling External Competitiveness The significant loss of export market share, deindustrialization, and relocation of companies is another sign of France’s economic woes. Due to the rise of China and other emerging markets, many advanced economies have lost global market share since the 1990s. Yet France’s export market share shrank more rapidly than those of many peer countries, most notably Germany (Graph 5). A large number of company relocations and increasing outward foreign direct investment (FDI, Graph 6) hampered capital accumulation and labor productivity.
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In order to afford to pay wages that are growing above productivity, both companies and the public sector became more and more indebted. The record low interest rates in the euro area made the debt accumulation look sustainable, but this debt spiral cannot continue ad infinitum. Prior to the euro, when France was inflating the money supply and prices relative to Germany, the French franc would depreciate versus the Deutsche mark, reducing the purchasing power of wages and other incomes in international terms. With a relatively strong euro, bolstered by more competitive euro area countries, this correction mechanism doesn’t function anymore. As a result, France’s current account moved into deficit and its external debt surged from 100 percent of GDP in 2004 to 180 percent of GDP in 2018.
Bloated Welfare State and Heavy Tax Burden Public spending grew relentlessly, from only 10 percent of GDP at the beginning of the twentieth century to 57 percent of GDP in 2019, the highest level among Organisation of Economic Co-operation and Development (OECD) countries (Graph 7). According to the International Monetary Fund (IMF), France has built a huge welfare state by spending about 24 percent of GDP on social payout programs (20 percent more than peersThe “peer country” group used by the IMF includes Finland, Germany, Italy, Sweden, and the United Kingdom.), due to very generous pensions, unemployment benefits, rent subsidies, and family and child allowances. France also spends about 8 percent of GDP on a practically fully socialized health sector (15 percent more than peers) and nearly 6 percent of GDP on education, again more than peers, but with less favorable outcomes. The very large sector of state-owned enterprises (SOEs) draws about 5 percent of GDP in budget support every year, 1.5 percentage points more than peers.
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France cannot collect enough revenues to cover its colossal amount of public spending despite a high level of taxation. The budget has been in a deficit since 1974, and public debt has increased fivefold, from 20 percent of GDP in 1980 to 100 percent of GDP in 2019 (Graph 8). The tax burden on businesses and labor remains substantial. At about 35 percent, France has the highest statutory corporate income tax rate in the OECD. Social contributions collected from employers are the highest in the EU at about 12 percent of GDP (OECD 2019). This fuels capital outflows and unemployment, reinforcing the vicious circle between anemic growth and debt accumulation.
Overregulation The government’s heavy intervention in the economy goes beyond the large public sector, which redistributes more than half of GDP. A myriad of rules and regulations encumber free initiative and employment. According to France’s ranking in the 2019 Global Competitiveness Index, domestic competition is restricted by the distortive taxes and subsidies and high entry barriers in the services sector. Relatively high nontariff barriers reduce foreign competition. Most important, labor market rigidity is very severe on account of costly layoffs, powerful trade unions, and a high minimum wage, which distort the pay-productivity ratio. In terms of labor taxation, France “achieved” the dubious honor of ranking last out of 141 countries. It is no surprise that the unemployment rate has stubbornly remained above 8 percent since the global financial crisis, whereas it dropped below 4 percent in the US and Germany.
Conclusions President Macron’s dilemma is understandable. For several decades the French economy has been entering a negative spiral of slowing growth and rapid accumulation of debt. The generous welfare model is even less sustainable in a globalized economy, and radical free market reforms are necessary to reignite growth. As social resistance to reforms has been unbreakable so far,The most recent example is the “Yellow Vest” street protests, which lasted from November 2018 until the lockdown. See Colleen de Bellefonds, "What Yellow Vests Reveal about France," US News and World Report (website), Dec. 7, 2018, https://www.usnews.com/news/best-countries/articles/2018-12-07/frances-yellow-vests-movement-reveals-countrys-growing-divisions. Macron seems poised to use the COVID-19 crisis to protect France’s sclerotic welfare model from international competition. At the same time he is also calling for debt mutualization in the euro area to reinflate the French debt bubble. But this new political and economic strategy is very likely to fail.
First, the French plans are incompatible with the current architecture of the European Union. The EU’s single market is built on the principle of businesses competing freely across the continent, limited state aid, and a common foreign trade policy. France would need to convince all the other EU members to turn protectionist, including the more competitive ones, which may be almost impossible. Similarly, the more thrifty members of the euro area are likely to oppose France’s call for debt mutualization. On the other hand, the “Green Deal,” which tops the political agenda in Europe and potentially involves a carbon tax on imports, may provide a tailwind for President Macron’s endeavors.
Second, autarky and debt monetization, reminiscent of France’s mercantilist and statist tradition, initiated by Colbert in the seventeenth century, will only accelerate the economic decline. As Rothbard argues reductio ad absurdum, protectionism can indeed ensure “self-sufficiency.” However this “sufficiency” comes at the cost of a lower standard of living attained with a higher labor input, because a hampered international division of labor reduces productivity. The unemployment problem could be alleviated and nominal wages could increase if most goods and services had to be produced domestically and the money were primarily used at home, in particular if an inflationary policy were also pursued, as France seems to favor. But prices would go up too, and real wages would plunge dramatically. Moreover, in the absence of international trade and social cooperation,
It would be almost inevitable for such an autistic world to be strongly marked by violence and perpetual war.Murray N. Rothbard, Man, Economy and State, with Power and Market, second scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2009), pp. 101 and 1103, https://mises.org/library/man-economy-and-state-power-and-market.
During the postcolonial period, most of the African countries which had opted for socialism as their economic system also adopted protectionism as an economic measure to favor certain politically preferred industries. Policymakers wanted to protect domestic industries from foreign competition through tariffs, subsidies, import quotas, or other restrictions or handicaps on the imports of foreign competitors. For example, today Tanzania is one of the top exporters of agricultural commodities in Africa. It mainly exports tobacco ($248.8 million), coffee ($181.6 million), and oilseeds ($230 million). Interestingly, those products are not primarily exported to other African countries. In fact, Switzerland is the main importer of Tanzanian agricultural commodities, purchasing 16.2 percent of Tanzanian agricultural production, and India is the second-largest importer of its goods. But Tanzania does not trade much with its African neighbors. As figure 1 shows, the country only trades with Kenya and South Africa, while the rest of the world is its customer. It has imposed higher tariffs and subsidies when trading with its neighbors but has loosened those same tariffs and subsidies on non-African countries. Despite the good intentions of protectionists, we find that their policies create two substantive conundrums in the economic development of a country.
Figure 1: Tanzania Major Export Destinations (2016)
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Source: Trading Economics. "Other" includes some African countries such as Rwanda and the Democratic Republic of the Congo (DRC), and Uganda, as well as the United States, many other Western countries, and Latin America. Protectionism harms domestic markets. A healthy domestic market relies on the freedom of consumers and entrepreneurs to choose the products they buy, whether for personal consumption or as inputs in their businesses. Protectionist policies limit this ability to choose. Since African protectionist policies are often based on quotas, consumers have very limited choice as to the quantity, quality, and type of products available to them than they would without trade protectionism. Moreover, tariffs and subsidies force a consumer to pay a higher price for a domestic product. Thus, the purchasing power of the African consumer is not as high as that of Western or Asian consumers. When trade protectionist policies are implemented upon domestic products, it compels the consumer to settle for low quality and pay more for a particular product. That is one of the reasons why African consumption is not adequate. Africans are constrained to consumption of lower-quality products that they purchase at a higher price. France, for example, sells its Peugeot automobile to many French-speaking countries, although many consumers consider Peugeots to be low-quality cars. However, because trade restrictions limit access to other choices in automobiles, many Africans end up purchasing these relatively low-quality cars at relatively high prices. This further contributes to the impoverishment of Africans. Protectionism also negatively affects the growth of new industries. In fact, the protection of an infant industry may actually end up costing a government a significant amount of money and financial resources and actually promotes inefficiencies within the new industry, which has no incentive to make efficient, intelligent long-term investments by borrowing funds or issuing common stock in domestic international capital markets.
Protectionism also creates poverty. Indeed, GDP output falls once tariffs rise because of a significant decrease in labor productivity. Income, in addition to being based on the availability of capital, depends on the productivity of labor. But growth in labor productivity requires growth in access to capital. When firms in the import-competing sectors receive protection, resources are reallocated within the economy to relatively unproductive uses. For example, when Kwame Nkrumah was the President of Ghana in the 1960s, he imposed tariffs and subsidies on the major Ghanaian industries. However, the president of the neighboring country Ivory Coast (Côte d'Ivoire) during that same period applied free trade policies to the major industries of the Ivorian economy. As we can observe in figure 2, income per capita significantly differed between Ghana and Ivory Coast. The application of free trade policies improved the living standard of the Ivorian people while the living standard of Ghanaians stagnated. Moreover, protectionism often leads to an increase in unemployment. Countries that close themselves off to foreign competition eventually lose their edge, along with innovation, jobs, and growth. This loss of touch with current world affairs leads to unemployment, and therefore to greater poverty.
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Source: World Bank, author’s computation How Free Trade Can Improve African Economies African countries can benefit from free trade by increasing their amount of or access to economic resources. The lowering of trade barriers helps small nations obtain the economic resources they need to produce consumer goods or services. It is here that the comparative advantage theory of David Ricardo becomes more relevant than ever. Ricardo over two centuries ago, in his pathbreaking book Principles of Political Economy and Taxation (1817), argued that comparative advantage exists where local industry can produce a product or service at a lower cost compared to elsewhere. This theory elucidates why a country might produce and export something its citizens don’t seem very skilled at producing when compared directly to the citizens of another wealthier country. The citizens of each country are better off specializing in the goods that they have a comparative advantage producing, even if one country has an absolute advantage in each item.
Over time, free trade will improve the efficiency of production in African economies, because trade enables producers to fill in the gaps in their production processes. That is, entrepreneurs and business owners can make their businesses more productive the more they have access to a full, global range of products and services. The acquisition of knowledge and skills will undeniably contribute to the amelioration of labor productivity and output efficiency. Higher labor productivity and output efficiency will logically reduce unemployment and therefore reduce poverty.
[From The Clash of Group Interests, and Other Essays, translated by Jane E. Sanders][The translator wishes to gratefully acknowledge the comments and suggestions of Professor John T. Sanders, Rochester Institute of Technology, and Professor David R. Henderson, University of Rochester, in the preparation of the translation.]
The nearly universal opinion expressed these days is that the economic crisis of recent years marks the end of capitalism. Capitalism allegedly has failed, has proven itself incapable of solving economic problems, and so mankind has no alternative, if it is to survive, than to make the transition to a planned economy, to socialism.
This is hardly a new idea. The socialists have always maintained that economic crises are the inevitable result of the capitalistic method of production and that there is no other means of eliminating economic crises than the transition to socialism. If these assertions are expressed more forcefully these days and evoke greater public response, it is not because the present crisis is greater or longer than its predecessors, but rather primarily because today public opinion is much more strongly influenced by socialist views than it was in previous decades.
I When there was no economic theory, the belief was that whoever had power and was determined to use it could accomplish anything. In the interest of their spiritual welfare and with a view toward their reward in Heaven, rulers were admonished by their priests to exercise moderation in their use of power. Also, it was not a question of what limits the inherent conditions of human life and production set for this power, but rather that they were considered boundless and omnipotent in the sphere of social affairs.
The foundation of social sciences, the work of a large number of great intellects, of whom David Hume and Adam Smith are most outstanding, has destroyed this conception. One discovered that social power was a spiritual one and not (as was supposed) a material and, in the rough sense of the word, a real one. And there was the recognition of a necessary coherence within market phenomena which power is unable to destroy. There was also a realization that something was operative in social affairs that the powerful could not influence and to which they had to accommodate themselves, just as they had to adjust to the laws of nature. In the history of human thought and science there is no greater discovery.
If one proceeds from this recognition of the laws of the market, economic theory shows just what kind of situation arises from the interference of force and power in market processes. The isolated intervention cannot reach the end the authorities strive for in enacting it and must result in consequences which are undesirable from the standpoint of the authorities. Even from the point of view of the authorities themselves the intervention is pointless and harmful. Proceeding from this perception, if one wants to arrange market activity according to the conclusions of scientific thought—and we give thought to these matters not only because we are seeking knowledge for its own sake, but also because we want to arrange our actions such that we can reach the goals we aspire to—one then comes unavoidably to a rejection of such interventions as superfluous, unnecessary, and harmful, a notion which characterizes the liberal teaching. It is not that liberalism wants to carry standards of value over into science; it wants to take from science a compass for market actions. Liberalism uses the results of scientific research in order to construct society in such a way that it will be able to realize as effectively as possible the purposes it is intended to realize. The politico-economic parties do not differ on the end result for which they strive but on the means they should employ to achieve their common goal. The liberals are of the opinion that private property in the means of production is the only way to create wealth for everyone, because they consider socialism impractical and because they believe that the system of interventionism (which according to the view of its advocates is between capitalism and socialism) cannot achieve its proponents' goals.
The liberal view has found bitter opposition. But the opponents of liberalism have not been successful in undermining its basic theory nor the practical application of this theory. They have not sought to defend themselves against the crushing criticism which the liberals have leveled against their plans by logical refutation; instead they have used evasions. The socialists considered themselves removed from this criticism, because Marxism has declared inquiry about the establishment and the efficacy of a socialist commonwealth heretical; they continued to cherish the socialist state of the future as heaven on earth, but refused to engage in a discussion of the details of their plan. The interventionists chose another path. They argued, on insufficient grounds, against the universal validity of economic theory. Not in a position to dispute economic theory logically, they could refer to nothing other than some "moral pathos," of which they spoke in the invitation to the founding meeting of the Vereins für Sozialpolitik [Association for Social Policy] in Eisenach. Against logic they set moralism, against theory emotional prejudice, against argument the reference to the will of the state.
Economic theory predicted the effects of interventionism and state and municipal socialism exactly as they happened. All the warnings were ignored. For fifty or sixty years the politics of European countries has been anticapitalist and antiliberal. More than forty years ago Sidney Webb (Lord Passfield) wrote: "it can now fairly be claimed that the socialist philosophy of to-day is but the conscious and explicit assertion of principles of social organization which have been already in great part unconsciously adopted. The economic history of the century is an almost continuous record of the progress of Socialism."Cf. Webb, Fabian Essays in Socialism….ed. by G. Bernard Shaw (American ed. edited by H.G. Wilshire. New York: The Humboldt Publishing Co., 1891), p. 4. That was at the beginning of this development and it was in England where liberalism was able for the longest time to hold off the anticapitalistic economic policies. Since then interventionist policies have made great strides. In general the view today is that we live in an age in which the "hampered economy" reigns—as the forerunner of the blessed socialist collective consciousness to come.
Now, because indeed that which economic theory predicted has happened, because the fruits of the anticapitalistic economic policies have come to light, a cry is heard from all sides: this is the decline of capitalism, the capitalistic system has failed!
Liberalism cannot be deemed responsible for any of the institutions which give today's economic policies their character. It was against the nationalization and the bringing under municipal control of projects which now show themselves to be catastrophes for the public sector and a source of filthy corruption; it was against the denial of protection for those willing to work and against placing state power at the disposal of the trade unions, against unemployment compensation, which has made unemployment a permanent and universal phenomenon, against social insurance, which has made those insured into grumblers, malingers, and neurasthenics, against tariffs (and thereby implicitly against cartels), against the limitation of freedom to live, to travel, or study where one likes, against excessive taxation and against inflation, against armaments, against colonial acquisitions, against the oppression of minorities, against imperialism and against war. It put up stubborn resistance against the politics of capital consumption. And liberalism did not create the armed party troops who are just waiting for the convenient opportunity to start a civil war.
II The line of argument that leads to blaming capitalism for at least some of these things is based on the notion that entrepreneurs and capitalists are no longer liberal but interventionist and statist. The fact is correct, but the conclusions people want to draw from it are wrong-headed. These deductions stem from the entirely untenable Marxist view that entrepreneurs and capitalists protected their special class interests through liberalism during the time when capitalism flourished but now, in the late and declining period of capitalism, protect them through interventionism. This is supposed to be proof that the "hampered economy" of interventionism is the historically necessary economics of the phase of capitalism in which we find ourselves today. But the concept of classical political economy and of liberalism as the ideology (in the Marxist sense of the word) of the bourgeoisie is one of the many distorted techniques of Marxism. If entrepreneurs and capitalists were liberal thinkers around 1800 in England and interventionist, statist, and socialist thinkers around 1930 in Germany, the reason is that entrepreneurs and capitalists were also captivated by the prevailing ideas of the times. In 1800 no less than in 1930 entrepreneurs had special interests which were protected by interventionism and hurt by liberalism.
Today the great entrepreneurs are often cited as "economic leaders." Capitalistic society knows no "economic leaders." Therein lies the characteristic difference between socialist economies on the one hand and capitalist economies on the other hand: in the latter, the entrepreneurs and the owners of the means of production follow no leadership save that of the market. The custom of citing initiators of great enterprises as economic leaders already gives some indication that these days it is not usually the case that one reaches these positions by economic successes but rather by other means.
In the interventionist state it is no longer of crucial importance for the success of an enterprise that operations be run in such a way that the needs of the consumer are satisfied in the best and least expensive way; it is much more important that one has "good relations" with the controlling political factions, that the interventions redound to the advantage and not the disadvantage of the enterprise. A few more Marks' worth of tariff-protection for the output of the enterprise, a few Marks less tariff-protection for the inputs in the manufacturing process can help the enterprise more than the greatest prudence in the conduct of operations. An enterprise may be well run, but it will go under if it does not know how to protect its interests in the arrangement of tariff rates, in the wage negotiations before arbitration boards, and in governing bodies of cartels. It is much more important to have "connections" than to produce well and cheaply. Consequently the men who reach the top of such enterprises are not those who know how to organize operations and give production a direction which the market situation demands, but rather men who are in good standing both "above" and "below," men who know how to get along with the press and with all political parties, especially with the radicals, such that their dealings cause no offense. This is that class of general directors who deal more with federal dignitaries and party leaders than with those from whom they buy or to whom they sell.
Because many ventures depend on political favors, those who undertake such ventures must repay the politicians with favors. There has been no big venture in recent years which has not had to expend considerable sums for transactions which from the outset were clearly unprofitable but which, despite expected losses, had to be concluded for political reasons. This is not to mention contributions to non-business concerns—election funds, public welfare institutions and the like.
Powers working toward the independence of the directors of the large banks, industrial concerns, and joint-stock companies from the stockholders are asserting themselves more strongly. This politically expedited "tendency for big businesses to socialize themselves," that is, for letting interests other than the regard "for the highest possible yield for the stockholders" determine the management of the ventures, has been greeted by statist writers as a sign that we have already vanquished capitalism.Cf. Keynes, "The End of Laisser-Faire," 1926, see, Essays in Persuasion (New York: W.W. Norton & Co., Inc., 1932), pp. 314–15. In the course of the reform of German stock rights, even legal efforts have already been made to put the interest and well-being of the entrepreneur, namely "his economic, legal, and social self-worth and lasting value and his independence from the changing majority of changing stockholders,"Cf. Passow, Der Strukturwandel der Aktiengesellcschaft im Lichte der Wirtschaftsenquente, (Jena 1939), S. 4. above those of the shareholder.
With the influence of the state behind them and supported by a thoroughly interventionist public opinion, the leaders of big enterprises today feel so strong in relation to the stockholders that they believe they need not take their interests into account. In their conduct of the businesses of society in those countries in which statism has most strongly come to rule—for example in the successor states of the old Austro-Hungarian Empire—they are as unconcerned about profitability as the directors of public utilities. The result is ruin. The theory which has been advanced says that these ventures are too large to be run simply with a view toward profit. This concept is extraordinarily opportune whenever the result of conducting business while fundamentally renouncing profitability is the bankruptcy of the enterprise. It is opportune, because at this moment the same theory demands the intervention of the state for support of enterprises which are too big to be allowed to fail.
III It is true that socialism and interventionism have not yet succeeded in completely eliminating capitalism. If they had, we Europeans, after centuries of prosperity, would rediscover the meaning of hunger on a massive scale. Capitalism is still prominent enough that new industries are coming into existence, and those already established are improving and expanding their equipment and operations. All the economic advances which have been and will be made stem from the persistant remnant of capitalism in our society. But capitalism is always harrassed by the intervention of the government and must pay as taxes a considerable part of its profits in order to defray the inferior productivity of public enterprise.
The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.
Bastiat has not failed, but rather Marx and Schmoller.
Recently, the Trump administration announced it would seek some $12 billion in subsidies to support the farmers hurt by the tariffs set by foreign countries as a consequence of the ongoing trade wars with China, the EU, and Canada, which, it seems, are not that ‘good, and easy to win’ after all.
At first glance, it may look like a good idea; many might think it makes sense to seemingly come forward to help those who are suffering and lend them a hand to get back on their feet. However, behind those subsidies are a worrisome sign of the ever-larger Ogre in Washington.
An Ogre? Let me explain:
In 1978, Mexican writer and Nobel Award Winner Octavio Paz, defined government as “el ogro filantrópico” (the philanthropic ogre) that is, a creature that gives out subsidies and programs to supposedly alleviate poverty, but at the same time devours more and more of the nation’s prosperity through the taxes used to fund those social programs and the ensuing corruption. The Ogre may even have good intentions, but its actions will do far more harm than good.
We could say that this Ogre, which hides beneath the government structures on every country on this planet, has even some kind of rhythm, almost like a dance. It moves in a succession of steps, devouring more with each of them until it becomes so bloated that it can’t dance anymore, and when the waltz stops it finally shows us its real face of tyranny and violence. We can see it at work right now, for example, in Venezuela.
What are these steps? Well, the waltz begins with the Ogre intervening in some parts of the economy, to, say, impose tariffs on a few products. At first it seems like nothing too fancy or too worrisome, and easy to be explained away. However, this creates a disruption; those affected by the original intervention demand the government’s help in return, and, being a philanthropist, after all, the Ogre is happy to comply, diverting money in support of that vulnerable group, and with every new step, it multiplies the disruptions on the economic landscape and the number of the demanding stakeholders.
Since more money is needed to deliver the goods, the Ogre soon has to face one of two choices: acquire more debt or print more money. In both scenarios, the cost of the waltz will be eventually paid for by the individuals, who end up paying more in taxes and bearing the cost of an increasingly manipulated economy.
In time, the signals of offer and demand become so obscured by government intervention that the economic agents no longer know if they are going in the right direction, with the resulting waste of value and resources, which in turn makes the people demand even more state intervention. Thus, the waltz picks up speed, becoming a dizzying display of spending; a turbulent river where the cronies catch all the fish while everyone else is left hungry.
That is the real perversity of the Ogre’s waltz: Once the music starts, is almost impossible to stop. No matter how many laws are passed or studies funded, or even how honest are the intentions of the swamp-like creature; the problems created by the increased government intervention cannot be solved by a new regulation, on the contrary, every problem “solved” generates a host of new externalities, until the system can’t spend anymore, because everybody is broke.
That is the genuine danger of the new subsidies proposed by Trump. Not only do they distort the incentives of the farming industry, but they will also add even more weight to an already crushing national debt that stands above $21 trillion. That debt will never decrease as long as the Ogre keeps adding new “temporary” programs that soon become acquired rights in the mind of the beneficiaries, including, of course, all those local politicians who will run for election on the back of Washington DC’s generosity.
I don’t know, maybe Trump means well. However, setting in motion the Ogre’s waltz, by embarking on a trade war and then using subsidies to “help” those most affected by it, will not work.
Those subsidies will increase the debt, they will further weaken the economy and open a boatload of opportunities for corruption and crony capitalism, and at the end of the day America will be less prosperous, and the world will be less free because of it. As the saying goes, the road to hell is paved with good intentions — and that's one tariff we won't offset through subsidies.
Part of the economic debate in Latin America, particularly in Argentina after the elections, focuses on what type of financial and trade relationship is most convenient for the region, and several discussions consider the merit of strengthening relations with China instead of the United States
The first thing we should understand is that it is a false dilemma. Latin America is not in an economic situation where it can afford to “choose” trading and financial partners. Therefore, the answer is simple: Latin American countries must strengthen their commercial relations with all countries, including China and the United States, and the way to do it is by improving transparency and reliability.
Why do some politicians repeat that their country has to choose between one and the other? There is a misconception among some commentators, who think that entering into aggressive agreements with China is much more beneficial, cheaper, and, in addition, will allow countries like Argentina or Mexico to diversify their position. The most populist politicians talk of China as if the country gave money for nothing. It is a ludicrous and misguided view of relations with China, as if the business partners and Chinese rulers were not going to demand the same conditions as US ones. The evidence from Venezuela, Ecuador, and many African nations is clear: China does not hand out free money. Money for nothing does not exist. The Chinese are neither fools nor amnesiacs.
The experience of decades shows us that many populist rulers believed that they would enter into large trade agreements with China and receive low-cost financing with no burdens attached. The example of Ecuador during Correa period shows us that this idea of enormous financing at no cost is completely false. China is not only as rigorous and demanding as any other trading partner, but — in many cases — has shown that it imposes conditions, especially collateral in natural resources, that sometimes are stricter.
Usually, the idea that China is going to offer favorable, flexible, and even almost-free conditions usually comes from a mistaken perception that the Asian country will finance the expansion of socialist or leftist models without conditions as if it were a donation. Nothing could be more wrong. China is an economy that is extremely dependent on the US dollar and has an elevated debt. Above all, it is an economy with a growing demand for commodities and, as such, usually lends money in exchange for wide access to natural resources. The Chinese economy is not a source of cheap donations and loans. Its companies and rulers have a very clear idea of the risk they take when they lend money to socialist regimes and countries with economic challenges. China always analyzes carefully the real economic return it needs in its business transactions. There is no free money.
We cannot think that China will give Argentina or Mexico free money or investments, or that it will demand less credit security than the United States. Quite the opposite. China, as a business partner, is much more demanding and rigorous than some politicians would prefer.
Sometimes, in the discussion about whether to favor China or the United States, there is a hidden line of thought, which could be summed up as, “Who can we default on without generating a financial crisis? Who will finance the unfinanceable at a low cost?" The answer is simple. Nobody.
The opportunity for Latin America? Open the economy, become an exporting power and attract foreign investment. To achieve this, countries must make legal and investment security the absolute pillars of their commercial and financial policies. Becoming a reliable country with unquestionable credit responsibility is a capital factor for economic recovery.
No country is going to give dollars for cents, or finance insane economic policies for free, as everyone starts with an analysis of risk of devaluation and default when they consider financing options. What Latin American governments must do is eliminate those two risks so that China, the US, and all the countries of the world perceive the enormous potential of the region.
Shinzo Abe’s speech to the Davos pantomime was a wake-up call. The Japan PM, now G-20 chairman until end-June, signaled with his speech that he has now become a Europhile, and is moving away from a US-centered approach. Washington, global markets, and Japanese savers should all take careful note. The likely consequences are not pretty.
Much of this stems from Abe's interest in continuing to expand trade relations with China. Everyone and their dog know that Germany and Japan are the two lead advanced economies which have integrated themselves with China, using that country for example as a final assembly location for their exports and in the process shifting a large part of their own potential bilateral trade surplus with the US to the People’s Republic.
Pro EU, Anti-Brexit Earlier in the month, Shinzo Abe on his lightning-European tour dropped in on Theresa May to publicly warn the British Prime Minister against defying EU power with a no-deal Brexit. And he let the Brexiters know, if they had any illusions about this matter, Tokyo would not reward their defiance by opening talks on a free trade deal between the two island economies.
Meanwhile, back in Tokyo, PM Abe’s Bank of Japan Chief, Haruhiko Kuroda, announced that there is to be no turning back from monetary radicalism featuring euro-style negative interest rates and long-term interest rate manipulation. Certainly, these policies have not pushed the inflation rate up to the 2 per cent target. But who doesn’t know by now that the real purpose of monetary radicalism under present circumstances is currency manipulation and stealth taxation of fellow-citizens?
There is nothing new about Japan periodically embracing European alliances and learning from Europe. The tradition goes all the way back to the Meiji restoration. And the danger that European ties can stoke frictions in US-Japan relations is also familiar. But now Japan’s geo-political situation is particularly fragile. The US, not the EU, is Japan’s more reliable partner in security.
Yet the essence of a Europhile policy for Tokyo is close friendship with the EU hegemon, Berlin. We know that the Trump Administration is watchful and alert to how Germany has been “gaming” global trade and security to the disadvantage of the US. The rapprochement of Tokyo and Berlin implicit in the concluding of the EU-Japan trade deal jars with the length of time during which the Abe government, worried about new demands to curb official or unofficial protection of its farmers and auto-makers, stalled the opening of talks with Washington on a free trade agreement (FTA) (eventually agreeing to their start last Autumn).
Also jarring was the alacrity with which Tokyo concluded a Trans-Pacific Partnership (TPP) deal once the Trump Administration turned its back on this, meaning that Japan has become the hegemon of a regional free trade area including Canada and Australia (but ostensibly so far excluding South Korea and India). Indeed, in some respects Canada’s own FTA with the EU, coming into effect last year, was a model for the Japan-EU deal.
One objective of Tokyo in its FTA with the EU was an expansion of the market for Japanese autos. Matching concessions to European agriculture are in areas which don’t compete with its own highly protected farmers (cheese, wine, pork, beef). Increasing financial integration also made sense not least given the massive accumulated stock of financial assets held in the euro-zone by Japanese investors made desperate for yield by the radical monetary experimentation of Abe-economics.
Doubling Down on Abenomics The yield-hungry Japanese have flocked to French government bonds (attracted by their yield spread over German and yet the perception of France at the EU core). There has also been a huge-build up of much higher yielding and riskier Italian government bonds. No wonder Shinzo Abe is shoulder to shoulder with Angela Merkel in hostility and fear of any “populist” quake under the EU – whether a no deal Brexit or anything else – which could cause the pillars of the euro-zone for fall.
Shinzo Abe and his architects of economic policy would not admit to having spread the terror of income famine amongst their fellow citizens. After all, he told the Davos “crowd” that Abe-economics had “defeated defeatism” and thereby the Japanese economy is prospering. The business statistics are at least superficially on his side for now.
The cheap yen for Japan, like the cheap euro for Germany, has stimulated a cumulative rapid growth of the export sector. But German and Japanese households (other than those earning bonuses in the big exporter corporations) are quietly suffering. Some may delude themselves that speculative froth will continue to compensate for negative returns on domestic bonds and money; but most realize that to attain their objective of accumulating capital for retirement, they have to save even harder than otherwise.
The burden on the Japanese saver is even greater than the German, in fact. The zero yield on 10-year JGBs compares to 10-year Bund yields at 0.2%. But JGBs are substantially riskier than Bunds as reflected in credit ratings. Moreover, investors in Bunds reap a potential prize if one day the Deutsche mark is re-born. Yes, present reported inflation in Germany is higher than in Japan. But further ahead, looking at the weak state of public finances in Japan and the likely time-limited nature of present downward forces on prices there (especially integration with South East Asia and especially China) that relative situation could easily go into reverse.
In German democracy, increasingly pluralistic, there are political forces which could strengthen and bring a halt to radical monetary inflation policies as pursued by the ECB. In Japan, by contrast, one party dominance makes any such challenge implausible. And in any case, there is not the same “distributional resentment” to fuel discontent.
In Japan all households are subject to tax by stealth on their savings. In Europe, the tax is concentrated in Germany and other Northern European EMU members. The Italians, in particular, though are not subject to this in that their banks and government are gradually being recapitalized to their benefit by the transfer. German resentment in particular of the transfer is what might eventually fan sufficient support on the right (and possibly far left) to topple the centrist governments presided over by Chancellor Merkel or her successor
If eventually the Merkel regime and the EU status quo over which it presides crashes, then historians will say that PM Abe made a big error in betting so much on a new alliance with Europe.
What if you found out that the Chinese are burying dollars under the Great Wall of China? What would your reaction be? Would you be upset that the Chinese weren’t spending those dollars on U. S. exports, narrowing Americans’ balance of trade deficit with China? Judging by the anti-Chinese sentiment characterizing public discussion of Chinese-U.S. economic relations these days, I suspect you would.
This was a question I always posed to my university honors students when going through the fundamentals of international economics. It was a great teaching moment, because without exception, and without prompting, the students consistently parroted media concern about the balance of trade deficit with China, and that if the Chinese were spending these dollars on U.S. goods it would reduce the U. S. trade deficit, benefiting the United States.
While it is true that the U.S. trade deficit would fall (assuming you don’t count the dollars as Chinese imports), the truth is that the Chinese burying dollars under the Great Wall would be a boon to American living standards! Hard to believe? Let’s consider a simple example.
Suppose Americans are buying Chinese travel luggage for $25 per piece, and the dollars end up under China’s Great Wall. What is going on here? Americans are getting travel luggage and the Chinese are getting pieces of paper that, as far as the United States is concerned, are easily produced at relatively low cost. In other words, Americans get travel luggage in exchange for extra turns of the printing press crank at the Bureau of Engraving and Printing. Sounds like a good deal for Americans if you ask me.
Indeed, had the Chinese used those dollars to buy say, soybeans, Americans would still have the travel luggage, but less soybeans. This necessarily means a lower living standard (less soy sauce and tofu at American Chinese restaurants) compared to the dollars going under the Great Wall. Indeed, dollars going under the Great Wall mean Americans are getting the travel luggage virtually free. What’s wrong with that?
Indeed, it’s analogous to you shopping for shoes, paying by check, after which the shoe store proprietor asks you if it would be OK with you if he hung your check in a picture frame in the store rather than presenting it to the bank for payment. This means you’d be getting the shoes for free. Again, what’s wrong with that? It means a higher living standard for you.
The overall lesson here is that when people in various countries trade with each other, exports should be viewed as the cost of doing business internationally, while its imports are the benefit. The reason dollars going under the Great Wall in exchange for travel luggage is so beneficial is that the opportunity cost of producing the dollars (a few more cranks of the printing press) is so low.
Of course, it’s always possible that the dollars could reappear as the Chinese started using them for what dollars are best suited to do: buy U.S. goods (like soybeans) or stocks and bonds. If that were to happen, it would mean Americans did not get the travel luggage almost free after all. What was almost a free lunch for Americans turns out to be not almost free after all.
The G20 meeting in Buenos Aires had a primary objective. To reach an agreement between the United States and China.
However, the announced agreement is more a “diplomatic truce” than a real agreement.
The United States commits to delaying tariffs against China that would start on January 1st, 2019 and China commits to purchase more agricultural and energy products (LNG, liquefied natural gas) in addition to promising to advance in legal security, compliance with contracts, the opening of capital markets and protection of intellectual property.
However, the wording is vague, the commitments are conditional and the time is limited.
When we talk about trade wars as if they were something new, we make a diagnosis mistake. We’ve been in a trade war for years. The United States has been denouncing trade barriers imposed by China and other countries directly and indirectly for years, with a World Trade Organization that did nothing about it.
The United States acted in the wrong way, and between 2009 and 2016 introduced more protectionist measures than any other G-20 country. The World Trade Organization warned on several occasions before the Trump administration took office of the increase in protectionism since 2011.
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China desperately needs to keep the trade surplus with the United States to maintain its extremely indebted growth model. More than the United States needs China to purchase its debt.
China is not the main holder of US bonds (not even the largest foreign buyer). The largest holders are North American institutions and investors in their vast majority.
The United States has seen demand for its bonds remain robust and yields have not soared even with China and the Fed selling. Meanwhile, China’s foreign exchange reserves have fallen.
China’s foreign currency reserves fell to the lowest level in 18 months in October. A reduction of $ 33.9 billion in October, the worst since December 2016 and the lowest level since April 2017.
China cannot maintain its growth – based on a huge debt bubble – if its exports to the US fall. There is no other market that can offset its exports to North America. And its trade surplus with the United States is already over 275 billion dollars per year, the biggest contributor to the Chinese GDP from the external sector.
A drop in the growth of China’s exports would mean a much larger collapse of its foreign exchange reserves, which are down 30% since the 2014 highs.
A collapse in foreign exchange reserves also accentuates the already existing capital flights, which in turn would lead to more capital controls and, with it, three effects. Lower growth, an increase in the already high debt and the risk of a very important devaluation of the yuan.
These three effects have already happened in 2018.
In summary, for China, the trade war is devastating. For the US it is negative, but for China it is a disaster.
The United States exports very little (11% of GDP), so any threat that leads to an agreement is good.
A trade war can generate higher costs of goods and services for Americans, but the reality is that China exports disinflation and, if any, inflation expectations are falling, not rising.
This does not mean I support trade wars. It means that the idea that both sides are equally negatively impacted is simply empirically incorrect.
As such, the agreement announced between the US and China in the G20 is nothing more than a “conditional ceasefire”.
China has little intention of guaranteeing intellectual property and eliminating capital controls or the immense interference between political and legal power.
The increase in purchases from China to the United States announced is likely to have a very low impact on the trade surplus . China’s trade surplus with the US has skyrocketed in 2018 from 21.9 billion dollars in January to 34.1 billion in September. If China doubles its purchases of agricultural and energy products from the United States, something very difficult to achieve, this surplus would only fall by a maximum figure of 3 billion US dollars.
This agreement is only a pause, and the announced tariffs would be recovered if improvements are not evident. The tariffs announced for January 1st would be increased to 25% if China does not comply in 90 days.
The differences in the interpretation of the agreement between the Chinese and US administrations can be seen in their official statements.
While the US says that China will change its policy with respect to intellectual property, capital control and legal security, China only says that they “will work together”. While the US states that the agreement is invalidated after 90 days, China does not mention the deadline. While the US mentions that the purchases of North American products will increase in specific sectors, China only talks about buying more products.
This agreement does not change the trade and policy differences of both countries, but it is very similar to the failed agreement reached with China in May that ended in nothing. We have to be very cautious and wait to see if real economic data improves. If China continues to devalue the Yuan and inject capital into its financial and corporate sectors it will be a sign that the agreement has no credibility for the Chinese government itself. Furthermore, as leading indicators show, the global slowdown is much deeper and complex than the differences between China and the US on trade. If the global economy recovered the trade growth levels of 201, global GDP slowdown would still be evident, and more pronounced than consensus currently estimates.
This trade deal is not only vague, conditional and temporary… It does not disguise the slowdown of major economies, which had nothing to do with trade wars and a lot to do with debt saturation.
Be careful thinking that this is a catalyst that puts the world back in growth and multiple expansion modes. The reality is that this deal is not a catalyst for the global economy.
Originally published at DLacalle.com
Rothbard wrote in the Libertarian Forum (v. 1, p. 184) that “… libertarians, if they have any personal philosophy beyond freedom from coercion, are supposed to be at the very least individualists.” Indeed, libertarianism holds high the rights and responsibilities of the sovereign individual: the right to self and to justly acquired property and thus the right not to be coerced or arbitrarily restricted; the responsibility for one’s own actions and the moral duty to respect and honor other individuals’ rights.
Yet libertarianism, or at least a relatively large subset of proponents of libertarianism, has taken a strange collectivist turn in the recent years. This is evident in a number of issues, such as free trade, where libertarians used to be in agreement in principle, albeit not necessarily in all the details or the applications of those principles. In contrast, this new turn argues from a different starting point. Rather than the individual’s rights, the starting point for this group is instead a notion of the individual’s collective belonging and identity (such as one’s country or ethnicity).
There has of course never been a problem for libertarians to recognize individuals for who they are, or choose to be, and thus within their preferred social and cultural context. No man is an island, and as social beings we are embedded in a context of community, culture, and tradition. The distinction between individualist and collectivist is not either-or, but which is primary: for collectivists, the individual is subjected to the will of the collective (or, in reality, the will of its leadership); for individualists, the collective has no right of its own but is subject to the individual’s choice to associate. For obvious reasons, the analysis of any state of affairs from a collectivist point of view is different than that from an individualist point of view.
The issue of free trade illustrates this clearly. Libertarians used to be universally and uninhibitedly for free trade. Whether domestically or across borders, voluntary exchange serves individuals best—and any restriction thereof is a violation of their rights. Thus, any restrictions should always be abolished, and the sooner the better.
Granted, reality is somewhat more complex. As I discuss in The Seen, the Unseen, and the Unrealized: How Regulations Affect Our Everyday Lives, whenever the state regulates economic action, there are severe and oftentimes far-reaching distortions of both structure and outcome of market exchange. As libertarians have long recognized, regulations create winners and losers. Also, rolling back individual regulations, while it potentially causes a “freer” market, it will cause a different set of winners and losers. The only truly fair and just economy is one completely devoid of the state’s manipulations, whether those are actively pursued or passively effected.
These complex implications of trade policy were never seen as an argument against deregulation, however. Rather, it is an argument for letting people and businesses exchange without interventions. Less intervention means less distortion, and this is always preferable. This should be preferred even by interventionists, because, as Mises famously recognized in Bureaucracy,
Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter.
In other words, libertarians were free traders and favored any step in the direction of free trade. But this is no longer obvious. Trump’s trade war with China appears to have caused a rift within libertarianism, or at least among those libertarians who eagerly discuss policy online, alongside the individualist/collectivist fault line.
Libertarian-individualists are true to the "traditional" libertarian view that the state should get out of trade altogether and that Trump’s trade war is only harming consumers and the economy. The collectivists instead focus on international trade as a matter of collectivist justice, and, as a result, raise other issues. Among those are the recognition that China (the ‘other’ collective) is engaged in ‘unfair business practices’ by subsidizing and in other ways supporting Chinese (their ‘own’) business and, as part of this, neglecting to enforce international treaties. (A similar argument can, of course, also be made for the US and any other state.)
This is itself no news, as libertarians have always recognized the destructiveness of realpolitik, nation-statism, and the overall distortive nature of interventionism. But the solution from a libertarian-individualist perspective has always been to call for deregulation and free markets—even unilaterally—with the obvious goal to get the state out of trade. That China, for example, subsidizes production so that American and European consumers can buy goods and services at a very low, and possibly below-cost, price is not a problem for anyone but the Chinese. They are, after all, picking up the tab for the low prices we enjoy.
From the collectivist libertarian perspective, the suggested solution is very different—and may even be contrary to traditional libertarian views. In their take, Chinese domestic and international trade policy is not an issue primarily for the Chinese, but threatens ‘our’ businesses and therefore ‘our’ ability to produce goods and services, which can make "us" dependent on Chinese production.
The issue of trade is no longer a matter of the free exchange between private parties, whether individuals or businesses, but a matter of the collective to which these parties ‘belong’. International trade then becomes an issue of ‘national security’ and, the argument goes, it is therefore justified to call on the state to act on “our” behalf. Consequently, Trump’s trade war is seen by this group as a means for "us" to pressure the Chinese to adopt “fair” business practices so that "our" (American and perhaps Western) businesses can compete on the same terms as Chinese companies.
While there are certainly problems involved with an expansionary Chinese state, a Keynesian monster with grand international ambitions made clear in, among other things, the Belt and Road initiative, it should be fundamentally problematic for libertarians to identify with, and even support, one state against another. Even more so to support a state setting out to restrict and tax trade, whether or not it is intended as a means to pressure (or punish) "them."
The trade war issue appears to cause confusion among the new collectivist breed of libertarians regarding the non-aggression principle. This core principle is what underlies the free trade issue: it is fundamentally a question of voluntary market exchange. Trade is a matter of the parties involved in each exchange, not a conflict between the parties or their ‘teams’. In fact, the state is antithetical to this freedom, whether or not it is exercised alone or in voluntary association. Thus, a libertarian cannot see the state as a mechanism for good, or as a means to an end, no matter how legitimate the end.
The Keynesian policy of stimulating an economy through a temporary budget deficit relied on deceiving economic actors into thinking there was more demand in the economy than existed. Like all confidence tricks, it eventually fails. Governments end up with perpetual budget deficits, which trend larger with every unresolved credit cycle.
Expanding money and credit as a means of funding government spending through the creation of debt has now become central to state finances everywhere, including the UK. The advantage for governments is very few people understand that this form of finance transfers wealth from the producers in an economy to the state. But the government is eating its own seed-corn by impoverishing its tax base, which if continued leads inexorably toward the destruction of its currency.
Any politician who claims to be a free-marketeer is not one unless sound money, devoid of inflationary financing, is embraced. Taking into account the importance of sound money and the reasons trade imbalances arise, a Johnson government that understands these issues will be equipped to fashion economic and monetary policy for the future. It is not enough to merely pay lip service to the necessary objectives, but to grasp the economic theory behind them, so that socialist and neo-Keynesian claptrap can be fully exposed in reasoned debate.
These are two objectives to strive toward, and will necessarily take time, because changes in government policy must steer the electorate along with it. They should be pinned up as mission statements on the notice boards in Downing Street. That being accepted, the following supporting policies must be implemented to re-orientate the ship of state toward economic success:
Tax policy. Tax cuts should be broadly financed by reductions in government spending, not through increasing the budget deficit in the hope that the economic stimulus will generate higher taxes. Welfare must only support people in genuine need, not those with just a sense of entitlement.Government spending. Means must be found to reduce the proportion of government spending in the economy as a whole, to reduce the burden on the productive private sector. A financial and economic crisis requires departmental spending to be slashed, not just future planned increases cut, as was the case under Gordon Brown in 2009.Encouragement to save. Taxes should be removed from savings and capital gains. Inheritance tax must be abolished. This is to allow people to accumulate personal wealth and to reduce the need for the state to provide.Trade. Trade agreements with other nations should be viewed as a first step toward wholly free trade. By exploiting the comparative advantage of allowing people to buy what they want from providers of goods and services irrespective of location, capital resources will naturally be redeployed toward their more efficient use. This is why understanding that trade imbalances do not arise from currency differentials is so important.Monetary policy. Steps must be taken to restrict the Bank of England from manipulating the economy through monetary policy. Targeting inflation and employment must be abandoned, and markets allowed to set interest rates. Credit expansion should be curtailed by ensuring that UK banks and branches of foreign banks operate to stricter capital rules. Goal-seeking stress-testing must end. In the longer-term, banks should lose the protection of limited liability, which has allowed bankers to make rash lending decisions without bearing the ultimate cost.Gold. The Treasury must replenish the nation’s gold reserves. The risk of a global currency crisis is increasing by the day, and foreign currency reserves will need to be reallocated at least in line with those of other major nations. Brexit is an opportunity to reset economic, monetary, and trade policies. The implications of getting rid of the EU millstone go far beyond the leaving date of 31 October. Assuming a Johnson government has a good grasp of why free trade benefits the economy and why trade imbalances exist, combined with the courage to steer Britain toward the long-term prosperity offered by free markets, it will derive its future power from a strong economy instead of merely claiming it based on the past.
The European Union’s objections to Volkswagen’s future factory in a non-EU state reveals that the Brussels bureaucracy doesn’t really want to help poor nations.
EU politicians and technocrats like to present themselves as progressive and enlightened policymakers. But that virtuous mask slipped last week after German auto giant Volkswagen announced that its new facility would be located in Turkey instead of an EU member nation. A news report carried in Zeit Online last Monday quoted German Green Party politician Reinhard Bütikofer as saying that Volkswagen’s decision has “caused consternation” within the European Parliament. This, Bütikofer said, was because of “the increasingly deteriorating situation of the rule of law, media freedom, and democracy under President Erdogan.” He also revealed that Volkswagen may face legal action from the EU Commission due to a breach of competition rules that bind member states.
If the Commission follows through on this threat, it will be bad for Volkswagen, bad for automobile buyers and, especially bad for Turkish people. Volkswagen plans to invest 1 billion euros in the multi-brand plant, which will employ around 4,000 workers. Bulgaria was reportedly the second-preferred choice but, as an EU member, was bound by funding regulations which constrained both Volkswagen’s and the Bulgarian government’s negotiation space.
Yet, while businesses are not charitable organizations, it is inarguable that Turkey benefits more from this investment, in relative terms, than Bulgaria would have (or Romania or Serbia, which were also considered by VW). Turkey has an unemployment rate of 13% as compared to Bulgaria’s 5%. More importantly, Turkey has more political tension than Bulgaria, so the very fact that VW is willing to set up a factory there sends a strong signal both internationally and internally about the need for political stability. Yet journalist Ivan Dikov argues in European Views that “In Bulgaria or Romania, the Volkswagen investment would have boosted tremendously the middle class, and thus the pro-Western, pro-EU orientation of the respective society (which have come under attack by foreign powers in recent years), and thus the potential of the respective country to contribute far more to the well-being, dynamics, and development of the entire European Union.” Dikov is oblivious to the fact that he’s arguing for VW to support a middle-class, which is by definition relatively well off, over support of a poor class, which is the cohort that stands to benefit most from VW’s investment in Turkey.
It is therefore ironic that the issue of human rights is being raised by EU spokespersons as an objection to VW’s decision. The argument seems to be that a country should have its political house in order before any firm can in good conscience invest there. Yet the history of most European nations shows that economic development long preceded any expansion of political freedoms. Most of the time, it is economic progress which leads to liberal democracy, which is not surprising given that business is most efficient when free, whereas governments are always attempting to restrict citizens’ rights as much as possible.
Protectionism requires political connivance. And, although free trade was one of the key arguments used to justify the creation of the European Union nearly three decades ago, the EU’s true protectionist face is becoming more and more bared. As economist Ryan Bourne of the Cato Institute has argued, “The long and short of it is that the EU is internally trade liberating but outwardly protectionist…This is particularly obvious when one sees certain tariffs, like those on oranges, applied seasonally as protection against the South African harvest.”
Whether by accident or design, this policy is an economic carving knife aimed to separate poorer countries, like Turkey, from the benefits of free trade with wealthier nations.
While the US had already been reversing course on trade liberalization for a decade prior, the election of Donald Trump brought with it a programmatic protectionist approach. As President, Joe Biden has largely followed Trump’s lead, with polls showing broad support among respondents of both parties for “Buy American” initiatives and other protectionist measures. Even though the massive disruption to the global economy precipitated by the response to covid makes saying anything too definite difficult, enough data is available to pass an educated judgment as to whether or not these policies should be continued.
The answer: no.
First, the US is losing its trade war of choice with China. Under Trump, the US ran a larger balance-of-trade deficit with China than in either of Barack Obama’s and George W. Bush’s two terms. Supporters of Trump’s, and now Biden’s, chosen policies might object that by the time Trump left office the deficit was smaller than the one he had inherited. Appearances can be deceptive, however, for, in the words of Mark Twain, there are three kinds of lies: “Lies, damned lies, and statistics.”
So what are the numbers hiding?
Frankly, a lot of cheating. Nothing illegal, strictly speaking, but as might be expected, creative ways have been found to circumvent attempts at preventing Chinese imports. As the Economist reports, these means of avoidance—such as exploiting the “de minimis” rule, dividing imports into smaller shipments not subject to import duties—mean the current trade deficit is likely underestimated by almost 20 percent.
As these goods are still coming into the country anyway, it makes particular sense in an era of already congested supply chains and high inflation to shelve the inefficacious policy, for even though voters do express general levels of approval for protectionist policies when polled, they dislike rising prices even more, and they generally do not make the connection between the two. However secondary the impact of these measures, and however difficult it is to calculate their import, there is no doubt these measures have contributed to worsening inflation and congesting already congested supply chains with needless time and resource wasting devoted to evasion.
On that note, rising US prices are hardly likely to stimulate Chinese interest in fulfilling their now tardy obligation to buy an additional $200 billion in US products as part of the Phase One trade deal signed by Trump and Xi Jinping. So far the Chinese have purchased exactly none.
Furthermore, the weaponization of trade by the Trump and Biden administrations has hastened China’s efforts to insulate its economy from potential US-induced disruptions. The securing of separate and independent supply chains for their critical materials has been a dangerous development.
While global trade just prior to World War I was the highest in total terms it had ever been—indeed, it would not recover those levels for more than half a century—much of that trade occurred within basically mercantilist imperial blocs. The reason for fighting wars was, in most cases, the literal capturing of foreign markets. By contrast, a truly all-encompassing system of world trade, such as has been experienced to varying degrees since the end of the Cold War, is an anomaly of the period since global integration began in the late fifteenth century. While even the advent of nuclear weapons was not enough to preclude war, trade interdependence should not be written off as irrelevant to attempts at obtaining a peaceful world.
Protectionism, of course, cuts directly against this.
For all that, President Biden’s recent State of the Union was filled with promises to buy American! This while he called for a reduction in consumer prices! No observant student of ECON 101 could have failed to miss the irony: protectionist measures increase the prices all consumers and businesses pay. The difference between that higher price and the one consumers and businesses would pay under normal market conditions is pocketed by the favored industry. Protectionism, whatever its form—be it import quotas, tariffs, domestic content requirements, or subsidies—is simply a mechanism whereby part of the consumer surplus is transferred to the producer.
Who wins and how much is largely decided out of sight: increasing the debt, eroding the public confidence, raising prices, and burdening the economy with interventions—all of it done, of course, in the name of the public good.
Added to this, now, are the sanctions on Russia that the US and its largely European allies have put in place. As Putin’s eventual successful ouster of the Kyiv government will make these sanctions all but unliftable, the lines dividing the emerging trading blocs of the twenty-first century will harden further.
Make no mistake: all of us will lose.
Last Sunday, US regulators suspended avocado imports from Mexico after a US inspector in Michoacán allegedly "received a threatening message on his official cellphone."
The US government claims this alleged threat was the catalyst for the ban, since, according to the US embassy, "facilitating the export of Mexican avocados to the U.S. and guaranteeing the safety of our agricultural inspection personnel go hand in hand." The US has further stated the ban will remain in place "as long as necessary" to ensure the safety of US inspectors.
It might be news to many Americans that the US employs inspectors in Mexico. After all, many Americans still subscribe to an outdated and naïve view of trade relations in which trade is managed primarily through tariffs and goods are simply taxed at the point of entry.
The whole affair of this week's avocado ban helps illustrate just how much is going on behind the scenes when it comes to imports from Mexico. The fact that a US regulatory agency can unilaterally end imports from Mexico, coupled with the fact that the US maintains a regulatory apparatus there, helps to remind us that there is no such thing as free trade between the US and Mexico, in spite of what protectionists continue to cluelessly insist.
In reality, agricultural products from Mexico are regulated by numerous mandates covering agricultural production. These bureaucratic regulations are governed by US trade law and by agreements built into US-Mexico trade agreements such as the currently in force "NAFTA 2.0," also known as the US-Mexico-Canada Agreement (USMCA).
Let's look at some of the ways the US regulatory state has extended itself over Mexican agriculture as well.
For one, the only state in Mexico even approved to export avocados to the United States at all is Michoacán. So, when the US shuts down trade with Michoacán, the entire nation's avocado production is locked out of the US. Moreover, Mexican growers had long been restricted in when it can import, with a season restricted to from October 15 to April 14. (Since 2004, this restriction has been loosened.)
On top of this, a great many regulations govern the production and import of avocados. For instance, the color and size of Mexican avocados are regulated. Mexican packers and farmers must submit to a host of regulations in order to be "certified" as importers into the US. Regulators monitor growers for potential pests, for the freshness of fruit, and for the timeliness of packing and shipping. This can be achieved through a wide variety of activities such as setting traps to identify pest populations, "foliage sampling," and visual inspection. All this must be done to obtain a "phytosanitary certificate."
These are the sorts of activities being overseen by US inspectors and regulators in Mexico, and all of this contributes to significantly raising the cost of producing for the US market. Some of these regulations—such as the ban on summer imports—are clearly designed to do nothing other than reduce competition for domestic sellers.
A Long History of Regulations and Controls Nor are these sorts of regulations particular to avocados. Since the 1950s, tariffs in many countries have become relatively less popular as nontariff barriers have become more common. These barriers to trade include
subsidizing US industries so as to help them outcompete foreign goodsrequiring government procurement of domestic products exclusively (known as "public procurement" policies)placing quotas on imports"rules of origin" preventing "transshipment" of goods from third parties through countries with "free trade" access"sanitary and phytosanitary measures," which are controls on the importation of foods affected by substances such as beef hormones and "genetically modified organisms"regulatory requirements on the production of foreign goods, including environmental regulations and mandates on foreign wages and labor unionsrequirements for packaging, labeling, and product standards The United States has even shown a particular fondness for these types of trade barriers, and economist Agnieszka Gehringer has noted:
The U.S. appears to be the most intensive user of non-tariff barriers in general and in their main categories…. This is true when looking at the total count of measures applied and at the number of product lines … to which such measures apply.
This is part of a long history of regulating avocado imports. Prior to 1914, avocados were imported into the US, but in 1914 US health officials banned avocados, ostensibly to avoid the importation of certain pests. Avocados were not imported again until 1997, subject to many regulations and only in winter months.
In other words, this week's new ban is simply a continuation of what has not been anything approaching "free trade" in avocados in over a century.
Trade Policy as an Extension of the Bureaucratic State Yet we continue to hear from protectionists that Mexican trade has an unfair advantage, supposedly because Mexican producers take advantage of the absence of regulation. This, of course, is obviously false, and if anything, "free trade" agreements like the North American Free Trade Agreement (NAFTA) are better described as extensions of the American regulatory state than as abolitions of trade barriers.
Moreover, we're now being told that Mexican agriculture ought to be regulated even more, specifically in the name of the environment or fighting crime. For example, a Thursday article from the Associated Press reads like an op-ed justifying the US government's intervention, strongly hinting that avocados are fueling environmental devastation in Mexico while enabling organized crime. Other countries can grow avocados too, and their avocado crops are—to use one of the Left's favorite buzzwords—more "sustainable." Or so we're told.
The subtext here, however, is one we've become quite accustomed to in recent decades: those foreigners don't do things right. They have "sweatshops." They use too much water. They have endangered species. They have organized crime. Thus, the moral thing to do is have government bureaucrats ban their products from American stores. Just imagine if other nations had behaved with equal paternalistic moralism in decades past. The fact that the mafia in the US—a gang of brutal thieves, extortionists, and murderers—was long at the center of organized labor and manufacturing plants would have kept US manufactured goods out of foreign markets for many years. Fortunately for countless American working-class families, that didn't happen.
The trade moralists also benefit from the bootleggers-and-Baptists phenomenon, in which moralists join together with profiteers who benefit from trade controls. That is, we can count on domestic avocado growers to support trade controls on foreign avocados for virtually any reason. Just as with sugar tariffs, these trade controls benefit domestic growers mightily at the expense of consumers.
Whatever the reason given for controlling trade, we know what this always means in practice: anyone who attempts to buy or import any unauthorized fruit must be arrested, fined, and punished. After all, every protectionist is fundamentally a supporter of regime violence. Trade controls cannot be enforced without police, fines, courts, and prisons.
But is it really the place of the US regime to regulate every farm in every foreign country as a condition of allowing Americans the freedom to access those products? Certainly many think so, including many who claim to be for greater freedom.
While flying recently I decided to look at the price of plane tickets in Europe compared to the United States. For example, a non-stop flight of about 900 miles from Dusseldorf to Madrid costs on Expedia $125 and takes 2 hours and 45 minutes. A similar distance in the US from any airport in Chicago to any airport in New York City (789 miles) has a lowest fare of $160 and takes 2 hours and 11 minutes. I picked two of the busiest US airports, because I expected competition to be greatest there. I compared several other European flights with US flights of similar distances and always found that the European flights were less expensive (for example, Rome to Berlin 736 miles $109 versus San Francisco to Seattle 679 miles $186).
Why do Americans pay more to fly a similar distance? In a recent interview, Nobel Prize winner Joseph Stiglitz blamed deregulation of the airlines. He said that deregulation was supposed to increase competition, but now we only have 3 legacy airlines. However, he fails to mention that the number of people flying in the US increased from 163 million in 1970 to 798 million in 2015, and the price per mile has fallen from a high of $0.32 in 1980 to around $0.15 in 2015. Perhaps deregulation did work to some extent.
The Airline Deregulation act signed by Jimmy Carter in 1978 removed government restrictions on entry, prices, and routes. As a result, the airline industry changed dramatically. Instead of flying direct flights between cities, the industry moved to a hub and spoke system where airlines would fly more passengers to a centrally located airport for one leg of the flight and then back out to their destination on the second leg of their flight. This reduced the cost of flying. These innovations would not have occurred without deregulation. This is the beauty of the marketplace. Innovators come up with better ways to serve the public. Further, Professor Stiglitz fails to acknowledge that there are other competitors on some routes, such as Frontier, Southwest, and Allegiant.
Stiglitz also implies that the airline industry is totally deregulated. This is not the case. The lack of full deregulation is keeping the price of our airline tickets higher and the quality of service lower (think about United Airlines’ recent escapades) than it would be with greater competition. How can it be that the airline industry is not fully deregulated? Cronyism exists in the US airline industry. The industry and unions fight any government deregulation that would increase competition from foreign airlines. Currently foreign airlines are only allowed to fly passengers from other continents to airports in the United States, but they cannot fly point-to-point between airports within the United States. Allowing foreign airlines access to US routes would increase competition, give consumers more choices, bring lower prices, and provide greater differentiation in service. Some airlines will offer the bare minimum of service. Others will differentiate by improving services. Imagine if the airlines treated customers better. Your next flight could be a lot more pleasant.
However, for incumbent US airlines, the new competition brought about by deregulation will make it more difficult for them to keep prices high and earn profits. Union members will fear losses of union jobs as consumers start to use foreign airlines which might hire non-union workers to handle bags, tickets, etc. The incentive for the US airlines and their workers is to get the government to protect them as a special interest group at a cost to consumers as a whole. Some have argued that for this type of deregulation to work, we would need to have the European Union adopt a similar policy for US airlines in Europe. What Europe does makes no difference for people who fly in the US. Such an argument is similar to arguing that US consumers should not be able to buy French wine if the French don’t allow French consumers to buy US wines. Why hurt American consumers just because other countries choose to have bad policies that hurt their consumers?
In a free market, consumers choose the winners and losers by voting with their dollars. In cronyism, the government picks the winners and losers and usually the winning cronies use their dollars to get favors through lobbying. This cronyism keeps our prices high and service low. Americans deserve more choices. Let consumers make their own choices instead of government bureaucrats and their lobbyist friends. Reprinted from The American Spectator.
As the Trump administration announces 25% tariffs on over $50bn of Chinese goods, and Europe and China prepare retaliation measures, The Economist concludes that “Rising tariffs are the worst of many threats to the world economy”, because, among other things, “Tariffs temporarily push up inflation, making it harder for central banks to cushion the blow.” This statement displays a deeply entrenched confusion—if not utter misunderstanding—of some basic economic concepts. Most important, many people fail to correctly distinguish between the causes and effects of price inflation and those of monetary inflation.
Monetary inflation is the increase in the quantity of money in an economy. This inflation causes the purchasing power of money to fall, which brings about price effects—a general rise in prices of goods and services—which we can refer to as price inflation. However, this general rise in prices following monetary inflation is disproportionate and staggered: prices will rise at different times and to different extents as money reaches a lower purchasing power.
But monetary inflation also has non-price effects. One of these is the transfer of wealth between the last receivers of the new money toward the first receivers.
Another—and even more important—is the distortion of the pattern of investment and production, as the new money being created through credit expansion reaches stock markets and businesses—thus artificially reducing the interest rate. This latter effect explains the occurrence of production booms misaligned with consumer preferences, and the later, inevitable economic bust or crash. These price and non-price effects of monetary inflation are general and underline every possible economic activity.
Trade tariffs, on the other hand, affect only some markets and bring about increases in some prices in the economy. As this happens, our consumption patterns change: if we consume fewer imports, prices of domestic substitutes will rise. If our consumption of imports rises or does not change, we will have a reduced income to spend on other goods, whose prices will now fall. Whatever the result, it does not engender a ‘general’ rise in prices, or a depreciation of the currency as a result.
Moreover, even if tariffs were applied to every good and service, there would be no systematic, inter-temporal distortion of the structure of production. A stalling of productive activity and a rise in production costs is likely to occur, as capital goods—e.g. steel or aluminum—will now be more expensive. But capital is now underutilized, not squandered. There may be less investment, but no malinvestment.
Understanding this, it is easier to see then that trade tariffs, as bad as they are, cannot produce an economic bust in the same sense as occurs in the business cycle (just as simple domestic taxation, albeit reducing welfare, does not cause an economic crisis). As Rothbard (1963) explained,
“declines in specific industries can never ignite a general depression. Shifts in data will cause increases in activity in one field, declines in another. [...]
The problem of the business cycle is one of general boom and depression; it is not a problem of exploring specific industries and wondering what factors make each one of them relatively prosperous or depressed. […]
In considering general movements in business, then, it is immediately evident that such movements must be transmitted through the general medium of exchange — money. Money forges the connecting link between all economic activities. If one price goes up and another down, we may conclude that demand has shifted from one industry to another; but if all prices move up or down together, some change must have occurred in the monetary sphere.”
It would be remarkably futile, then, to endeavor to cushion the blow of trade tariffs with loose monetary policy. The worst thing, by far, for a world economy of interconnected financial and capital markets, is monetary inflation and credit expansion. It is never a cure, and always a curse. Trade tariffs are, however, the second worst threat to a global market—often likely to make the bust much worse and the recovery slower, and to diminish our hopes for peace.
The possible trade war between China and the United States has become one of the hottest topics in the recent international news, though officially the trade war has not started yet. Economic theories have already told us that free trade can benefit the individuals among different countries; and on the contrary, tariffs can make them worse off. Some analysis has also clearly demonstrated the loss that the Americans would suffer from the potential trade tariffs. On the side of China, people would also suffer some negative consequences from the trade war. One is that China might become more protectionist after the rise of Chinese nationalism and populism triggered by a trade war.
Some observers claim that the Trump Administration is using new tariffs as a strategy to push China’s regime to open China's markets. It is certainly true that China employs protectionist measures of its own. At least in the last decade, the Chinese government has subsidized millions of dollars on its steel industry every year, sets at least a 21% tariff on the foreign auto importation to support China’s state-subsidized auto industry, and blocks the business of the foreign digital enterprises to prevent competition and to control social media.
The Chinese anti-free trade policies are too numerous to record. However, the Trump administration's use of the coercive tariffs may further aggravate these protectionist impulses.
After China’s official announcement of the potential trade tariffs on U.S. imports as retaliation measures, some Chinese people started to cheer the tariffs on social media, claiming that the trade war is a useful method to fight against "American imperialism."
In the past decade, China’s Communist government has successfully used nationalism and populism, creating conflict with other countries. The result of this manipulation of nationalist and populist sentiment have been damaging to in China to private property, to international business operations, and even to the lives of some citizens.
In 2012 anti-Japanese demonstrations, angry Chinese protesters in the streets burned Japanese-brand cars, vandalized Japanese brand-shops and called for boycotting Japanese goods, causing over a US$100m loss for Japanese enterprises in China. In these demonstrations, Li Jianli, a Japanese-brand car owner, was attacked and almost killed. Later, in 2017 anti-Korean demonstrations, Korean-brand cars were also smashed, and some of the products in the South Korean retail store chain Lotte were also destroyed by angry protestors. After suffering billions in losses, Lotte decided to quit the Chinese market.
Though the protesters in the above demonstrations were just a small percentage of the Chinese population, their destruction and aggression on private property have already made the many Chinese individuals, consumers and Chinese employees of foreign companies worse off. The withdraw of foreign enterprises (i.e., Lotte) due to the demonstrations has made Chinese customers poorer. Jobs have been destroyed by the exit of the foreign investors.
In the long term, protectionist sentiments, in both the US and China, can become dangerous to international peace. As a final note, I’d like to quote Ludwig von Mises on the relationship between nationalism and the philosophy of protectionism, which is just in line with the current tension between China and the U.S:
Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. … What is needed to make peace durable is a change in ideologies. What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. … The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.
As what Mises precisely pointed out, the wrong concept on trade protectionism among the many Chinese and American individuals should be changed. Trade barriers can cause more conflicts and can make both the two sides worse off. On the country, the free trade can reduce the friction and enhance more peace.
As Congress debates the American Health Care Act, its members should remember the benefits in cost and quality generated by the free market. What Americans need is not another complicated insurance scheme, but a return to health care that patients pay for themselves.
For the past several decades, government intervention has pushed Americans to pay for more of their medical expenses with insurance. The result is that medical costs rose 118 percent from 1992 to 2012.
Costs rise under an insurance system because patients have no incentive to price-shop. As Nobel laureate Vernon Smith explains, in our current system, party A (the service provider) tells party B (the customer) what they should buy. Party C (either the government or an insurance company) then pays for it.
This deprives patients of the incentive to price-compare, because they’re not directly paying for the services that party A recommends. But when consumers are encouraged to factor in cost, prices fall.
RELATED: "How Government Regulations Made Healthcare So Expensive" by Mike Holly
In fact, this is exactly what has happened in areas of healthcare not dominated by insurance.
LASIK is an elective procedure that’s not covered by insurance; and over the past two decades, quality has risen as prices have fallen. In 1997, a precursor to LASIK surgery that involved the surgeon wielding a knife cost $8,000. In 2012, a safer laser-guided surgery cost only about $3,800. Prices halved in 15 years even as quality rose.
Cosmetic surgery is similarly not often covered by insurance. From 1992 to 2012, cosmetic surgery costs rose only 30 percent. Adjusted for inflation, costs actually fell.
Even traditional surgery is less expensive when patients bypass insurance. In the Wall Street Journal, Jeffrey Singer tells the story of a patient who decreased his out-of-pocket surgical costs from $20,000 to $3,000 by negotiating price with the hospital on his own instead of relying on insurance.
Putting patients in charge of their own healthcare encourages them to be price-conscious. When this happens, service providers have an incentive to compete on price, and competition produces downward price pressure.
RELATED: "Why Health Care Costs Exploded After World War II" by Michel Accad
In a free market, one in which the law didn’t require that insurance cover everything from pregnancy to mental health, health insurance would primarily cover catastrophes. Elective procedures would be paid for by the patient, either in cash or with financing.
A free market in health care could also lower costs by incentivizing surgeries that reduce health care costs long term.
Bariatric surgery is a classic example: while weight loss surgery costs $14,000 to $23,000 on average, it often pays for itself in lower medical costs for patients. This is because obesity can cause expensive health conditions such as sleep apnea, high cholesterol, and heart conditions; the average cost of obesity is about $15,000 per year. Bariatric surgery, which helps 80 percent of patients to lose most of their unwanted weight and keep it off, can substantially reduce these problems. For instance, the duodenal switch helps 95 percent of patients to resolve their Type II diabetes.
To be clear, bariatric surgery is not right for everyone, and solutions like the Lap Band can cause substantial complications. However, for those for whom it is a good fit, surgery can reduce lifetime health care costs dramatically.
Unfortunately, our current highly regulated healthcare market drives up costs and prevents patients from receiving surgery. In a survey of primary care providers, 53 percent of respondents reported that their patients could not afford weight loss surgery. That’s one reason why, even though one-third of Americans are obese, less than 200,000 receive weight loss surgery each year.
Right now, 80 percent of patients rely on private insurance to pay for bariatric surgery, which inflates costs. Additionally, many insurance providers refuse to cover surgery, in part because the patient could have an expensive surgery under X insurer, and then switch to Y insurer afterward; Y would then reap the financial rewards of a less expensive customer. Critics may call this a market failure, but this situation would be uncommon in a true free market where people paid for their own costs and reaped the benefits themselves.
If we want to incentivize cost-saving surgeries, we should roll back the laws that give insurance an outsize influence in healthcare.
The United States health care system is one of the most regulated sectors of the economy, and was so even before Obamacare. This has, predictably, driven up costs. Instead of another complicated insurance scheme, let’s give freedom a try.
Dear Mr. President:
With your July 10 announcement of $200 billion in new tariffs on Chinese goods, doubling down on tariff increases announced earlier, it is clear you seek an aggressive trade war. This is unacceptable treatment for a country with which the United States has increasingly improved relations over a period of almost five decades prior to 2018.
These trade restrictions will damage China, but also average Americans. A common tactic of war is to cut off supplies to enemies. Your tariffs will cut off supplies, or raise prices, for American consumers — effectively treating them as enemies.
Tariffs are taxes. Most of your proposed tariffs will feed though the supply chain and in time hit poorer Americans hardest. Why attack the most vulnerable in our society, who benefit enormously from inexpensive imported retail goods?
You point to “unfair trade practices” as you define them. Yet, the very essence of a free society is voluntary trade. That means that I can do business with my neighbor, or not. If my neighbor does not want to transact with me, despite the goods and services and terms I offer, then he does not have to do so. This feature of the economic environment is essential both within the United States and internationally.
American firms go to China to do business, to export goods and services from the United States, and to buy goods and services for importing into the United States. China imposes conditions you regard as unfair. No one forces Americans to do business in China or anywhere else. If a business or industry does not like China’s terms, it should seek other markets. But it should not and must not use the power of U.S. law to force China to do business as we might prefer.
The issue is not one of whether China’s conditions are or are not “fair,” but of whether the United States should use coercion — taxes on imports — against its own citizens to force a solution to its liking.
We urge you to return the U.S. tariff schedule to the one in force at the beginning of 2018.
To the Congress :
President Trump is using authority provided by Congress in trade legislation enacted over the years. Congress is responsible for the current state of affairs because you have delegated excessive authority over trade to the executive branch—authority properly residing with the legislature under the Constitution. You have within your power a simple way to end this trade war: pass legislation setting the U.S. tariff schedule at its level as of January 1, 2018. The President would no doubt veto the bill. You can override the veto.
Please accept your responsibility to stop President Trump from continuing on this destructive course. If you do not, future generations will look back and ask: why did Congress not act?
Sincerely Yours,
William Poole
Economic impact studies are everywhere.
Whether it’s to support a new highway project, special tax breaks for solar energy, the building of a civic center or sports complex, or to promote subsidies for Hollywood film producers, you can find an economic impact study, often touting how great the project will be for the state or local economy.
The formula is simple, predictable, and effective. A special interest group that stands to benefit from the project funds an economic impact study that purports to provide hard numbers on the number of jobs, the increase in wages, and the additional output that will be generated by the project or subsidy, and it will do this on an industry-by-industry basis. It makes grandiose claims about how much overall economic growth will be enhanced for the state or region generally. Once the report is completed, the special interest group that paid for the study will tout these results in press releases that will be picked up by the largely uncritical media establishment, ensuring that the political decision makers and others who determine the fate of the project receive political cover.
These studies all have several things in common. First, they typically use proprietary, off-the-shelf models with acronym names like IMPLAN (Impact Analysis for Planning), CUM (Capacity Utilization Model), or REMI (Regional Economic Model, Inc.). Rights to use the models are purchased by professional consulting firms who are hired by the interest groups to do the studies. Furthermore, seldom do those who actually perform the studies have formal training in economics. Instead, their expertise is in using one or more of the aforementioned proprietary models. And finally, all of these studies ignore basic principles of economics and, as a result, do not meaningfully measure what they claim to be measuring—the economic impact of the public policies and projects that they are assessing.
Real Economic Impact Analysis: “the seen and the unseen”To properly assess the impact of any economic activity, whether it’s building a convention center or sports stadium or installing a vast solar power plant, it must first be understood that the project will yield directly observable activities that one can reasonably expect to occur and there will be economic activities that don’t occur but otherwise would. By definition, these impacts, while real, are not directly observable.
The second category is what economists call opportunity costs. Opportunity costs are the result of the fact that all economic activity uses scarce resources that, under normal conditions, would be used for other purposes had the project under consideration not occurred. Opportunity costs, while real, are by their nature related to resource uses that are diverted from economic activities that would otherwise be pursued and are therefore unseen.
Any economic impact study that does not attempt to assess these opportunity costs cannot legitimately be called economic analysis. In fact, not attempting to take account of the latter is considered to be the biggest mistake that non-economists make when thinking about economic issues. As the nineteenth-century economist Frederic Bastiat famously pointed out: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist considers both the effect that can be seen and those effects that must be foreseen.”
For example, let’s imagine that a local government decides that it wants to spend $20 million on constructing a convention center to serve both the local community and possibly outside groups who might use the facility for meetings or conferences. In general, what would a true economic impact study have to take into consideration? Of course, the study would look first at “the seen,” that is, the effect of the $20 million expenditure on the industries that might be directly impacted, such as the construction industry, local suppliers of materials and equipment, labor demand in these industries, etc. These would be immediate effects as the construction begins and is carried out to completion. Of course, local restaurants and hotels might benefit and therefore increase their output as a result of this new business. If labor is paid more in these industries, then these workers will go out and spend some of that money increasing the demand for other products. These are often called ripple or secondary effects of the $20 million expenditure,and they are what are typically called the “multiplier” effect of the initial spending.
The point is that, at least conceptually, these activities actually occur and can be seen. But what must be realized is that none of them is free. Every dollar that is spent as these “impacts” occur and every resource that is used, including labor, has an unseen opportunity cost. Starting with the original $20 million, the question is simple. What economic activities would have occurred if that money remained in the hands of the taxpayer? It would have been spent on various goods and services or saved in local banks and therefore would have had an economic impact that would also have had secondary effects associated with it. This would have to be subtracted from the visible effects.
During the process of building the convention center, as discussed, local resources will be used. For example, the demand for labor will increase which means that for some, wages will be increased in the process of bidding labor away from other possible uses. Some local industries unrelated to the construction of the convention center will see their costs rise and will either contract their business or reduce investment in future expansion. This means that other workers, again those not related to the construction of the convention center, will see a reduction in the demand for their services over what it otherwise would be and would face the prospect of lower wages.
The point to be made here is that this would occur while the visible ripple or secondary effects that are being analyzed are occurring. What needs to be understood is that the measurements of visible effects are actually describing how the building of the convention center, or any similar project, is absorbing resources away from other economic activities. A true assessment of the economic impact of this or any other project would have to estimate the losses due to these unseen activities and subtract them from the values associated with the seen activities.
The fact is that economic impact studies that are typically invoked by interest groups and state and local governments don’t even attempt to get it right. In a description of one of the more common models offered by the U.S Department of Commerce, it is stated that “As policy makers and the public are often skeptical about economic impact claims, you need credible analysis to demonstrate the effects of your project. State and local stakeholders need to understand how a new development may add to income, output, and employment in their economy.” This statement captures the essence of what is wrong with all commonly used economic impact models. It also helps explain why they cannot accurately be labeled as real “economic” models. The possibility of “new development” subtracting from any of these three variables is not part of the vision. There is a reason for this. The possibility that a new project could cause a net reduction in income, output, or employment is ruled out of the models by their methodology. The “unseen” of opportunity costs go unexamined and therefore unaccounted for. Bastiat would label this a “bad economics” I would go a step further and argue that it is not economics at all.
Roy Cordato, Ph.D. is Senior Economist and Resident Scholar at the John Locke Foundation in Raleigh, NC.
Many in Manchester are still reeling from the May 22nd suicide bombing that killed 23 people and left dozens more injured. Since then, thousands have come to visit a memorial in St. Ann’s square, a short distance from the site of the attack, to place flowers or to offer prayers for the victims and their loved ones. Such a peaceful response is inspiring, but the St. Ann’s memorial carries a deeper significance as well: many visitors likely do not realize they are placing their flowers at the foot of a statue of Richard Cobden (1804-1865), the great 19th-century liberal and Manchester political economist.
Although the location of the memorial is unintentional, it is entirely appropriate. Cobden was a tireless advocate of peace and free trade, and his philosophy, now known as “Manchester liberalism” or “Manchesterism,” deeply influenced many liberals, including Mises, who considered himself a member of the tradition. Today, Cobden’s work continues to inspire the advocates of a free society, and more importantly, it also provides an antidote to the violence and war that plague the world.
The Manchester liberals argued vigorously that peace and free trade are the two mutually-reinforcing pillars of a free society, and in fact, that one cannot exist for long without the other. Mises developed their ideas in his own writings, in which he explains more clearly the process by which economic intervention leads to domestic strife, nationalism, and war, and through all these, to further intervention and social decline. When governments regulate economies at home, they create conflict between the winners and losers from their policies. In order to distract from these conflicts, governments turn the public’s attention to external “threats,” usually weak and distant nations. Eliminating these threats requires the use of military force, which can only be supported by diverting part of the domestic economy from productive commerce to unproductive war making. The result is a growing military-industrial complex and the erosion of peace and prosperity.
Seen in this light, it becomes clear that the pro-war and (nominally) pro-trade goals of conservatives and the (nominally) anti-war and anti-trade views of progressives are both doomed to failure: in reality, each produces more war, and less trade. The liberals realized that the only way to avoid the cycle of war is to oppose imperialism while staunchly advocating peaceful commerce between nations. Cobden and his French counterpart Michel Chevalier, for instance, worked toward both goals through the Anglo-French treaty of 1860 that they helped to negotiate.
Yet tragically, although the classical liberals won some victories for the cause of free trade, their greater philosophy of global liberalism has been mostly ignored. The result is the continued creep of the warfare state and of domestic and international interventionism. Bombs and economic sanctions wreak havoc on foreign peoples and foster both retaliatory violence and sympathy for it among the victims of economic and military warfare. Retaliation also works to the advantages of states, which use it as justification for further encroachments on civil liberties at home, for example, through domestic surveillance programs and controls over movement within and across their borders.
This story is by now all too familiar, and the only true solution is a difficult one: to substitute peaceful exchange for war and imperialism. Ultimately, peace and prosperity can only return when the ideas of Cobden, Mises, and liberalism prevail over the ideology of war and statism.
The Trump Administration has enacted tariffs on imported solar cells and larger modules (as well as on washing machines). In general, tariffs are counterproductive, because they only help some producers at the expense of others, and they unambiguously raise prices for consumers. That logic applies to this case as well. However, insofar as the American solar companies that import cells and modules are some of the biggest losers in this deal, they have little grounds for complaint, as they are already receiving lavish benefits from provisions in the tax code. Two wrongs don’t make a right, to be sure, but employment in the renewables sector is arguably closer to the “natural” level after this latest move by the federal government.
The Context for the AnnouncementThe tariffs on solar cells and modules start at 30 percent in the first year, and then fall by 5 percentage points until reaching 15 percent. According to the Administration, the purpose of the tariffs is to correct for the distortion in trade caused by the Chinese government’s use of “state incentives, subsidies, and tariffs to dominate the global supply chain” in this arena.
Back in the fall, the U.S. International Trade Commission recommended that the federal government enact tariffs in response to China’s allegedly unfair practices. Indeed, the Obama Administration had reached a similar conclusion, as CNBC explains:
The Obama administration twice placed tariffs on solar imports from China, but Chinese companies skirted the penalties by moving production to neighboring countries. The Trump administration’s tariffs close that loophole by applying tariffs to all solar cell and module imports.
I personally don’t recall as much outrage over the Obama Administration’s moves when they occurred.
Tariffs, a Blunt and Inefficient InstrumentIn general, economists from across the political spectrum agree that tariffs are a very blunt instrument, and reduce economic efficiency. They, of course, have the ability to help certain producers—that’s why tariffs exist—but in general, the gains to the winners are smaller than the losses to the losers. As such, when the U.S. government imposes a new tariff, it makes Americans per capita poorer than they otherwise would be.
The pithiest case against tariffs was penned by Henry George, who observed: “What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” (Quote from page 47 here.) For an introduction to the economic case for free trade in modern, plain language, see the chapter in my textbook. For a classic critique of “protectionism,” read the famous satire by the masterful Bastiat.
When it comes to our current situation, the new tariffs will help U.S. manufacturers of solar equipment. Indeed, it was two U.S.-based companies—Suniva and SolarWorld—that brought the case to the government’s attention. By artificially raising the price of imports, the tariffs make it easier for U.S. manufacturers to compete, and thus the move arguably “creates jobs” for such companies. However, these potential job gains are offset by the loss of jobs of U.S. companies that use solar cells and modules, because the higher prices will ultimately mean fewer sales in renewables at the consumer level. These analyses are always guesswork, but according to one estimate quoted by CNBC:
Imposing tariffs could create as many as 6,400 solar manufacturing positions, but job losses in other parts of the industry would almost certainly exceed those gains, an independent analysis by Bloomberg New Energy Finance performed for Utility Dive found.
So to summarize, compared to the situation a month ago, the new tariff on solar cells and modules makes Americans poorer on net. It doesn’t create jobs per se, it just shuffles them around. And by artificially making imports more expensive, it merely reduces options for U.S. consumers.
Remember that a tariff is a tax on potential purchases that Americans want to make. Fans of the free market should not be surprised to learn that the textbook analysis says a tariff (generally speaking) makes Americans poorer, on average, because its artificial incentives make production less efficient. That’s what taxes do.
It’s true that we don’t have a free market in global trade. However, if the Chinese government wants to subsidize its exports of solar products, then that makes the Chinese people poorer. In the limit, if the Chinese government bought up products and then sent them as gifts to Americans, that would be a pure transfer of wealth from China to the United States. Getting gifts from foreigners doesn’t make us poorer, on net, even though the particular type of gift could hurt particular U.S. firms and their workers.
U.S. Renewables Sector Has Little Grounds for ComplaintHaving said all of the above, the one group who can’t complain about the impact of the new tariffs is the U.S. renewables sector. These firms are already benefiting from artificial tax code support, in the form of the Production Tax Credit (PTC) and Investment Tax Credit (ITC). (Note that the eligibility has changed over the years, but solar operations from the past and not claiming the ITC can still claim the PTC.) Consider Figure 1 below, taken from my March 2017 Congressional testimony on energy subsidies in the tax code:
The above chart shows the total dollar amounts (based on government statistics). Things are even more lopsided when we account for the amount of electricity actually produced by the various sources:
As these figures make perfectly clear, U.S. solar producers are the last group in the world who can complain about unfair tax treatment leading to distortions.
ConclusionAs I explained in my testimony last year, the federal tax code artificially boosts the market share of wind and solar power in the United States. Now, the new tariffs enacted by the Trump Administration will reshuffle that artificially high amount, reducing the number of workers in solar installation (for example) while boosting the number of workers in solar manufacturing. Even so, the total number of U.S. workers in “solar” is still artificially high, compared to a situation where the U.S. tax code just applied the same rate to all firms, and didn’t have special credits for some domestic firms, or penalties on foreign imports.
In general, tariffs are a very blunt instrument and a poor device for making Americans more prosperous. However, the U.S. firms who are the direct “losers” of the new solar tariffs have little grounds for complaint, since they’ve been benefiting for years from favorable tax treatment.
Originally published at Institute for Energy Research
Once upon a time there was a northern, medieval phenomenon as much the subject of universal myth and curiosity as that of the enchantress city-republics flourishing down south: the Hanseatic League of the mid-13th to 16th centuries. “The Hansa“ (old German for “associations“) or “The League,“ as it was known, began as a treaty between Lübeck and Hamburg “to clear the road of pirates and robbers between the Elbe and the Trave“ [a river in northern Germany with its delta at the Baltic sea]. It gradually increased to add Cologne and Bremen, later expanding to Gdansk, Riga and Novgorod, finally incorporating Bruges, Brunswick, and many satellite-cities throughout Scandinavia. The main goal of this expansion was to keep the herring fisheries of the Baltic in the hands of the merchant-princes of Lübeck and decidedly out of the hands of Frederick II Hohenstaufen, stupor mundi extraordinaire, who, in 1226, decreed that lovely, gothic-gabled town an Imperial City. Then, too, routes to capture the salt trade to Cyprus were critical. Soon, The League was dominating commercial relations with the Levant, Venice, Spain, France and England in timber, fur, grain, honey, Scandinavian copper and iron, in return for spices, medicine, fruit and wine and cotton. Such is how this loose coalition of Flying Dutchman--capitalists emerged as an empire without a State.
Navigare necesse est, viviere non est necesse is inscribed over the door to the old shipping house in Bremen: “It is necessary to carry on navigation, it is not necessary to live.” This old Hanseatic wisdom truly captured the spirit of this great port-civilization. Ruled by a code of honor as a de-centralized alliance, trade was everything and “The State” was looked upon as a land-locked, bureaucratic annoyance. The League came together and stayed together to share the risks of trading, seafaring and—where necessary—to deal with pestering overlords who knew nothing of commerce on the high seas but could smell a fresh source of taxation from a thousand Baltic tributaries away. They were “men who would not fight or steal; who would not live by plunder for pay,” as a 19th century British magazine, The Illustrated Magazine of Art, once swooned in nostalgia. “As those who wished to sell honestly, they were compelled to unite together for their own protection in order that they not be deprived of the rich goods they brought back with them from Italy for the north of Europe. They formed an association—one which ultimately became the proud and powerful rival of Kings and Emperors.”
In no time those kings and emperors “begged their loans and pawned their crowns” to do business with the Hansa and their fleet of 248 merchant ships — the pride and power of the seas. Lübeck, at one point the richest city in Europe and referred to as the “Carthage of the North”, became the unofficial capital of the League, one that maintained its own mercenary-army of 50,000. But that was about it. The League had no coherent political organization. To join or to leave was determined by trading interests of the merchants—there was never a clearly defined administrative center or even a system for raising taxes. Admission was strict: no cities would be allowed in unless situated on the sea or some navigable river adjoining. Cities “which did not keep the key to their own gates” were not even considered. They had no parliament, no president; no consistent civil jurisdiction outside formal oaths and pledges. As a protector they chose the Grand Master of the Teutonic Knights—and even he had to take an oath to preserve the mercantile freedom of this merry posse of salty dogs. The League’s on-again, off-again Diet met whenever and wherever it was convenient to discuss things; there was no army or navy, and in the event of some outside threat, the cities most at stake would come together to decide a common plan of action such as higher tariffs, and only rarely the waging of war. As The League’s founding charter proclaimed: “If the conflict is against a prince who is lord of one of the cities, this city shall not furnish men but only give money.”
The condition of affairs in Germany at this time was favorable to the development of these feisty free towns, for Emperor Frederick was always engaged in vain wars in Italy, while leaving imperial matters at home to take their own course.
Thus, the Hansa, one might say, was the medieval, northern, sea-faring equivalent of the exalted mode of the great poles — Athens, Corinth, Thebes—themselves centers of industry, generating economic-civic relationships and an explosion in inter-regional trade between other city-states. The League remained as such only a few decades after that fateful day in 1598 when Elizabeth I closed a key Hansa trading association on the Thames in London, primed as she was to create an imperial power of England.
When The League first started to take shape, it spread with astonishing rapidity, reaching the extreme eastern point of the Baltic a few decades after the founding of Lübeck. The establishment of so many successful colonies stimulated a heady commercial spirit, and the race to search out the remotest markets became a kind of sport of wayfarers. That the League originated along the Baltic was due to the fact that the entire region was far behind the other great commercial districts of Europe in terms of civilized development, and presented greater risks and dangers to traders than did the Mediterranean or the North Sea. The Italian cities, for instance, never combined into an organized system for commercial ends. The Dutch towns would never have been under the necessity of uniting, as far as their trade with England and Norway was concerned; they were drawn into the Hanseatic League because of their interests in the Baltic.
As one historian, Ellen Semple of the American Geographical Society of New York, wrote of The League: “For the towns scattered along the German and Russian coast from the Trave to the Neva, union was a matter of life and death. Moreover, they were full of the spirit of enterprise and self-reliance engendered by their mode of life. Their inhabitants, lured as colonists to these inhospitable shores by partial exemption from taxation and by certain unusual rights and privileges as citizens, had tasted of the sweets of independence.”
These commercial cities were located between the advanced industrial centers of Flanders, the Netherlands, and western Germany on the one hand, and the undeveloped lands to the southeast, east and north on the other. To the south of them was a great passage from the Mediterranean, and also from the Black and Caspian Seas. They formed the northern termini of the trading routes “and they thrived or declined according to the commercial activity along these great continental highways”. They entered into close relations with the inland cities which grew up along these routes to complement the work of the coast towns, and formed with them their own city-systems, in which each sustained a defined relation to the others. For this reason, the Hanseatic League, mysterious as its origin is, was formed first by a federation of maritime cities “simply for the purposes of protection to their common trade”.
The Hansa was also one of two great powers that used gold-as-money systems that worked in their day — some would say all of history — the other being Venice. This gold as money was in constant circulation; there was no credit-as-money in The League.
It was Socrates who spoke of the concept of a “city-soul.” The natural justice, as he called it, of city life was that men made products for the men who need them, with each individual endowed with some mental talent or physical capacity to equip the community. It is a justice, as one scholar of the philosopher has written, drawn from nature and “applied to the man-made organization of his order and rule.” For the Hansa, the City was an expression of civic greatness — and not “The State”. The Hanseatic League remains a wonderful, romantic, practical tale of the power of pure commerce to organize and civilize human relationships, and its unfailing genius in advancing the progress of human society.
In the wake of Hurricane Maria, most of Puerto Rico lost electricity. Since electronic transactions were not longer possible under these conditions, the Federal Reserve was forced to fly a planeload of cash to the island to avoid a total breakdown of the economy there.
But even then, we were assured that the loss of power was a momentary blip. Everything would be back to normal soon.
But as of December 29 (more than three months after the hurricane hit) only 55% percent of power-company customers actually have power again.
The good news is that the "Army Corps of Engineers has projected that power will be restored for most people by March, but those in very remote areas might have to wait until May because of the difficulty in moving supplies."
So, in some parts of the United States, when disaster strikes, one has to wait only a mere six months to have power restored.
This is partly due, not surprisingly, to the fact that electricity services function under the weight of a government-granted monopoly given to the local power company. It's not as if a competitor can come in and start working with local residents to rebuild the infrastructure. That, of course, is illegal. Besides, it's likely that non-monopolistic electric companies would only be willing to do that at high prices. But that would be verboten also, because it would be labeled "gouging."
Needless to say, under these conditions, the standard of living for many Puerto Ricans is plummeting, and now many on the island fear a surge in crime:
Thirty-two people have been slain in Puerto Rico in the first 11 days of the year, double the number killed over the same period in 2017. If the surge proves to be more than just a temporary blip, January could be the most homicidal month on the island in at least two years, adding a dangerous new element to the island’s recovery from Hurricane Maria, its worst disaster in decades.
While the number of homicides did not immediately spike in the weeks after the hurricane struck on Sept. 20, police and independent experts say many killings appear at least partly related to its aftereffects.
The storm has plunged much of the island into darkness, increased economic hardship and contributed to a sickout by police, all fueling lawlessness. What’s more, officials say a turf war has broken out among drug gangs looking to grab territory after the storm’s disruption.
Help Is Not on the WayFor many years, Americans became accustomed to the idea that in the wake of any disaster, help would soon come flooding in. Power would be quickly restored and re-building efforts would begin in force.
Over the past decade, however, that narrative has become less and less convincing.
After Hurricane Katrina in 2005, for example, the Federal Emergency Management Agency (FEMA) is now widely regarded as an agency made the situation worse in the storm-affected area —especially in New Orleans.
Moreover, the worst part of the disaster did not come directly from the storm. It came from the failure of levees built by the Army Core of Engineers.
It was a disaster made far worse by the incompetence of government "experts." Yet again, faith in the ingenuity and reliability of federal bureaucrats was rewarded with death and destruction.
After years of decline, it took a decade for the New Orleans population to recover in many areas. In other areas, population has still not recovered, and as is so often the case with natural disasters, lower-income populations have been impacted the most.
Source.
Now, more than a decade later, there are still new lessons to learn about the folly of waiting for government help in the wake of disasters.
Puerto Rico's fate provides a couple of grim reminders.
First of all, the lack of power in Puerto Rico reminds us that it's important to always keep extra physical cash in case of emergencies. Economists and politicians who work in shiny skyscrapers in wealthy cities are often quite comfortable concluding that physical cash is no longer necessary. After all, just look at all the wonderful technology that surrounds us! Need to buy something? Just use your iPhone.
Of course, all the wonderful solutions to our problems only work when there is power running to cell towers, and when there's power to charge phones. This should not be assumed even in urban areas, as Puerto Rico has shown us, and this assumption gets even worse as we move into more rural areas. Moreover, without physical cash, the informal economy — which is especially essential in times of disaster — comes to a screeching halt.
And secondly, governments will continue to place obstacles in the way of the private-sector people who are inclined to help.
Back in October, as Puerto Rico began recovery efforts in earnest, some in Washington began to discuss repealing the Jones Act. The Jones Act greatly limits shipping to Puerto Rico (and other domestic ports) by mandating that " all maritime transport between domestic ports to be flagged, built, and manned by the United States."
The Act grants a monopoly to the United States Merchant Marine, and locks out more efficient shipping organizations.
Naturally, the effect of this has been to greatly increase the price of shipping to Puerto Rico.
Last fall, some policymakers — the Trump Administration included — were forced to admit that the Act was stifling the recovery effort. Yet shockingly, many months after the disaster, the Jones Act is still in force.
In the continental United States, of course, recovery efforts are helped immensely by private organizations shipping goods directly to the affected areas — usually by roads. Just imagine, though, that if one wanted to ship clean water to Houston, one needed to do it only through special federally-approved shipping organizations, and only after filling out reams of paperwork.
While it's true that it's impossible to hop in a car and drive to Puerto Rico, the island isn't exactly in the middle of the Pacific, either. A great many American organizations are capable of shipping goods to Puerto Rico all by themselves. But they are barred by federal law.
And, of course, as far as foreigners are concerned, there is no free trade with Puerto Rico, so everything must go through federal bureaucrats to be imported into Puerto Rico. The Island can't unilaterally declare itself to be a free-trade zone.
So, here we are months later, and the United States government continues to squeeze trade and shipping with Puerto Rico while also claiming to be concerned about "helping" the Island nation recover. Maybe more Puerto Ricans will be able to read about it once the other half of the island finally gets electricity again.
President Donald Trump has announced the planned imposition of a new, 25 percent tariff on imported steel and a 10 percent tariff on foreign made aluminum entering the United States. This has brought about threats of trade retaliation by a number of America’s trading partners. The menacing clouds of a possible trade war are showing themselves on the global horizon.
Claiming that other countries are taking advantage of the U.S., as reflected in American trade deficits, Trump, in one of his infamous tweets, has declared that “trade wars are good, and easy to win.” How and why? Trump asserted: “Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
An Individual’s Trade Deficits and Surpluses Balance OutLet us think this through a little bit. Suppose I pay $100 for my food from a nearby grocery store, but the grocery store owner and employees only buy, in return, $10 worth of economics lectures that I would be happy to deliver. Clearly, I am experiencing a trade imbalance with this grocery store in the form of a $90 trade deficit. I buy far more in the store than the people working there buy from me. And according to the president, I am, therefore, being taken advantage of by this grocery store.
What might I do if I personally acted upon Trump’s analysis of my situation? I could stop buying $90 worth of food items that I’ve been purchasing at this grocery. The store and I would, now, be in a reciprocal trade balance. I spend $10 dollars on the items for sale in this business establishment, and they turn around and spend that $10 on economic lectures that I’m offering to sell. The trade balance is in balance.
But now I have a problem. I’m short $90 worth of food items that I previously had been purchasing at the grocery store. Having reduced that dollar amount of food “imports” into my personal household, I may decide that I’ll now produce it “domestically” at home on my own property.
But I’m an economics professor, not a farmer. For the sake of the argument, let’s put aside the fact that I don’t own any farmland or farming equipment. If nothing else, agricultural production is not my specialized niche in the social system of division of labor. So, no doubt, my efforts to undertake “import-substitution” domestic food production will end up costing me more to generate the same amount of food output than the $90 I had been paying at the grocery store.
Say, that my “homeland” production of food requires me to expend a dollar outlay of my labor time and related farming equipment and resources totaling a cost of $115. That is, it now costs me $25 more for me to grow and supply myself with the same amount of food that I used to buy at the grocery store for $90. This means that $25 worth of other goods and services that previously I had been able to produce and sell and then use the proceeds from which to buy $25 of desired consumer goods from others in the marketplace will have to be foregone. I am now $25 poorer in terms of my material standard of living.
Of course, my ability to spent $90 more on food in that grocery store than the store personnel buy from me in the form of economics lecture services only arises from my ability to earn $90 more from others who do purchase my lecturing services than I purchase of the particular goods and services sold by them in the marketplace. So looking over all my exchanges with all my trading partners, my balance sheet of total purchases and total sales balance out at the bottom line.
Higher Import Taxes Mean Higher Prices for GoodsI would suggest that the conclusions drawn from the situation of an isolated individual has its counterpart in understanding the same process over a large number of interdependent individuals living and working within a particular country.
Suppose President Trump follows through with his threat to impose that 25 percent tax increase on steel imports into the U.S. In 2017, America imported almost $30 billion of foreign steel into the country. According to the U.S. International Trade Administration, 16 percent of that steel came from Canada, 13 percent from Brazil, 10 percent from South Korea, and nine percent from Mexico and Russia, respectively. Smaller amounts come from Turkey, Japan, Taiwan, Germany and India.
If the rationale for the president possibly imposing this higher import tax by executive authority is due to “national security” concerns, then the Trump administration must have some really deep insider information that America is facing eminent dangers of war from countries with whom it has shared decades-old political and military alliances or, with the exception of Russia, nations with whom America has close peaceful relations.
If the import tax is implemented, this will require the foreign sellers to raise their prices for the steel they sell to American buyers by some amount up to the full 25 percent of the import duty. They may try to absorb a portion of the higher cost of selling their steel in America, but there is a limit to which they are willing and able to eat into their own profit margins, which partly depends on consumer “elasticity” for that imported steel, that is, by how much do sales go down when they raise their price by some specific amount?
To the extent that U.S. manufacturers who use steel in their production processes experience higher costs for purchasing that input, they too will find it necessary to increase, to one degree or another, the prices of the finished goods they are offering to consumers and other producers on the market.
Consumers may not feel the full 25 percent tariff increase for every one of the goods they purchase that has steel content in its manufacture. But the prices they pay will reflect to one degree or another the (marginal) higher costs of production due to more expensive steel.
Import Tax Redistributions from Consumers to ProducersEach individual buyer may only be burdened by many small increases in the costs of the many steel-using goods they buy. But all those little-bit of higher prices here, and little-bit higher prices there, will sum up into tens of millions of dollars of added revenues for the domestic steel producers.
For instance, in 2017 about 30 million metric tons of different types of steel were imported into the U.S. at that cost of almost $30 billion, again according to the U.S. International Trade Administration. Suppose that the price of steel per metric ton rose just 15 percent. That would raise the cost of imported steel by $4.5 billion.
In 2017, domestic American producers produced about 82 million metric tons of steel, and it sold at an average price of $740 per metric ton for all types, generating total revenues of $60 billion. A 15 percent increase in this per tonnage price would generate an additional $9.1 billion in extra revenue for U.S. domestic producers.
This means that over $9 billion would be redistributed from the steel-using American public and business community into the pockets of U.S. steel manufacturers. Over the two years, 2016 and 2017, the steel industry spent a total of around $20 million on lobbying activities in Washington, D.C., according to the Center for Responsive Politics. By any standard of measurement, a $20 million dollar investment that results in a $9 billion payoff would not be considered too shabby.
But even if it were only to be half — $4.5 billion – in total additional revenues for U.S. steel producers due to the import duty on foreign steel, that would come to about a $40 per capita cost on every household in the country to benefit the steel industry. That is enough to buy two or three pairs of children’s shoes on sale at Walmart. This is almost equal to 10 percent of the average total amount that men above 16 years of age annually spend on cloths. It is an amount that would be enough to buy at least six Big Mac meals at McDonalds. It is equal to purchasing over 30 dozen eggs. It is enough to buy at least 10 Starbuck’s lattes.
All of these types of individual lost purchases for all the individuals in the U.S. as a whole will represent the cumulative costs for the 325 million people in the United States, and all to “protect” through an increased import tax around 150,000 jobs in the steel sector of the economy, out of a total labor force of 161 million people.
Subsidized Foreign Goods are not Damaging to AmericaBut, it is sometimes replied, many of these foreign steel imports are sold in the United States at prices subsidized by governments in the countries from which the steel is coming. This may very well be true, but this means that American manufacturers and consumers are then given a bargain. We get something for less than we otherwise would have had to pay for it.
Americans then have to produce and sell fewer exportable goods to buy those imports. American resources and hours of labor that do not have to go into producing more goods for export to pay for higher costing imports are freed up to use and invest in ways Americans otherwise could not have afforded to do. Those resources and labor hours are available to make more goods and services to satisfy other domestic demands for desired products. Or to be used to buy different and attractive importable goods that previously could not be purchased. Our standards of living are increased.
If another country’s exports are being subsidized the complaint should be made by the citizens of that other country, who are taxed to fund the subsidy, and whose take home paychecks are reduced to provide a “crony” privilege to a special interest group at their expense.
Of course, it is also possible that the exported good was not being subsidized. Instead, the foreign seller had found a competitive cost-efficient way of producing it for less and thereby selling it to Americans for less, while still making a profit. From the American buyers’ perspective, in both cases the outcome is the same: a desired product is obtained at a lower price and, thereby, the buyers are economically better off.
The Trade Balance Always BalancesIf the foreign seller does sell more in America and increases his earned dollar revenues, he will have increased his financial capacity to demand more American exports he might find it attractive to buy that previously were beyond his reach.
Even if he does not find American goods attractive to buy or not in an amount equal to the dollar earnings from his exports to the U.S., holding those dollars gets him nothing. He may, instead, trade those dollars on the foreign exchange market for some other currency that he’d rather have for his own buying purposes on the global market.
But who would be selling that other currency in exchange for dollars, other than someone who wants dollars to do . . . what? Buy American finished goods, or directly invest in a potentially profitable business in America, or invest indirectly by depositing those dollars in an American financial institution to earn the interest income that makes that alternative an attractive one. The latter choice increases the pool of savings in the U.S. economy and assists in funding investment projects undertaken by Americans.
Once we look beyond what is immediately seen, and follow the process through several addition steps, we see that the “fear” of trade imbalances and being “taken advantage of,” are completely misplaced. (See my article, “Trade Deficits Don’t Matter, Unless Caused by Government”.)
Instead, what America is facing are the illogical trade policies of an economically illiterate president in the White House. President Trump’s decisions do not only threaten to make Americans poorer than they, otherwise, have to be, but which might set in motion the opening shots of an international trade war that could drag the world into a downward spiral of global hostility, economic instability, and worsening standards of living for hundreds of millions of people around the globe.
[This article is Part 4 of a series. See Part 1 and Part 2 and Part 3.]
Mises’s insight into the importance of Cantillon effects can be further extended to explain not only income and wealth inequalities among individuals (Part 2), or the reasons for the economic disparities among national economies around the globe (Part 3), but also some rather curious developments in global industrial organization over the last few decades.
The growth of cross-border business activities in the 21st century has been accompanied by organizational changes within companies that produce or trade internationally. These changes—concerning the size, corporate hierarchy, or financial decision-making of firms—, have been analyzed in detail in both the global management and the international trade literature. Firms have in fact become a rather common unit of analysis in international economics, especially “since the mid-1990s, [when] a large number of empirical studies provided a wealth of information about the important role that firms play in mediating countries’ imports and exports” (Bernard et al. 2007, 2).
The creation and development of firms that trade internationally, or that have branches in different countries is usually investigated in a framework centered on four elements: “organizational formation through internalization of some transactions, strong reliance on alternative governance structures to access resources, establishment of foreign location advantages, and control over unique resources” (Oviatt and McDougall 1994, 45). And yet, “despite this resurgence [of the theory of the firm], there is still little connection between the entrepreneurship literature and the literature on the firm, both in academia and in management practice” (Foss and Klein 2012, ix). More importantly, as entrepreneurship is generally linked to small enterprises—and less with international corporations, or export-import activities—it remains dissociated from the study of international investments, and of international firms. The latter, in turn, remains dissociated from the study of international monetary systems and their impact on international enterprise growth and formation. Therefore, these studies omit to discuss the relationship between monetary policies, and firms’ features and financial behavior in global markets.
Nevertheless, the international firm can be understood as an entrepreneurial phenomenon within international markets, and because entrepreneurial judgment is action calculated in monetary terms, the prerequisite for the creation and development of international enterprise is the existence of money and money prices that can make heterogeneous resources commensurable, and input and output comparable. Only with the help of monetary calculation can entrepreneurs make rational decisions concerning the organization, size, compartmentalization, geographical location, and financial decisions of the firm. Consequently, all decisions taken by a firm on international markets (to trade, to invest, to be born globally, to do green field investments, to merge with or acquire another company, to license or wholly own its subsidiaries, or to slice up production stages across countries) are indelibly tied to the entrepreneurial judgment of an individual or group of individuals, and the result of their entrepreneurial decisions.
Calculated entrepreneurial action in terms of money prices in international markets represents thus the basis for trade, production, and global financial phenomena. Because of this, monetary expansion impacts the organization of firms in two important ways.
On the one hand, because the boundaries of the firm are determined by economic calculation, falsification of the latter can affect decision about the outlook, structure, and size of the firm as a whole. As Foss and Klein explain, “the limits to firm size can be understood as a special case of the arguments offered by Mises and Hayek about the impossibility of rational economic planning under socialism” (2012, 181). In other words, “these ultimate limits are set on the relative size of the firm by the necessity for markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses” (Rothbard 2009, 536). Furthermore, the structure, boundaries, and the internal organization of firms—both for small companies, as well as international enterprises—respond to changes in entrepreneurial judgment, which in turn is sensitive to changes in the interest rate. On the other hand, entrepreneurial judgment is also sensitive to the structure of incentives, such that monetary expansion and government intervention can promote unsustainable firm growth or unsustainable start-up businesses, discourage innovation or bias entrepreneurs’ financial decisions toward debt and promote financialization—as we shall see more in Part 5.
In the case of firm size and firm boundaries, empirical studies show that international trade is populated in an overwhelming proportion by large firms, which are more likely to be successful on global markets than smaller firms. According to the U.S. Bureau of Economic Analysis and Eurostat data, large firms in the US, UK, Germany, and France comprised around 80% of the total value of their countries’ imports and exports in 2012-2013, the rest being shared between small and medium enterprises. Over the last decades, the SME share in trade has in fact diminished, although SMEs have increased in absolute numbers over the same period. Further disaggregation of the data reveals, however, an even more important bias: the growth in the number of SMEs was led in great part by micro and small firms, while medium-sized business have almost disappeared in most countries, from both domestic and international activities. As a result, international trade is “hourglass-shaped” (Feldman and Klofsten 2000, 632), comprising mainly very small and very large companies, while medium-sized firms appear to be only a transitional point in enterprise growth.
Common explanations for this bias in favor of large firms emphasize the latter’s competitive advantages: large firms command most of international trade because they are better and quicker at identifying international opportunities, have more resources than smaller firms, more bargaining power with local government authorities, and better access to capital markets. However, as there is nothing that would suggest medium-size firms as an unviable business model, such an anomalous distribution of transactions by firm size cannot be entirely justified as a natural tendency of the market economy. These explanations cover only partially the bias in favor of large firms, and do not clarify the reason for the disappearing ‘middle’ market.
A better explanation is that the distortion of economic calculation via monetary expansion brings about this hourglass distribution of firm size in international trade. This explanation is first corroborated by the ‘odd’ behavior of existing middle market companies. Approximately 31% of mid-sized firms in Germany, for example, are owned by a family, and a further 40% by some combination of private equity and family, while only 14% are traded on a stock market ( The Economist 2012 ). As an oasis in the middle of a debt desert, medium-sized firms from most countries prefer to finance their business from retained profits rather than borrowing or from the stock market, and do not wish to make use of public trade finance to internationalize. Their reluctance to resort to debt might explain why they lack the ‘financial edge’ to penetrate global markets, but also why they were, as a group, less affected by the recent financial crisis.
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The overwhelming majority of starting companies, however, rely heavily on external finance—out of which almost half is bank credit, as shown in Figure A (data from Beck et al. 2008)—even from the beginning of their activities. This is due to the fact that loanable funds markets are the easiest to access source of capital, as well as the most plentiful.
During financial booms, this dependence of firms on bank finance is only strengthened, because working capital is cheap and asset bubbles provide entrepreneurs with better collateral to access more credit. But the easier entrepreneurs obtain funding for their projects, the more inclined they are to expand the firm and to extend their “resource bundles” (Foss and Klein 2012)—i.e. to acquire complementary resources, integrate additional lines of production, or simply develop existing activities. Consequently, bank loans, inter-firm credit, and other external finance from domestic and foreign sources, allow many companies, during periods of monetary expansion, to grow rapidly and to a greater extent than otherwise. Banks also support the growth of firms that would not have otherwise qualified for (trade) finance, which can provide little collateral and whose growth prospects appear viable to investors only because of the artificially lower interest rates. These developments, together with capitalist-entrepreneurs’ search to diversify their growing asset portfolios and foreign investments, further strengthens the participation of such companies on international markets.
Similarly important to a firm’s international decisions are the potential changes in the geographical distribution of global commercial networks. Many firms, as they grow, are incited to internationalize by policy pressure and by the credit lines offered by chambers of commerce, industrial associations, banks, or other export-promoting government agencies (as we shall see in more detail in Part 6). As a result, they also become more integrated in international production chains, and begin to export to more distant foreign markets. On an unhampered market, such integration would be genuine, and thus highly beneficial to the international division of labor. In the present monetary system, however, firms seek these commercial relationships in pursuit of short-term gains, or due to an understatement of the risk of their transactions. The growth of such firms and global production chains, therefore, is not authentic, and their long-term survival becomes dependent on the continuation of monetary expansion.
The expansion of bank credit, and implicitly that of trade finance, also leads to a decrease in innovation. Many businesses are discouraged from incremental innovation, such as cost cutting or improving features of existing products, because cheap finance lessens the pressure of competition, and provides a financial edge that can, for a longer or shorter time, substitute an otherwise necessary managerial or innovative edge. Other businesses are encouraged to invest in radical innovation, through which they create new products and new markets for their products—and promote, as seen before, an increase in the extensive margin of trade. Nonetheless, if their innovativeness is in fact reckless decision-making, their projects turn out to be just costly experiments.
Even so, when innovation is encouraged, this is likely to happen in existing, large firms, and to be denied to smaller companies, due to the way in which innovation and financing programs are set up by the national chambers of commerce, industrial associations, banks, or other government agencies. According to OECD statistics (OECD 2013), data from 2005 to 2010 shows that only 700 firms accounted for close to half of the world's total research and development expenditure, while less than 10%, on average, of total patent applications in OECD countries over the same period were filed by firms younger than 5 years. These figures support what Hülsmann (2008, 181) argues, that
“any new product and any thoroughgoing innovation in business organization is a threat for banks, because they are already more or less heavily invested in established companies, which produce the old products and use the old forms of organization. They have therefore every incentive to either prevent the innovation by declining to finance it, or to communicate the new ideas to their partners in the business world.”
The infusion of new technology contributes to the growth of some firms more than others, further reflecting the unevenness of Cantillon effects, i.e. of the social and economic changes following monetary expansion: FDI technological spillovers are concentrated, because of the features of the business cycle, into the higher stages of production, benefitting these sectors in a different proportion than otherwise prescribed by the market. On the other hand, trade barriers and patent laws divert and limit the transfer of technology and know-how, and again disproportionately favor firms in some countries more than others, at odds with the pattern of technology transfer on a free market.
In conclusion, between the small firms that cannot grow or innovate — but which, in number, increase every year as a result of government programs for SME start-up — and the large firms whose activities grow faster than otherwise, one finds the explanation for the otherwise puzzling absence of the middle market in international trade.
The newest cover story in The Economist deplores the situation of cities in developed countries that are left behind in terms of economic development by the digitized, globalized economy. One such is Scranton, Pennsylvania, where, since 2007, the local government has spent over $6bn on corporate subsidies in an effort to encourage redevelopment and boost local infrastructure. Such places and their disengaged, disgruntled workers are also fueling the rise in anti-globalization rhetoric which has propelled several new faces into the political arena in the US, France, and Britain, and produced unexpected election results.
The Economist suggests three new avenues for reviving these economically laggard cities, all of which involve heavy-handed government policies: (1) spreading know-how to better help local firms, (2) help colleges train local firms in mastering new technologies, and (3) using tax incentives and subsidies to encourage local investment.
But the premise on which these suggestions are based is entirely flawed: it is not sweeping globalization that has kept these cities behind, but government policies.
Globalization did indeed remove once thriving industries from these areas and relocate them to better-performing regions. These changes are inevitable in the economy: comparative advantage shifts as consumer preferences shift, quickly and significantly; entire regions may see capital and labor move from a local booming industry to other areas, other industries, or even abroad. This is an inevitable law of economics, and in the nature of the market.
But there is another law inherent in the market, and in the network of specialization that binds economic communities together: that no individual or region is left without a comparative advantage. Specialization is beneficial because and only if resources are allocated based on relative productivity, and free trade is allowed to take place as a result.
Thus, other industries are sure to flourish where once coal mining reigned, if only the market is allowed to reallocate resources to the most efficient and productive production processes. Transitional periods may be difficult, and the movement of both capital and labor costly—both financially and personally. But if the change is one toward more efficient production, everyone will be better off: prices will tend to drop and real wages to increase.
However, this cannot occur if governments divert these resources into corporate subsidies, restrict free trade, and promote their own brand of ‘managed globalization’; if monetary policies destroy the means and incentives to save for future investments; or if new government policies waste these resources on spreading know-how or interfering even more in education. To be sure, tax breaks are always welcome, but if they are geared solely towards dying industries, and the new industries which may revive these laggard areas are more heavily taxed as a result, redevelopment may never take hold. Government policies, however well-intentioned, can never reverse, but only stall an already difficult and inevitable change.
The anti-globalization “box” thus contains two different types of arguments: one against economic change in general, which is entirely futile, and the other against difficult economic transitions, which are often brought about and prolonged in the first place by government spending and regulations. As long as both arguments survive, so will the anti-globalization rhetoric and the opportunities to capitalize on it in the political sphere.
It is poor economics that still keeps these regions poor. And it is not in the interest of politics to promote sound economic ideas. Only the market can make economies and economics richer.
As Ron Paul once wrote, "politicians who compromise and seek bipartisanship are the most dangerous among the entire crew in Washington." This week Trump began making his Clinton-esque pivot toward being such a president, making deals with Nancy Pelosi and Chuck Schumer on the debt ceiling and immigration. Along with the neocon's victories over foreign policy realists and Trump's embrace of an activist Fed, any hopes of draining the swamp are long dead.
Luckily, however, nullification is still alive and well.
On Mises Weekends, Jeff is joined by former Harvard Crimson and Bills linebacker Jake Lindsey. Fresh off a pre-season tryout and looking to continue a career in the NFL, Jake joins Jeff for a candid interview about his two passions, football and Austrian economics.
And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:
With a Central Bank, Bank "Deregulation" Can Be a Bad Thing by Frank ShostakWhy Natural Disasters Are Worse For Poor Countries by Ryan McMakenDon't Trust Government To Protect Your Privacy by Caleb FullerThe Neoconservatives Have Declared War on the Realists by Ryan McMakenJanet Reno, American Saint by James BovardHuman Action, Mises's Masterpiece by Henry HazlittThe Space Race Is Now "Privatized" — But You're Still Paying for It by George Ford SmithThink Gentrification Is Bad? The Opposite Is Worse by Ryan McMakenA Bad Trip: The US Government and LSD by Chris CaltonKeynes: A Master of Confused and Confusing Prose by Hunter LewisWhy Is the Euro Still Gaining Against the Dollar? by Daniel LacalleIs Forced Military Service Good for the Economy? by Ryan McMakenH.L. Mencken: The Joyous Libertarian by Murray RothbardMaine Is Nullifying Federal Regulations that Cripple Local Farmers by Chris CaltonHow Much Policing Do We Really Need? by Tate FegleyWhat If Every Person Paid an Equal Share of the Military Budget by Ryan McMakenWhat We Lost on September 11th by Jeff DeistLudwig von Mises and the Real Meaning of Liberalism by Richard M. EbelingWhy Police Cannot (and Will Not) Protect Our Rights by William L. AndersonCongress Exploits Hurricane to Raise Debt Ceiling by Ron PaulRule by Experts? by Peter G. KleinStanley Fischer's Well-Timed Fed Exit by Brendan Brown
President Trump’s trade war doesn’t seem to be going well. Corporations have already left the United States, and our agricultural sector is already beginning to feel economic strain. However, despite these and potentially more disastrous consequences, the president’s actions are still receiving widespread support, and the cry among his supporters remains “trust Trump!”
A clue to the origins of the trade war’s support can be seen in a recent Newsweek article where a soybean farmer who “claimed that [Trump’s] trade policies were negatively impacting [his] bottom lines” was asked “how far he’d go” in his continued support of the president’s policy, despite the personal consequences. The farmer responded “the Scottish in me says, to the death.” This response suggests that support for the president’s trade policies may be rooted in what social psychology calls honor ideology.
Honor Ideology and the Culture of Honor The psychological construct of honor emerged from the study of the Scots and their descendants who settled the 18th-century American frontier, the same people referenced by the soybean farmer. Initially focused on the American South, the study of honor has since expanded to see honor as a more universal phenomenon, evolving under certain conditions, namely (1) a harsh, resource-scarce environment and (2) a lack of meaningful law enforcement. In such circumstances, individuals must often ensure their own survival against threats to their resources by maintaining an “honorable” reputation.
Here, the word “honorable” takes on a different meaning than it might have in the popular mindset. In social psychology, to be known as “honorable” means to be perceived as strong, to be well-regarded by peers, and most of all, to be known as someone who it is very, very dangerous to cross. Indeed, one of the most fundamental parts of an honor culture, and its resulting ideology, is what is known as the lex talionis, or “rule of retribution,” a willingness and obligation to risk life and well-being in the defense of one’s honor. This is because in an honor culture, reputation is fundamental to survival. Without an honorable reputation, you and your family may be seen as vulnerable and open to theft or assault. Thus, honor endorsers are notoriously ruthless in the defense of their reputation, being willing to respond to even minor slights with as much ferocity as they might an actual assault.
Like many cultural adaptations, honor ideology has outlived the circumstances of its origin. However, though the lawless frontier is long gone, the lex talionis remains fundamental to cultures of honor, producing a number of detrimental outcomes, including higher rates of homicide, domestic abuse, and suicide. The modern honor endorser remains as willing as ever to respond to threats via the lex talionis.
Honor and Politics Honor’s focus on the survival of oneself and one’s family lends it a collective focus which has political consequences. When collective identities, like nationality, are perceived as beneficial to survival (e.g., having a feeling of safety or an advantage due to one’s nationality), then collective and personal identities may merge in what is called “identity fusion.” In an honor culture, this fused identity will be defended and maintained as much as the personal one. This fusion can be hard to reverse, even when part of the collective identity, e.g., the national government, becomes a threat to personal well-being or safety.
Thus, honor endorsement often predicts support for national action that follows the lex talionis. If national reputation or safety (i.e., national honor) is threatened or slighted, then the only possible response is forceful retaliation, no matter the consequences. Research has shown how honor endorsement predicts support for violent retribution in response to national threats like terrorism and illegal immigration. It is likely that the support for President Trump’s trade war, even in the face of potential economic harm, shares a similar root in the culture of honor.
Honor Ideology and the Trade War President Trump’s rhetoric has always contained a great deal of honor related content, as has been remarked on even before the 2016 election. Many of his campaign promises revolved around the importance of making America respected, even feared, by making us stronger. Much of the President’s rhetoric surrounding the trade war follows this pattern, such as in this meeting with governors and members of Congress. The president constantly claims we’ve been “taken advantage of” economically, and says that the only way for us to have free trade is through the enactment of tariffs. In other words, in order to have free trade, we must first appear “strong” as a nation by retributively punishing those who have “wronged” us, even though this is precisely the opposite of free trade. This is functionally the same as an honor culture’s belief that the only way to be truly safe is to “get revenge” despite any and all possible dangers.
Many of the president’s supporters also defend the trade war using the language of honor ideology. In an interview with ABC, Senator Lindsey Graham said “the only way you’ll get China to change is make them pay a price and our farming communities [are] on the front lines, but we’ve got to stick with it.” This is the lex talionis talking, claiming we can’t act as we might prefer until we level the playing field again via retribution. In the 18th century, that retribution might take the form of a duel. In the 21st century, however, honor seems to demand economic violence, like tariffs.
Beyond Retaliation It is important to note that honor ideology is not a sign of lesser intelligence, lesser societal evolution, lesser morality, or indeed, any sort of inherent flaw in those who subscribe to it. Like all cultural adaptations, honor ideology evolved as an effective remedy to the circumstances of its time. Honor cultures can even have positive results, producing loyalty, hospitality, politeness, and commitment to family in many cases. However, it is important for us to recognize when some features of an adaptation should and should not be applied. Honor is rarely about making things “better.” Rather than truly fixing a situation, honor is about restoring reputation and perception in the eyes of others. It can be ruthless and single-minded, and is not the sort of mindset which leads to harmonious outcomes, especially not in economics, where mutually beneficial exchange is fundamental to trade.
More qualified people than I can remark on the specifics of why tariffs are economically unsound and why free trade is the best option. Indeed, some, like Senator Ben Sasse, have already done this, both in the public sphere and to President Trump himself. However, I do believe I can confidently state that if we allow honor ideology to dictate our economic policy, if we continue this trade war in the spirit of lex talionis, we may indeed defend our national reputation for strength, but will gain little else.
It’s become quite fashionable for members of the so-called Intellectual Dark Web (IDW) like Dave Rubin, Ben Shapiro, and Jordan Peterson to decry equality of outcome as a thinly veiled guise for tyranny and oppression. However, in pleading against the doctrine of equality of outcome, these digital intellectuals inevitably defend the insidious doctrine of equality of opportunity.
What?! How could you be against equality of opportunity! Isn’t America the land of the free?! Isn’t equality of opportunity the literal meaning of freedom?
No.
In fact, to stand for equality of opportunity is to stand against what economist Ludwig von Mises called “the fundamental social phenomenon:” the division of labor.
The division of labor is the product of a naturally occurring social regularity, what Mises called “the Ricardian Law of Association” (158). The law of association is based on the English economist David Ricardo’s insight that for any two countries A and B where A is more efficient than B in producing both goods p and q, both countries are better off if both countries specialize in producing exclusively that in which each is relatively more efficient. Mises writes:
“Ricardo was fully aware of the fact that his law of comparative cost, which he expounded mainly in order to deal with a special problem of international trade, is a particular instance of the more universal law of association.
If A is in such a way more efficient than B that he needs for the production of 1 unit of the commodity p 3 hours compared with B’s 5, and for the production of 1 unit of q 2 hours compared with B’s 4, then both will gain if A confines himself to producing q and leaves B to produce p. If each of them gives 60 hours to producing p and 60 hours to producing q, the result of A’s labor is 20 p + 30 q; of B’s, 12 p + 15 q; and for both together, 32 p + 45 q. If however, A confines himself to producing q alone, he produces 60 q in 120 hours, while B, if he confines himself to producing p, produces in the same time 24 p. The result of their activities is then 24 p + 60 q, which, as p has for A a substitution ratio of 3/2 q and for B one of 5/4 q, signifies a larger output than 32 p + 45 q. Therefore it is manifest that the division of labor brings advantages to all who take part in it. Collaboration of the more talented, more able, and more industrious with the less talented, less able, and less industrious results in benefit for both . The gains derived from the division of labor are always mutual” (emphasis added).
Put differently, even though country (or individual A) can produce p and q faster than B, it still makes sense for A and B to specialize. Where Mises uses the language “substitution ratio” to explain why, you can also think in terms of what economists call opportunity cost. What Mises is showing in his example is that the opportunity cost to produce p is lower for B than it is for A.
This is the essence of the law of association. It’s the corner-stone of the division of labor. Furthermore, it isn’t just that we can all prosper in terms of greater total production despite the uneven, unequal distribution of talents and opportunities. It’s because of our differences that specialization within the division of labor according to the law of association that everyone is better off cooperating and trading.
To protest against equality of opportunity is to contest what Mises calls the natural conditions determining man’s life and effort. Mises states clearly, these “natural facts are: First, the innate inequality of men with regard to their ability to perform various kinds of labor. Second: the unequal distribution of the nature-given, nonhuman opportunities of production on the surface of the earth” (emphasis added).
We are unevenly, unequally distributed in nature. Therefore, the productive opportunities confronting us are always unequal. To call for equality of opportunity is just as much a plea for the tyrannical, forceful transformation of man’s uneven, unequal natural situation as the call for equality of outcome is a plea for the tyrannical, forceful redistribution of wealth.
As a matter of fact, man is inherently unequal in both opportunity and outcome. In contrast to the presumptions of the far-left and other economic illiterates, mankind’s inequality is the active ingredient in progressive, prosperous social transformation. That is, this inequality can be harnessed to make everyone better off. Mises writes, “If the earth’s surface were such that the physical conditions of production were the same at every point and if one man were as equal to all other men as is a circle to another with the same diameter in Euclidean geometry, division of labor would not offer any advantages for acting man” (emphasis added).
A close reader might object: “Mises is talking about nonhuman opportunities, things like geography and natural resources. Equality of opportunity is about equality of human opportunity!”
But this, too, misses the mark. First, consider the logistical impossibility of offering equal opportunity to every human task. Is the shop-owner expected to offer his available cashier position to every person equally, i.e. at the same time and in equally intelligible language across the planet?
Second, equality for so-called human opportunity would amount to an outright elimination of the essence of property ownership — that is, the right to determine not only what to do with one’s property, but the right to decide how to determine what to do with it! Suppose for the purpose of efficiency, or of mere arbitrary whim (or of whatever reason he chooses!), the shop-owner decides only to advertise his open cashier’s position to college-age students who live within five miles of his storefront. What “solution” would the tyrannical marchers for equality of opportunity recommend in order to remedy this supposed injustice?
The plea for equality of opportunity is a bourgeois virtue signal against the much-maligned boogieman of discrimination. My egalitarian friends fail to realize that the menace of equality does not quietly confine itself to modern racial and ethnic sensibilities. To the contrary, it bleeds throughout the culture whereby, in time, the mere acknowledgement of the biological differences between male and female constitutes an act of discriminatory “hate speech.” Paradoxically, free speech activists who apologize for equality of opportunity in order to justify their distaste of equality of outcome risk their own primary cause.
Fortunately, no affirmation of equality of outcome nor of opportunity is necessary to defend a free, collaborative, prosperous society. Economics, and economics alone, demonstrates otherwise. Mises writes,
“Neither history nor ethnology nor any other branch of knowledge can provide a description of the evolution which has from the packs and flocks of mankind’s nonhuman ancestors to the primitive, yet already high differentiated, societal groups about which information is provided in excavations, in the most ancient documents of history, and in the reports of explorers and travelers who have met savage tribes. The task which science is faced in respect of the origins of society can only consist in the demonstration of those factors which can and must result in association and its progressive intensification. Praxeology solves the problem. If and as far as labor under the division of labor is more productive than isolated labor, and if and as far as man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being not in sacrificing his own concerns for the sake of a mythical Moloch, society, but in aiming at an improvement in his own welfare. Experience teaches that this condition – higher productivity achieved under the division of labor – is present because its cause – the inborn inequality of men and the inequality in the geographical distribution of the natural factors of production – is real. Thus we are in a position to comprehend the course of social evolution ” (emphasis added).
Advocates of a peaceful and prosperous society, or of free speech — as appears to be the unifying mission of the IDW — need not protest the uneven, unequal nature of mankind. Rather, they need only turn to economics to see that inequality is the nexus conjoining man’s natural condition of antagonistic poverty to collaborative prosperity.
Theodore Roosevelt (president 1901–09) and Woodrow Wilson (president 1913–21) are the two celebrated progressive presidents. Many of today’s observers, not familiar with the detailed history of that era, fail to appreciate the fundamental importance of the tariff issue to debates of that time.
A search for “tariff” in Scott Berg’s biography, Wilson, turns up 66 hits. Then, 250 hits in Doris Kearns Goodwin’s, The Bully Pulpit: Theodore Roosevelt, William Howard Taft, and the Golden Age of Journalism. Wilson’s 1913 book, The New Freedom A Call For the Emancipation of the Generous Energies of a People, was an edited selection of his campaign speeches. Sixty-three hits on this book.
What were the issues? The tariff was a breeding ground for corruption and unfair to those forced to pay elevated prices. The tariff reinforced the position of firms with market power — the “trusts” in the language of that time.
Wilson was thoroughly familiar with how the tariff actually worked, as he explained clearly in The New Freedom. “We have come to recognize in the tariff as it is now constructed, not a system of protection, but a system of favoritism, of privilege, too often granted secretly and by subterfuge, instead of openly and frankly and legitimately, and we have determined to put an end to the whole bad business … .”
Goodwin discusses the difficulties reformers had in making any progress in Congress. “Aware that [Senator Nelson] Aldrich had abundant experience in devising obscure classifications for each of the 4,000 duties in the tariff schedule, …” How familiar does this passage sound?
As is true of pro-tariff arguments today, obfuscation of the issues was a key mechanism of the forces supporting trade restriction during the Progressive Era. Goodwin recounts the campaign against the tariff waged by journalist Ida Tarbell. “Fifty years ago, [Tarbell wrote in 1909] wool was disposed of in perhaps fifty words, which anybody could understand; to-day it takes some three thousand, and as for intelligibility, nobody but an expert versed in the different grades of wools, of yarns, and of woolen articles could tell what the duty really is.” These tariffs pumped up the profits of American firms manufacturing woolen clothing. Tariffs raised the cost of machinery used in cotton production and reduced competition from machinery producers abroad.
Then, as now, log-rolling coalitions made reform difficult. Goodwin writes: “To Taft’s disappointment, the controversial wool schedule was not changed. The combination of ‘the Western wool growers and the Eastern wool manufacturers,’ he lamented, rendered it ‘impossible’ to get lower duties ‘through either the Committee or the House.’ ”
Wilson was a Southerner, born in Virginia and raised in Georgia and South Carolina. He understood the costs high tariffs imposed on the South. The beneficiaries were Eastern manufacturing interests. Farmers were especially disadvantaged as they paid excessive prices for farm equipment in an era of rapid mechanization of agriculture.
A key campaign promise of Wilson’s was reduction of the tariff. This he did after assuming office with the Revenue Act of 1913. Tariff reduction was good for the South and the rest of the country as well. Unfortunately, Wilson failed to institutionalize a lower tariff and did not “put an end to the whole bad business.” In 1922, Congress raised tariffs once again with the Fordney–McCumber Tariff. As I recounted recently in my Tariff of Abominations II, President Trump is taking the United States back to an unhealthy era of tariff controversy, special-interest pleading and retaliation by other countries.
Worse, President Trump has upset a painful and slow institutional process begun after World War II in moving the world toward freer trade. No country will be a winner. Wilson’s experience as president after the election of 1912 should serve as a warning. Winning a battle is not enough to win a war.
Perhaps it is time to start thinking about the tariff in an entirely different way. Starting with the Tariff Act of 1789, the US tariff has been the playground of special interests, and used as a means of rewarding political friends, and harming political enemies. If we must have a tariff, all tariffs ought to be levied at the same rate. This approach would turn the tariff principle from that of “bad business” favoritism to pure revenue.
On Monday, WTO officials will gather in Buenos Aires for their 11th ministerial conference. There is very little hope that any of the deals on the agenda will be reached, as both the WTO’s negotiations and its dispute settlement system have long been paralyzed by political bickering and a deep-seated inefficiency in the organization itself. Anxious WTO ministers (such as the EU’s trade commissioner) are now grasping at straws and blaming Trump and his lack of support for the WTO’s troubles.
Yet twenty-two years after its creation, the organization has almost nothing to show for it as far as trade liberalization is concerned. Juggling 164 member countries, each with its own protectionist agenda, was never likely to bring about ‘more open trade’, ‘more competitive markets’, or ‘market stability and predictability’. Especially not after trade rules, services, intellectual property, and environmental protection were brought to the negotiations table alongside tariffs and non-tariff barriers. Countries started by holding agreements hostage to their demands, continued with disregarding agreements completely, and now end on quibbling over the language used in joint statements.
An easy, albeit crude, depiction of WTO’s failure can be seen in the figure below, where the world tariffs effectively applied (which include unilateral liberalization and preferential trade agreements) have been consistently lower than those achieved via multilateral negotiations (most favored nation) in the first twelve years after WTO’s creation—when it was allegedly most successful.
Other research offers the same story, and we’ve seen in detail before the reason why bottom-up, unilateral trade liberalization tends to work, and top-down, multilateral trade agreements never do (here, here, and here).
The WTO’s end seems nearer now, and not a moment too soon. So it did a few years ago, though, and yet it lingers on because governments have a few reasons to keep it alive.
First of all, once bureaucratic spending machines are set in motion, there’s little that can be done to rein them back in. The less efficient they are and the less they do, the more their budgets are increased for meetings, summits, and conferences meant to tackle precisely their inefficiencies. Had a private company been so utterly unproductive in its main activity, it would have long ago filed for bankruptcy. But the WTO, like the IMF, the World Bank, and all the other national and international governing bodies, does not operate on a profit and loss basis, but on political partisanship. As such, the WTO can easily reinvent itself during expensive lunches in exotic locations, and squander almost $200 million of taxpayers’ money every year.
Second, and more importantly, the WTO is actually useful to governments, even though it is detrimental to free trade and consumers. It provides a forum ripe with opportunities to satisfy domestic interest groups by hurting international competition, create political alliances with favored countries, or use trade as a strategic asset in a game of political tic-tac-toe.
Will we ever see the WTO dismantled? I’m not holding my breath. It will continue, in other shapes or forms, to waste money and facilitate trade: not merchandise trade, mind you, but the exchange of political favors.
Whether it’s for cheap steel or cheap tires, Americans are supposed to be afraid of trade with China because it provides us with products we want at low prices. But to the damage allegedly inflicted on our economy by those who would save us money, must we now add…artificial Christmas trees?
According to a November 27 story in Breitbart News, Chinese companies dominate the domestic market, and their fake trees are “driving” Christmas tree-growers in Oregon out of business. The number of fake trees sold in the U.S. “more than doubled” from 2010 to 2016 (my wife and I contributed to that statistic, purchasing our beloved tree in 2014) while the number of Christmas trees cut and sold dropped by twenty-six percent. The number of “active growers” dropped by thirty percent. All of which is supposed to alarm us.
There’s no reason to be concerned. Demand for real trees is declining in favor of artificial trees because more consumers prefer their convenience, quality, and price. Breitbart claims this is a “vicious cycle,” but it’s just a reflection of consumer desire.
Consumers in the U.S. are buying fake trees because they are cheaper, and because they believe fake trees to be healthier and safer. In a market economy we each decide to the best of our ability which products and services we require; that’s an important part of life in a free society. Oregon tree-growers will suffer the ill-effects of this trend, but players in the market voluntarily take that risk (for which they rightly deserve any reward). Consumers save money, which can then be spent on other things we desire, and our homes have fewer allergens. Perhaps even fewer fires.
Breitbart warns that fake trees aren’t biodegradable! True. But neither are American-made artificial Christmas trees, and regardless of who makes them they practically last forever. And the land previously used to grow trees can now be put to more efficient and productive use, or donated to a land trust, or opened to hiking or hunting. The labor and resources required to grow, chop and ship trees around the country will be employed satisfying other demands. Humanity is better served.
Over a century and a half ago, a French economist named Frederic Bastiat urged his readers to embrace free trade, to look beyond the “immediate and temporary effects” of economic changes and displacements “to their general and ultimate consequences,” which ended up being a general standard of living today for common people that is far greater than even nobility enjoyed in the glory of Imperial Rome. Protectionists can bash Chinese artificial trees, but they better satisfy consumers. That’s the whole point of trade.
Reprinted from the Future of Freedom Foundation.
On Thursday March 1, the Trump administration announced plans to impose 25% tariffs on imports of steel and 10% tariffs on imports of aluminum.
The US President is of the view that without the required protection, the US steel and aluminium industries are likely to follow the deteriorating path and this in turn will undermine the US labor market.
The steps announced by the US President raises the likelihood of a global trade war. President Trump seems to believe that war is great and that the US will emerge triumphant.
One would have thought that out of all people, President Trump, who prides himself of placing America first, would never consider imposing tariffs. After all a tariff on any imported good implies curtailing the supply of less costly goods and encouraging the supply to the domestic market of more costly domestically produced goods i.e. punishing the domestic consumers i.e. the Americans.
Furthermore, by raising a protection wall to various inefficient domestic industries, Trump’s policies are going to promote inefficiency, thereby undermining the process of real wealth generation.
Also, the employment data contradicts the logic of Trump’s tariff policy. According to CNBC, while there are about 200,000 workers in the steel, aluminum and iron industries, there are 6.5 million people employed by businesses that use steel. This raises the risk of undermining rather than benefiting the US labor market.See: "Trump’s tariff plan leaves blue-collar winners and losers," specifically: "The mills and smelters that supply the raw material, and that would directly benefit from the tariffs, have been shrinking for years. Today, those industries employ fewer than 200,000 people. The companies that buy steel and aluminum, to make everything from trucks to chicken coops, employ more than 6.5 million workers, according to a Heritage Foundation analysis of Commerce Department data." (https://www.cnbc.com/2018/03/04/trumps-tariff-plan-leaves-blue-collar-winners-and-losers.html)
Given that President Trump prides himself as a successful businessman, he surely must be well aware that the ultimate goal of every business is to make profit. Hence, to succeed in this task as a businessman, Donald Trump will now allow government policies that are going to undermine the net worth of his company.
Yet for some strange reason the President is of the view that this is ok for the economy as a whole.
It did not occur to him that there is no such thing as an economy without individuals. If planned policies such as imposition of tariffs are going to weaken the process of wealth formation and undermine individuals wellbeing, obviously this is going to be bad news for the economy as a whole i.e. for America, which President Trump holds as number one on his priority list.
One could only hope that most countries such as China, the Eurozone and Canada will not retaliate to Trump’s tariffs and start a trade war to feed the ego of politicians.
By lifting tariffs on American imports, these countries will only make things much worse for themselves.
What is the point of punishing your own citizens because of a misguided economic policy of the US President? By curbing imports from the US to the domestic markets, one does not fix the negative side effects of US tariffs.
If all countries in the world were to impose tariffs on imports, this would quickly arrest international trade and lead to massive economic impoverishment.
In the words of Murray N. Rothbard,
The tariff principle is an attack on the market, and its logical goal is the self-sufficiency of industrial producers; it is a goal that, if realized, would spell poverty for all… It would be a regression from civilization to barbarism.
On March 22, Donald Trump announced a new series of tariffs on products coming from China. When Trump announced the measures, he assured everyone of two things: First, the move would “make the country stronger and richer.” Second, the trade deficit with China, supposedly amounting to $375 billion, was “the greatest deficit of any country in the history of the world.”
There are several problems with Trump’s logic. My colleague Olav Dirkmaat explained in a previous article why complaining about a negative trade balance does not make any sense, since it can be explained by a positive capital-account balance. Because his article explains this clearly, there is no need to address it here. However, there are two other fallacies I should point out.
Fallacy 1: Free Trade is Destroying American Jobs Since the publication of Adam Smith’s Wealth of Nations and the subsequent works of David Ricardo, economists have understood the benefits of trade. If Americans prefer to buy cellphones manufactured in China, it is because China has a comparative advantage in assembling phones and the United States is devoting its resources to producing other goods in which it has a comparative advantage.
More precisely, we should say the United States is producing goods and services. This is important because many services are nontradable (legal services, medical services, management, etc.). The nontradable-goods sector is not affected by free trade. If we examine the figures, we realize that the main imports from China to the United States are manufactured goods.
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As a country, such as the United States, gets richer, the demand for tradable goods falls and the demand for nontradable goods (services) increases. This is logical: When an individual’s income increases, they can consume more foods or buy new clothes (tradable goods). However, how much more food or clothes? The amount is limited. Without a doubt, increases in income will generate more demand for other goods or services, many of which are nontradable.
Why is this relevant? Because Trump argues that free trade is destroying American jobs. There is no doubt that free trade does end some jobs in less productive sectors. But the tradable-goods sector increasingly counts less in the booming US economy. As Douglas Irwin shows in Free Trade under Fire, the tradable-goods sector accounted for 26 percent of US GDP in 1970, but by 2013 it had fallen to 16 percent. Further, in 1970 26 percent of the workforce worked in the tradable-goods sector. But by 2017, only 9.3 percent worked in that sector (data from the Bureau of Labor Statistics).
This shows that the claim that free trade is destroying American jobs is true for an increasingly small sector of the labor force. Because most of the work force is in the service sector, this argument loses its power. This is true even without taking account of the fact that jobs lost in this way free up resources for other productive activities and in turn generate new jobs. This argument challenges the main premise of Trump’s argument.
Fallacy 2: The Trade Deficit with China is the Highest in History. According to him, the United States’ $375 billion trade deficit with China is scandalous. But the trade deficit is being overestimated. Why? Because of vertical specialization.
Vertical specialization refers to the circumstance in which the multiple inputs a good is composed of are produced in different places. Think about the iPhone. The iPhone is designed in California, and its memory chips and screen are manufactured in Japan, its processor in South Korea, its camera and GPS in Germany, and the WLAN transmitter in the United States. Finally, the iPhone is assembled in China. After it is assembled, the iPhone is exported to the United States.
According to Irwin, in 2009 the iPhone was imported from China at $179 per unit. However, the cost of manufacturing the parts of the iPhone in China was only $6.50, 3.6 percent of the value of the good. However, the trade balance registers the import according to the value in the country of origin. Therefore, the iPhones add $179 a unit to the trade deficit: $1.6 billion in 2009. This greatly exaggerates the trade deficit with China when we take into account the relatively low value added to the good in China, and underestimates the US trade deficit with Germany and Japan. Given this logic, we should reconsider the validity of Trump’s figure.
The worst effect of imposing barriers to imports is the damage to the export sector. However, this is the subject for a future article.
Originally published by UFM Market Trends
On March 21, 2019, the BBC ran a story titled “Chinese imports ‘driving fishermen to despair.’” Although the title might lead one to think the article is another installment on the US-China trade war, it is instead a piece on the relationship between China and Kenya. The situation covered by the BBC is a highlight of the intersection of environmental concerns, economics, population dynamics, and social reactions.
At the root of the problem is Kenya’s Lake Victoria, the nation’s primary source of fresh-water fish. Decades of mismanagement and environmental abuse have caused the lake to become depleted of its fish stocks while also becoming so polluted that the fish would be inedible regardless. With the local resources incapable of supporting the demand of an increased population that was also hesitant about eating contaminated food, fishmongers responded by importing farmed fish from China.
The entire situation is a textbook example of the case for and against free trade. A freight-driver interviewed by the BBC said: “thanks to this Chinese tilapia, poor people can now eat nutritious protein-rich fish as well.” The source added that the driver earns approximately $300 per day, much more than the average monthly salary, through driving the fish cross-country. On the one hand, this part of the story is indicative of the benefits of free trade – cheap, healthful food and low-skilled employment.
On the other hand, there are concerns, such as the eponymous fishermen of the title. It is inaccurate to say that they are being driven out of business entirely by Chinese competition. According to the report, although there is a cultural preference for local fish, residents have been concerned for some time about the effects of pollution in Lake Victoria on the fish supply – sensible people generally don’t eat foodstuffs that are known to be contaminated. The domestic market was already losing interest in the local product, and the arrival of farmed, unsullied fish from overseas merely sealed a growing trend.
As the problem for which they are directly responsible, overharvesting, has increased, so have the costs borne by the fishermen. For example, one man told the BBC that the shoreline fish breeding grounds are now off-limits as part of a government initiative to revitalize the lake. Consequently, the fishermen’s overhead now includes the expense of extra fuel to go further out on the water and any potential fines incurred through sailing too close to the restricted areas. Additionally, the man interviewed complained that if he and his co-workers do manage to catch anything (something which is uncertain due, once again, to overfishing), they are often unable to sell it, leaving them with a load of spoiled fish. Myopically, though perhaps naturally, the fishermen lay blame for their plight at the door of the Chinese competition, and the industry lobby even briefly obtained special protections from the Kenyan government, which ultimately reversed the decision.
The moral of this pathetic tale is the aspect that free trade has an uncomfortable tendency to reveal the incompetence or lack of foresight of individuals and groups. More harshly, an impartial observer sees them as the architects of their own failure. It is true that in the example situation, the fishermen are not responsible for the chemical pollution of the lake, but they and the generations before them are culpable for the overfishing which occurred separately from the other problem. It is the same case as of slowly diminishing the principal in an investment. Eventually there is nothing left.
In an intimate setting, a village for example, if one sees a family in which the parents waste their substance, leaving little or nothing for their children, one might feel sympathy but not responsibility. It is not, after all, incumbent upon the rest of society to bear the cost of the short-sightedness of a single family, or in this case a specific group of individuals. It is even less so if, across the generations, there is persistent repetition of the same mistakes, e.g. insisting on catching a load of fish even while knowing that the probability of selling is low and that available stocks are diminishing.
Yet, forcing the entire community to suffer for the poor decisions made by a smaller group of people is exactly what trade protections achieve. In the case of the Kenyan fishermen, the reversal of their special protections came, not because the government heeded the needs of the market (based on the report, it appears as though the government was perfectly happy to give its citizens a choice between no fish or poisoned fish) but because the Chinese used diplomatic channels to protest.
Even harder for some is the feeling held by those in the position of the fishermen that they are skilled workers, while the chipper freight-driver is an unskilled nobody whose prosperity is unfair because it is disproportionate to his perceived knowledge level. To be fair, there is no hint of any such dynamic in the report on Kenya, but it looms very large in more industrialized countries today . Though to return to the example of the fishermen, one might pause in the midst of emotion-triggering rhetoric, such as “driven to despair,” and ask what real skill is expressed in simply exhausting a resource.
If one removes the word “fish” and replaces it with a variable representing an industry in similar circumstances, one has the equation for most popular discontent with free trade. The inconsistencies and failings of small groups are exposed for all to see. And the rest of society is not likely to be particularly sympathetic, especially if their pocketbooks, or health, suffer. In this way, yes, free trade can be socially divisive. But no more so than protections since it is implicit that before the arrival of the Chinese farmed product, fish was a luxury instead of part of a normal, balanced diet. Perhaps it is also an irony of free trade that it provides a chance for a nation to choose its divisions – in this case through health or through wealth.
Originally published by the Austrian Economics Center.
The Trump administration’s latest attempts to continue this trade war with China have now reached a level beyond comprehension and will only hurt American and Chinese consumers in the process. The consequences might be much more disastrous for America if China dumps their U.S. Treasuries, causing a devaluation in the U.S. dollar, subsequently forcing the Federal Reserve to raise interest rates to crippling levels.
During an interview in July with Dr. Murray Sabrin, Professor of Finance at Ramapo College in New Jersey, he states, “Trade is the lifeblood of civilization. Barriers to trade reduce living standards and create international tensions and have led to major conflicts throughout history. Tearing down trade barriers therefore would allow the global economy to flourish and ease tensions around the world.”
“Mr Trump, tear down these trade barriers,” says Dr. Sabrin who was recently endorsed in July by former congressman and three-time presidential candidate—one of the most respected libertarians—Dr. Ron Paul. Dr. Paul also shares Dr. Sabrin’s sentiments about the damaging effects of Trump’s tariffs and sent a letter to the president in March asking him to withdraw his proposed tariffs.
It wasn’t enough with Trump’s initial tariffs on Chinese manufactured goods and the retaliatory tariffs imposed by China in return, now the president wants to threaten tariffs on all $500 billion of Chinese imports.
As reported by Reason in June 2018, this all began during the hype of Trump’s presidential campaign when his constant rhetoric bashing America’s bad trade deals prompted top Republicans such as Marco Rubio and Ted Cruz to place the national dialogue on “fair” trade instead of “free” trade.
Trump now feels obligated to follow through with his political rhetoric and implement his trade war, while Congress stands down and does nothing, despite the evidence that demonstrates poor economic outcomes through the tariff practices Trump is engaging in.
Some would hope that Trump’s tariffs talk is nothing more than just a negotiating tactic but a trade war has most certainly begun and the only ones that will be hurt in the end are American and Chinese consumers. Protectionism only begets more protectionism, leading to a race to the bottom, harming only businesses and consumers.
The Trump administration has thus far imposed $34 billon in tariffs on China, along with tariffs on steel and aluminum imports from the EU, Canada, and Mexico. Trump could fulfill his $500 billion tariff threat and the American citizens that are not necessarily supporting the tariffs, but blindly supporting the president, will have a rude awakening once the reality manifests in the long term for the economy.
The tariffs presumably would help certain industries like steel but the products that are manufactured using steel would be more expensive so American consumers would turn to foreign imports for cheaper alternatives, which will only hurt our economy.
China has imposed tariffs mainly on America’s agricultural products such as orange juice, soybeans, fish, pork, dairy, cotton, beef, produce, sorghum, nuts, and rice. However, the goods made in China that Trump wants to impose tariffs are on are everything from industrialized machinery for paper, meats, and glass products to bulldozers to boat motors to helicopters. It’s clear which country has superior manufacturing capabilities.
“This only demonstrates America is low on the manufacturing totem pole,” says Dr. Sabrin and “what we export to China is much less valuable than what China exports to us because the U.S. has ceased to be a major manufacturing economy.”
We can’t get cheap manufactured goods anywhere else like we do from China, but China can get agricultural products from anywhere they want from farmers in foreign markets.
These agricultural tariffs will be less competitive in the Chinese markets as opposed to other global competitors so China will buy fewer agriculture products from the U.S., which will have a negative impact on American farmers and businesses that rely on those farmers’ products.
U.S. farmers are doubly impacted by these tariffs not only when they take a hit with Chinese tariffs on their agricultural products, but also when their Chinese imported farm equipment comes attached with Trump’s tariffs, which raise additional costs for them to do business.
The other point of weakness for the US lies in the US’s immense foreign-held debt.
Currently, the national debt is $21 trillion dollars, of which foreign partners hold $6.2 trillion, and of that $1.18 trillion is held by China alone.
Dr. Sabrin warns, “This U.S. debt to China could be used in a trade war against the Trump administration.” If so, the Chinese could decide to sell off their Treasury holdings and watch the dollar tank, while other countries could follow along. If this happens, the Federal Reserve would be compelled to raise interest rates, escalating a decline in the American economy. The smart move by the Trump administration and Congress would be to reduce trade barriers immediately and withdraw these detrimental tariffs.
One of the most insidious ways politicians expand government is by creating new programs to “solve” problems created by politicians. For example, government interference in health care increased health care costs, making it difficult or even impossible for many to obtain affordable, quality care. The effects of these prior interventions were used to justify Obamacare.
Now, the failures of Obamacare are being used to justify further government intervention in health care. This does not just include the renewed push for socialized medicine. It also includes supporting new laws mandating price transparency. The lack of transparency in health care pricing is a direct result of government policies encouraging over-reliance on third-party payers.
This phenomenon is also observed in foreign policy. American military interventions result in blowback that is used to justify more military intervention. The result is an ever-expanding warfare state and curtailments on our liberty in the name of security.
Another example of this is related to the reaction to President Trump’s tariffs. Many of America’s leading trading partners have imposed “retaliatory” tariffs on US goods. Many of these tariffs target agriculture exports. These tariffs could be devastating for American farmers, since exports compose as much as 20 percent of the average farmer’s income.
President Trump has responded to the hardships imposed on farmers by these retaliatory tariffs with a 12 billion dollars farm bailout program. The program has three elements: direct payments to farmers, use of federal funds to buy surplus crops and distribute them to food banks and nutrition programs, and a new federal effort to promote American agriculture overseas.
This program will not fix the problems caused by Tramp’s tariffs. For one thing, the payments are unlikely to equal the money farmers will lose from this trade war. Also, government marketing programs benefit large agribusiness but do nothing to help small farmers. In fact, by giving another advantage to large agribusiness, the program may make it more difficult for small farmers to compete in the global marketplace.
Distributing surplus food to programs serving the needy may seem like a worthwhile use of government funds. However, the federal government has neither constitutional nor moral authority to use money taken by force from taxpayers for charitable purposes. Government-funded welfare programs also crowd out much more effective and compassionate private efforts. Of course, if government regulations such as the minimum wage and occupational licensing did not destroy job opportunities, government farm programs did not increase food prices, and the Federal Reserve’s inflationary policies did not continuously erode purchasing power, the demand for food aid would be much less. By increasing spending and debt, the agriculture bailout will do much more to create poverty than to help the needy.
Agriculture is hardly the only industry suffering from the new trade war. Industries — such as automobile manufacturing — that depend on imports for affordable materials are suffering along with American exporters. AFL-CIO President Richard Trumka (who supports tariffs) has called for bailouts of industries negatively impacted by tariffs. He is likely to be joined in his advocacy by crony capitalists seeking another government handout.
More bailouts will only add to the trade war’s economic damage by increasing government spending and hastening the welfare--warfare state’s collapse and the rejection of the dollar’s world reserve currency status. Instead of trying to fix tariffs-caused damage through more corporate welfare, President Trump and Congress should pursue a policy of free markets and free trade for all and bailouts for none.\
Reprinted with permission.
With the US–China trade war and the Brexit dealings making headlines around the world, debates about international trade are at a high point. Unfortunately, those wishing to turn to the theory of international economics for support and enlightenment on these issues will find themselves disappointed. This field is perhaps the epitome of the much-despised “ivory tower economics,” as it is now severed from the reality of global markets. Dry, long-winded, and highly formalized, international economics is kept in a separate, pristine theoretical box, taught and used in a vacuum without much reference to other areas of economic science, and even less connected to the realities of global business. If connections are made by scholars, they are tenuous, unrealistic, or merely conjectural. Mainstream international trade theory explains only very little of international trade reality.
There are three reasons for this, which can be traced back to the methodological roots of international economic analysis, especially: 1) an exclusively macroeconomic approach, 2) the use of the classical dichotomy, and 3) the absence of the entrepreneur. Let me explain these in turn.
First, David Ricardo and John Stuart Mill drew a sharp line between domestic and international exchange, positing that international ‘value’ is different from domestic ‘value’, and thus that the two types of exchange, within and across borders, must be treated differently by economic analysis. This led, in turn, to international economics developing as an exclusively macroeconomic theoretical system, dealing with countries as units of analysis instead of seeing international exchange as a mere extension of domestic exchange, different in context and data, but not in kind. After 1871 and the Marginalist Revolution, neoclassical theories formalized, elaborated, or criticized the principle of comparative advantage, framing it within the new subjective paradigm, but kept the arbitrary idea of a nation’s borders as their unit of analysis.
In 1895, in an attempt to eliminate the labor theory of value from the principle of comparative advantage, Pareto created the first mathematical model of Ricardo’s principle—for two countries and two goods—in which relative costs were expressed in terms of marginal utility. In 1936, Gottfried Haberler then formulated the theory in terms of opportunity costs rather than hours of labor. Pareto and Haberler’s revisions opened the gate for mathematical models with multiple countries and multiple goods, and set the conceptual foundations for modern trade theory. The Swedish economist Bertil Ohlin, inspired by his professor Eli Heckscher, developed the theory of factor endowments in his 1933 treatise, Interregional and International Trade. Unlike Pareto and Haberler, Ohlin wished to discard Ricardo’s theory completely, and replace it with his own macroeconomic explanation of international trade. In this approach, given two factors of production, labor and capital, countries relatively more endowed in capital should produce and export capital-intensive goods, thus specializing in sectors that use the factor of production with which the country is relatively more endowed.
Second, classical economics has also introduced the “classical dichotomy” between the real and monetary sectors of the economy. This led to international economics growing into two separate branches: the pure theory of international trade, centered on the movements of goods and production factors, and international monetary theory, dealing with foreign exchange and the balance of payments equilibrium. The classical dichotomy not only survived the Marginalist Revolution, but later in the century was reinforced by a foundational shift from early neoclassical methods toward the Samuelsonian synthesis of Keynes’s theoretical system. During the 1980s and 1990s, this foundational shift led to an uprising against the neoclassical orthodoxy in international trade, which aimed at correcting previous errors like the perfect competition hypothesis, and extending trade models to incorporate more variables—such as technological development, scale economies, and product life-cycle theories. However, these extensions also operated with the classical dichotomy.
Third, the “unfortunate legacy” (Redlich 1966) of the British Classical school, i.e., the disregard for the role of entrepreneurship, was carried on after the Marginalist Revolution and the subsequent paradigm shift, and also significantly shaped the development of mainstream theories of international trade. Modern trade models, much like the theory of the firm model, became “an instrument of optimality analysis of well-defined problems which need no entrepreneur for their solution” (Baumol 2010). Since uncertainty had no meaning in a frictionless, predictable system—which postulated profit maximizing agents, production functions, and equilibrium prices—“the entrepreneur became a mere automaton, a passive onlooker with no real scope for individual decision-making” (Hébert and Link 2006, 326). International trade theories shared the evolutionary fate of mainstream economic analysis because Pareto, Ohlin, Samuelson, and Krugman developed their theories within the same non-entrepreneurial paradigm. Largely because of this, Ricardian and factor-endowments models have failed to develop beyond thinking of naturally-given productivities of land and homogeneous capital as sole causes of the international pattern of specialization (Dorobat and Topan 2015).
Finally, the best proof of the divorce between theory and reality in this field is displayed by the critical mass of economists declaring themselves in favor of free trade that are skeptical of or completely opposed to removing all tariffs and customs. As I explained before, “whichever side of the barricade commentators claim to be on, they all believe that increasing one’s own welfare can only be accomplished by decreasing the welfare of others—or, that the benefits of trade can only arise through reciprocal governmental agreements on mutual tariff concessions”—or, alternatively, through the escalation of political or economic conflict.
As we shall see in the next article, Mises built his analysis of international economics by avoiding each of these three pitfalls. This led to a coherent praxeological analysis of (monetary) exchange across national borders that is not only relevant today, but the only valid alternative to the body of modern trade theory and the best argument for a free trade policy.
[This article is an excerpt, edited for online publication, from Carmen Dorobăţ’s PhD thesis, “Cantillon Effects in International Trade: The Consequences of Fiat Money for Trade, Finance, and the International Distribution of Wealth.”]
Blue jeans have more in common with drugs than you might think.
One of the more consequential episodes in the history of crony capitalism occurred in 17th and 18th century France. Cheap clothing made from cotton was threatening the rich woolen, linen, and silk manufacturers, so they persuaded the government to ban it. In short order, government agents began spying into homes and coaches and reporting on anyone who dared to wear the new fabric. Thousands of violators of the ban were rounded up and either sent to prison or to ships as galley slaves, which was a death sentence.
In Britain, the same manufacturers demanded a similar ban from the King, but were turned down. As a direct result, Britain launched its industrial revolution by making cheap cotton clothing for the world, and began to get rich, while France stagnated economically. If France had not banned cotton, and had not fallen so far behind Britain economically, Napoleon might have had the money to build a huge fleet and successfully invade Britain. European and world history might have turned out quite differently.
It is easy to recognize and mock the absurdities of crony capitalism in the past, but not always easy to spot it today. For example, we have a replay of the cotton story in contemporary American medicine. It is increasingly recognized that food, supplements, and lifestyle changes are the most potent medicines. But this represents a threat to drug companies, oncologists, and surgeons, and they have enlisted the power of the government to protect their interests.
It is illegal to claim that any substance, even a food, not approved by the Food and Drug Administration (FDA) can cure, control, or even prevent an illness. But approval costs many billions of dollars, so with few exceptions only new to nature molecules, that is, patentable drugs, can be approved. A producer of food or supplements who violates this law will be threatened with massive fines and long jail terms.
In recent years, both walnut and cherry growers have been threatened by the FDA because they dared to share university research that their product had specific health benefits. Other producers have been convicted and put away for decades.
Meanwhile the protected drug and surgery interests charge more and more for products that may do as much harm as good, as you can read in the manufacturer’s own fine print. And the cost of this government protected monopoly, created under the guise of “protecting the public,” puts a lid on both job creation and employee raises while swelling horrific government deficits.
Nor is it only the federal government. State governments are also allied with entrenched medical interests. For example, it is against the law in California for doctors to treat cancer using anything other than drugs, radiation, or surgery. The federal government protects drug companies making vaccines from any legal liability for harm to children, but California also mandates that any child attending public or private school must have had the full schedule of vaccinations. There is even a bill pending there that would gag free speech about vaccines. No wonder drug companies regard vaccines as one of their most promising profit making opportunities.
Like cotton clothing manufacture in centuries past, what might be called natural medicine could be an enormous new American growth industry. Customer interest is so strong, the industry has grown, albeit slowly, despite being legally throttled. There is however little or no prospect that other countries will take the lead, because their governments are even better controlled by bureaucrats allied with medical special interests.
Meanwhile it is still very difficult to educate the public because of the legal barriers. Even President Trump’s White House physician does not know that a score of 20 on a vitamin D test is extremely unhealthy. He reported that the president had passed all his tests with flying colors. A physician trained in natural medicine could set him straight, but he would then no doubt be targeted by his state medical board.
[This article is Part 6 of a series. See Part 1 and Part 2 and Part 3 and Part 4 and Part 5.]
In wrapping up this series of articles on the applications of Mises’s insight into Cantillon effects in analyzing international trade, it is worth discussing the additional distortionary effect of trade finance on trade patterns, particularly in the case when government-backed trade finance is fueled by credit expansion instead of real savings. In tackling this issue, one must discuss the role of Export Credit Agencies (ECAs), i.e. of quasi-governmental institutions that act as an intermediary between governments and national exporters in offering financial support, intermediary loans, credit insurance and guarantees.
Export Credit Agencies have received a good deal of criticism over the last decades, and rightly so. First, they have been called out on their contradictory statements concerning the nature of their activities: they claim they underwrite projects the market considers too risky, while arguing that they are conservative in their investments, thus making ‘sure bets’. Given that private financial institutions would not refuse profitable investments in the first place, scholars indicate that either ECAs crowd out private trade finance, or they expose unaware taxpayers to bad loans, case in which export promotion becomes nothing more than foreign aid.
Second, export credit agencies are significantly biased in the choice of clients: by their own admission, they support trade activities that are either ‘environmentally friendly’, belong to ‘strategic’ industries, or have ‘high potential’ for export growth but are otherwise neglected by the private sector. However, once more, private financiers would not overlook high growth opportunities, unless they were not, in fact, profitable.
Third, every export credit agency around the world touts as its foremost goal the countering of foreign subsidy programs, thus ensuring a level playing field for domestic companies facing unfair competition from foreign firms. Yet, for all intents and purposes, public trade loans and export subsidies have similar effects on the market, albeit being different in their bureaucratic characteristics. Scholars thus argue that ECAs tilt the playing field in the first place—and that it is for this reason that no results of their countervailing activities are ever published. Reports of ECAs contribution to international trade that are made public purport to show only loose statistical correlations—and not the causal link—between increases in exports, and ECA loans and insurance ( Contessi and de Nicola 2012 ).
In spite of these differences, and the potential crowding out effect, private and public trade finance do seem to work together in harmony, most likely the result of the symbiosis between governments and banks. Although most mainstream economists would argue that ECAs, with all their flaws, act as ‘quasi-market’ players, in this case it is commercial banks which act as quasi-government agencies. Banks are enabled by special mandates to underwrite higher levels of trade risks than they otherwise would have been able to, and thus to profit from otherwise unprofitable ventures, eventually at the expense of taxpayers. The most appropriate examples here are Coface,Atradius, and Euler-Hermes, which are constituted both as private trade insurers and ECAs.
This cooperation notwithstanding, the more vulnerable issue does not have to do with the process in which governments choose their favorites among financial intermediaries, but with the source of the funds poured into international trade by government agencies: whether loans are requisitioned from the taxed income of the population, or from an expanded money supply purports an important distinction on the overall impact of ECA activity. The difference between the two cases is best depicted under two scenarios: 100% reserves commodity money system, and fractional reserve fiat money system.
In the first scenario, absent any government intervention in trade and trade finance, international trade flows align to the configuration of comparative advantage under the most efficient worldwide allocation of resources, while financial intermediation funds trade activities solely from the savings of the public. But if in this context we allow for government financial intervention in international trade, this intervention would be restricted under the 100% reserves commodity money standard: ECAs could only capture resources through taxation or borrowing, creating an island of calculation and allocational chaos.
International trade would then operate on a different pattern of comparative advantage than the one otherwise prevailing on the unhampered market: some exporting or importing businesses—favored by government trade promotion—would flourish at the expense of other industries, as the economy would experience unnatural business fluctuations. Nonetheless, entrepreneurs would adjust their calculations to the new market data, accounting for government activity as an increase in the scarcity of available capital, and “a lowering of the general standard of living in the present and the future” ( Rothbard 2009, 1026 ). Furthermore, as the market interest rate would not be artificially lowered—in fact, “diversion and waste of savings causes interest rates to be higher than they otherwise would, since now private uses must compete with government demands” ( Rothbard 2009, 1026 )—, entrepreneurial judgment would not be induced into malinvesting.
In the second scenario, of fractional reserve banking, government-led trade finance is being granted from an expanded money supply, by export credit agencies and commercial banks alike. Consequently, we are dealing with a much more disruptive intervention: ECAs reallocate resources to unproductive uses, wasting a part of the savings, and lowering the capital structure, but also mislead entrepreneurs into wasting savings and lowering the capital structure by reinforcing and enlarging the effects of credit expansion.
As a case in point, ECAs increase the reserves of commercial banks by providing them with financial intermediary loans that allow them to further expand bank credit, or via interest rate equalization policies, both measures having the effect of further artificially lowering the interest rate below unhampered market levels. ECA guarantees help reduce interest rate spreads between short-term and long-term by allowing banks and their clients to easily extend the maturity of their debt. In addition, because ECAs are eligible for a 0% risk weighting (Aaa or AAA rating) with respect to their debt held by private sector banks, this further undervalues the risk weighting of projects that benefit from their support.
This government safety net encourages firms to borrow and trade internationally, as state guarantees lower the trade risk perceived by entrepreneurs, as well as shift the costs of intermediating transactions from banks to domestic taxpayers. Hence, unlike the 100% reserve scenario where competition between private and public demands for savings raises the interest rate, here government injection of funds into trade finance prevents interest rates to rise, deepening malinvestments and precluding the readjustment of international trade after a crisis. These favorable terms for trade finance engage entrepreneurs and the banking system in a reckless planning of financial activity, with government intervention adding more unnatural business fluctuations to the already distorted production structure.
In March, the US trade account balance stood at a deficit of $ 50 billion against a deficit of $49.28 billion in February and a deficit of $47.4 billion in March last year.
Most commentators consider the trade account balance as the single most important piece of information regarding the health of the economy.
According to the widely accepted view, a surplus on the trade account is considered as a positive development while a deficit is perceived in a negative light. What is the reason for this?
By popular thinking, the key to economic growth is demand for goods and services. Increases and decreases in demand are behind the rises and declines in the economy’s production of goods. Hence, in order to keep the economy going economic policies must pay close attention to the overall demand.
Now, part of the demand for domestic products emanates from overseas. The accommodation of this type of demand is labeled exports. Likewise, local residents exercise demand for goods and services produced overseas, which is labeled import.
It is held that while an increase in export strengthens the demand for domestic output, an increase in import weakens the demand. Exports, according to this way of thinking, are a factor that contributes to economic growth while imports detract from the growth of the economy. Hence whenever imports exceed exports a trade deficit emerges and this is bad news for economic activity as depicted by the gross domestic product (GDP).
The deficit is viewed as a symptom of bad economic health. Subsequently, by the popular way of thinking what is required is a boost in exports and a curtailing of imports in order to reduce the deficit.
This, it is held, will lead to improved economic health. The popular view maintains that it is the role of the government and the central bank to introduce a suitable mix of policies, which will guide the economy along the path towards a “favorable” trade account balance.
As a result of the so-called unfavorable trade account balance, the US has recently lifted its tariffs on imports from various countries, in particular China, in order to make the trade balance “more favorable.” However, does it all make sense?
Trade Account Balance In a Market Economy In a market economy, each individual sells goods and services for money and uses money to buy desired goods and services. The goods and services sold by an individual could be termed "export," while the goods and services bought could be termed "import." The record of such monetary exchanges for any period could be labeled as the trade account balance.
In a free market economy, individuals’ decisions regarding the selling and the buying of goods and services i.e. export and import is made voluntarily, otherwise it would not be undertaken. The emergence of an exchange between individuals implies that they expect to benefit.
Whenever an individual plans to import more than he exports, the shortfall will be balanced either by running down existing savings or by borrowing. The creditor who supplies the required funds does so because he expects to profit from that.
The current practice of lumping individual’s trade account balances into a national trade account balance is of little relevance to businesses.
What possible interest can a business have with the national trade account balance? Will it assist him, in his business conduct? Since there is no such thing as the US PTY Ltd that can be bought or sold in the market the national trade account balance, will be of no use to businesses.
While the national trade account balance is of little economic significance and is a sterile concept, individual or company trade account balances are real things that carry economic significance.
For instance, the trade account statement of a particular company could be of assistance to various present and potential investors in that company. Again, this is not the case with the national trade account balance.
While the national trade account balance is a harmless definition, the government reaction to it produces harmful effects. Government policies that are aimed at attaining a more “favorable” trade account balance by means of monetary and fiscal policies disrupt the harmony in the market place. This disruption leads to a shift of scarce resources away from the production of most desired (by consumers) goods and services, towards the production of less desirable goods and services.
Furthermore it is not "the US" that exports wheat, but a particular farmer or a group of farmers who export wheat. They are engaged in the export of wheat because they expect to profit from that.
Similarly, it is not "the US" that imports Japanese electrical appliances, but an individual from the US or a group of Americans. They import these appliances because they believe that a profit can be made.
If the national trade account balance is an important indicator of the economic health, as various commentators imply, one is then tempted to suggest that it would be a sensible idea to have trade account balances of cities or regions. After all, if we could detect the economic malaise in a particular city or a region, the treatment of the national malaise could be made much easier.
Imagine then that the economists in New York have discovered that their city has a massive trade account deficit with Chicago. Does this mean that the city of New York authority should step in to enforce the reduction of the deficit by banning imports from Chicago?
Luckily, we do not have inter-city trade account balances and it seems that no one is concerned with this issue. Yet the principle of the inter-city trade account balances is also valid for the national trade account balance.
The concern expressed by many commentators that an “unfavorable” trade account balance is bad for the economy is questionable. No individual or group of individuals can suffer as a result of “unfavorable” trade account balance. An important reason for suffering can emerge from a drop in incomes of individuals because of government tampering with the economy.
Again, the enthusiasm and excitement revealed by the financial markets towards the trade account data is not because of its importance, but because of the expected response of the government and the central bank to the data.
Economists and analysts spend much of their time guessing the likely response of the government or the central bank to a particular trade account balance. Various methods are employed to forecast the trade gap and its implications on the government’s reaction. Sophisticated econometric models are used to produce various possible outcomes. However, all of that is barely related to true economic fundamentals that from time to time awaken analysts by means of sudden shocks.
The fallacy of the national trade account balance concept is also relevant to the national foreign debt. There is no such thing as the national foreign debt since nations as such do not borrow or lend only individuals can do that.
Consequently, if an American lends money to an Australian the entire transaction is their own private affair and is not of concern to any other. Both the American and the Australian are expecting to benefit from this transaction.
Lumping individuals’ foreign debt into the total national foreign debt is thus also another questionable practice. What is this total supposed to mean? Who owns this debt? What about all those individuals who do not have foreign debt? Should they also be responsible for the national foreign debt?
The only situation in which individual Australians should be concerned with foreign debt is when the government incurs the debt. The government is not wealth generating unit and as such derives its livelihood from the private sector.
Consequently, any foreign government debt incurred means that the private sector will have to foot the bill sometime in the future.
It’s as old as time: taking on debt to fund a sure thing. Be it houses, stocks, cryptocurrencies, tulip bulbs or taxi medallions. Winnie Hu tells the current tale of woe brilliantly for The New York Times. Big city taxi medallions were once considered to be good as gold. Ms. Hu writes,
Sohan Gill once saw his medallion as such a good investment — “better than a house” — that his wife bought two more in 2001. Now they cannot find enough drivers for the cabs because business is so bad. And Mr. Gill, 63, who had retired from driving, had to go back on the road. “How many more years am I going to drive to take care of these medallions?” he asked.
That sounds so much like Las Vegas 2005. Why own one house? Buy two more. Now retirement is put on hold.
A full blown medallion crash is unraveling in New York City as Ms. Hu explains.
Since 2015, a total of 85 medallions have been sold as part of foreclosure proceedings, according to city records. In August alone, 12 of the 21 medallion sales were part of foreclosures; the prices of all the sales ranged from $150,000 to $450,000 per medallion.
A medallion being essentially a license to drive a cab, $150,000 to $450,000 doesn’t seem like the bottom, however at the peak. 2014, a medallion went for $1.3 million. By the way, Uber was founded in 2009, but New York cab owners either didn’t get the memo, or didn't understand the implications.
In 2014, those crafty devils at New York City Hall sold 350 new medallions at the height of the market, generating $359 million in revenue.
The city has capped the number of medallions at 13,587, but, “There are more than 63,000 black cars providing rides in the city through five major app services: Uber, Lyft, Via, Gett and Juno,” writes Hu.
Cabbies are fighting back the way they always have, in court. But so far, to no avail. “We are not against competition, we are not against technology, but we want to compete fair and square,” said Nino Hervias, 58, a taxi owner and spokesman for the Taxi Medallion Owner Driver Association.
A couple drivers have taken legal action, known as an Article 78 proceeding, to compel the city and its regulators to establish and enforce standards that will make sure that all licensed cars — including yellow cabs — “are and remain financially stable.” It sounds like subsidies are being sought. The State Supreme Court will hear the case in October.
Meanwhile, a guy like Uppkar Thind, 46, an immigrant from India, is driving 11 to 13 hours a day trying to pay off a medallion he bought for $357,000 in 2006 with money borrowed from his relatives and a credit union. “I worked hard,’’ he told the Times. “I achieved my American dream and it turned into a nightmare.”
The nightmare sounds like it will continue. Ms. Hu writes,
In an unprecedented fire sale of medallions, up to 46 of them are expected to go on the auction block later this month as part of bankruptcy proceedings against taxi companies affiliated with an embattled taxi mogul. While the city has previously held auctions to sell a limited number of new medallions — about 1,800 since 1996 — this is believed to be the first auction to dispose of foreclosed medallions, according to city officials.
“I see my future crashing down,” says Issa Isac, 46, an immigrant from Burkina Faso who borrowed $335,000 to buy a medallion but couldn’t keep up with the payments. “I worry every day. Sometimes, I can’t sleep thinking about it. Everything changed overnight.”
As you would expect, some financial institutions have been sucked into this vortex. Forbes reports,
Three New York-based credit unions that specialized in loaning money against taxi cab medallions, the hard-to-get licenses that allow the city's traditional cab fleet to operate, have been placed into conservatorship as the value of those medallions has plummeted.
However, while the over leveraged are hurting, big money is circling. Crain's New York Business reports, that private equity firms are kicking the tires. "A lot of very smart people who run very successful firms feel the market may have bottomed out," says Andrew Murstein, president of Medallion Financial.
Gary Sernovitz writes for The New Yorker, "if you can buy medallions for ninety per cent less to operate in a business that’s down twenty per cent, the conditions may be ripe for a value investment — like buying real estate in 2009. Some institutional investors are tantalized."
New Yorkers may be getting a ride from Blackstone in the near future.
Almost a decade later, the Federal Reserve this week announced it will begin reversing quantitative easing. Slowly. Very slowly. The balance sheet currently stands at $4.5 trillion and they will begin allowing $10 billion in assets to roll off their sheets next month. Given the unprecedented nature of QE, even this modest reduction has many market observers on edge. Of course, the fallout from the Fed's actions are still being felt, while the Trump Treasury is making threats that it would have disastrous consequences if acted on.
On Mises Weekends, Jeff is joined by Dr. Mark Thornton to get his take on the Fed's actions and what it all means for stock markets, investors, and the US economy. Can quantitative easing, a roundabout form of monetizing debt, actually work? Can monetary policy make us rich? Or are Fed officials just groping in the dark, putting off a day of reckoning?
And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:
There's a Bubble in New York City Taxi Medallions by Doug FrenchThe Agony of the Welfare State, Finnish Style by Joseph T. SalernoWhy is NASA Covering Up Elon Musk's Mistakes? by Drew ArmstrongGovernment Regulation and Crony Capitalism is Keeping Thousands in Florida without Power by Tho BishopIf the Majority Votes to Secede — What About the Minority? by Ryan McMakenMises and Cosmopolitanism by David GordonQuestions Remain as the Fed Finally Begins to Reverse QE by Tho BishopThen Came Nixon by Chris CaltonThe Washington Post's Latest (and Lamest) Attack on the Mises Institute by Ryan McMakenWhat Is the Correct Amount of Money? by Frank ShostakTrump's China-Sanctions Madness Imperils the Dollar by Ryan McMakenLet Catalonia Decide by Jeff DeistPasschendaele: A Century after the Horror by Matthew McCaffreyUS Sanctions Against Venezuela Will Hurt Americans by Ryan McMakenThe World Is Creeping Toward De-Dollarization by Ronald-Peter StöferleCongress Shirks Its Duty on Foreign Policy Yet Again by Ron PaulLudwig von Mises on Collectivist Fallacies and Interventionist Follies by Richard M. EbelingThe Capitalist Revolution by Ludwig von MisesMoney-Supply Growth Drops Again — Falls to 108-Month Low by Ryan McMakenJohnny Appleseed: Land Speculator, Alcholol Dealer, Capitalist by Chris Calton
[Advocates for tariffs and trade controls often claim that tariffs are good "for everyone" because they ultimately lead to more production and wealth creation for everyone in the economy. In Chapter 2 of Theory and History, Ludwig von Mises notes that interventionist policies designed to benefit a certain interest group (e.g., tariffs) fail to obtain the goals claimed, and thus are not good "for everyone" after all. -Ed.]
Economic policies are directed toward the attainment of definite ends. In dealing with them economics does not question the value attached to these ends by acting men. It merely investigates two points: First, whether or not the policies concerned are fit to attain the ends which those recommending and applying them want to attain. Secondly, whether these policies do not perhaps produce effects which, from the point of view of those recommending and applying them, are undesirable.
It is true that the terms in which many economists, especially those of the older generations, expressed the result of their inquiries could easily be misinterpreted. In dealing with a definite policy they adopted a manner of speech which would have been adequate from the point of view of those who considered resorting to it in order to attain definite ends. Precisely because the economists were not biased and did not venture to question the acting men's choice of ends, they presented the result of their deliberation in a mode of expression which took the valuations of the actors for granted. People aim at definite ends when resorting to a tariff or decreeing minimum wage rates. When the economists thought such policies would attain the ends sought by their supporters, they called them good—just as a physician calls a certain therapy good because he takes the end—curing his patient—for granted.
One of the most famous of the theorems developed by the Classical economists, Ricardo's theory of comparative costs, is safe against all criticism, if we may judge by the fact that hundreds of passionate adversaries over a period of a hundred and forty years have failed to advance any tenable argument against it. It is much more than merely a theory dealing with the effects of free trade and protection. It is a proposition about the fundamental principles of human cooperation under the division of labor and specialization and the integration of vocational groups, about the origin and further intensification of social bonds between men, and should as such be called the law of association. It is indispensable for understanding the origin of civilization and the course of history. Contrary to popular conceptions, it does not say that free trade is good and protection bad. It merely demonstrates that protection is not a means to increase the supply of goods produced. Thus it says nothing about protection's suitability or unsuitability to attain other ends, for instance to improve a nation's chance of defending its independence in war.
Those charging the economists with bias refer to their alleged eagerness to serve "the interests." In the context of their accusation this refers to selfish pursuit of the well-being of special groups to the prejudice of the common weal. Now it must be remembered that the idea of the common weal in the sense of a harmony of the interests of all members of society is a modern idea and that it owes its origin precisely to the teachings of the Classical economists. Older generations believed that there is an irreconcilable conflict of interests among men and among groups of men. The gain of one is invariably the damage of others; no man profits but by the loss of others. We may call this tenet the Montaigne dogma because in modern times it was first expounded by Montaigne. It was the essence of the teachings of Mercantilism and the main target of the Classical economists' critique of Mercantilism, to which they opposed their doctrine of the harmony of the rightly understood or long run interests of all members of a market society. The socialists and interventionists reject the doctrine of the harmony of interests. The socialists declare that there is irreconcilable conflict among the interests of the various social classes of a nation; while the interests of the proletarians demand the substitution of socialism for capitalism, those of the exploiters demand the preservation of capitalism. The nationalists declare that the interests of the various nations are irreconcilably in conflict.
It is obvious that the antagonism of such incompatible doctrines can be resolved only by logical reasoning. But the opponents of the harmony doctrine are not prepared to submit their views to such examination. As soon as somebody criticizes their arguments and tries to prove the harmony doctrine they cry out bias. The mere fact that only they and not their adversaries, the supporters of the harmony doctrine, raise this reproach of bias shows clearly that they are unable to reject their opponents' statements by ratiocination. They engage in the examination of the problems concerned with the prepossession that only biased apologists of sinister interests can possibly contest the correctness of their socialist or interventionist dogmas. In their eyes the mere fact that a man disagrees with their ideas is the proof of his bias.
When carried to its ultimate logical consequences this attitude implies the doctrine of polylogism. Polylogism denies the uniformity of the logical structure of the human mind. Every social class, every nation, race, or period of history is equipped with a logic that differs from the logic of other classes, nations, races, or ages. Hence bourgeois economics differs from proletarian economics, German physics from the physics of other nations, Aryan mathematics from Semitic mathematics. There is no need to examine here the essentials of the various brands of polylogism. For polylogism never went beyond the simple declaration that a diversity of the mind's logical structure exists. It never pointed out in what these differences consist, for instance how the logic of the proletarians differs from that of the bourgeois. All the champions of polylogism did was to reject definite statements by referring to unspecified peculiarities of their author's logic
In 1962, businessman Sam Walton had an entrepreneurial objective in mind: Offer shoppers the lowest prices possible. From forcing US suppliers to slash costs to finding cheap imports abroad, Walmart became an iconic global brand, generating $500 billion in annual revenues because of its ability to enhance the consumer’s purchasing power, enabling the rise of the middle class.
The Federal Reserve may have depreciated the value of the greenback, but $100 at Walmart can get you quite far. With a single Benjamin, you can purchase a tea kettle, bed sheets, the latest bestselling novel, five pairs of underwear, and dinner for tonight. And, noticing an array of opportunities in the marketplace, Walmart is expanding its arsenal, specializing in walk-in care, ecommerce, and banking.
For all the flack that Walmart receives from the left for ostensibly destroying mom and pop shops, the company has a decent business model that appears to be satisfying the customer.
But those lowest prices guaranteed may come under threat. As the US government embarks upon a bitter trade dispute with China, Walmart is warning that it may be forced to raise prices due to tariffs.
If Sam Walton were around today, he’d be apoplectic, staging a sit-in on Capitol Hill — or, perhaps sending his team of lobbyists to do it for him.
Walmart’s Trade Woes President Donald Trump and his administration recently escalated the trade spat with the world’s second-largest economy by slapping 10% tariffs on approximately $200 billion worth of Chinese products, ranging from mattresses to Christmas items to travel bags. The first round of levies will go into effect on Monday, and the second round — 25% tariffs — will be instituted on January 1, 2019.
China immediately retaliated by announcing its own series of taxes on US imports.
This has Walmart fearful of the repercussions, particularly in the form of price hikes for its customers.
In a letter to US Trade Representative Robert Lighthizer, the Arkansas-based retailer said the tariffs would affect a wide selection of products, like food, personal care items, and transportation. The company urged both sides to come to an immediate resolution to avoid hurting consumers.
As the largest retailer in the United States and a major buyer of U.S. manufactured goods, we are very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole.
Should the tariffs go into effect, Walmart customers will face cost increases for essential items like car seats, cribs, backpacks, hats, pet products and bicycles. Either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether.
Other businesses have petitioned the White House to ditch the trade war. Ace Hardware, Joann fabric and craft stores, and Target have all warned that the taxes “will hurt American consumers,” especially working-class families, who will now be required to pay more for essential goods.
Rising Prices the New Norm Since the president engaged in a trade fight earlier this year, a whole host of consumer prices have already started to rise. Months after Trump imposed 20% and 50% tariffs on washing machine imports, shoppers are paying as much as 17% more for laundry equipment.
A long list of businesses has confirmed they are raising prices to offset the ballooning costs from tariffs. Coca-Cola, Samuel Adams, and MillerCoors will increase the price of their beverages. Caterpillar will boost prices to limit freight costs. Newell Brands, the maker of Crock-Pot and other appliances, said consumers will pay more for its products. Polaris, the manufacturer of motorcycles, snowmobiles, and boats, confirmed its own hike.
The National Retail Federation (NRF), a trade organization, estimated in August that a 25% tariff on furniture would cost Americans an extra $4.5 billion per year.
Moreover, get ready for a more expensive Christmas because 91% of festive articles come from China.
It may not be surprising then to see the consumer price index (CPI) rise by 0.2% in August, the fifth consecutive monthly gain, though the annual rate slowed to 2.7%.
Mark Perry, an economist at the American Enterprise Institute (AEI), wrote in July:
As simple economics tells us, the Trump tariffs on washing machines aren’t imposed on foreign appliance producers like Samsung and LG as much as they are imposed on Americans in the form of higher prices for consumers. Likewise, Trump’s ill-advised trade war, which started in January when he approved the tariffs on imported washing machines, is really largely a war on Americans.
The Walmart-China “Joint Venture” You cannot discuss Walmart’s incredible success without also talking about China.
In the early days of Walton’s entrepreneurial endeavors, he would drive around in a pickup truck and purchase inexpensive goods for his chain of discount stores. This pursuit for the lowest prices possible eventually extended to the Pacific, making imports an important part of Walmart’s prosperity.
In 1984, Asian imports — direct and indirect — represented about 6% of the company’s total sales. That figure spiked to roughly 50% a little more than a decade later.
While Walton and his executives launched a “Buy American” campaign, which did rescue many domestic manufacturing companies, the Walmart founder conceded that he was not ready to pay a premium to do so. Anytime he came across US goods, he asked: “Is it good for our customers?” If they were not, then Walmart would go overseas and buy the same products at a cheaper cost.
And, thus, the joint venture with China has allowed Walmart to become one of the biggest companies in the world today. Despite the portrayal of Walmart as an odious corporate leviathan, the company is integral in communities, employing tens of thousands and offering shareholders a 2.17% dividend. The U.S.-China trade war might disrupt Walmart’s business model, but you can bet that the retail juggernaut will still try to stick to its moniker of “lowest prices guaranteed.”
Originally published at Liberty Nation.
In discussions of international trade, the pervasive mind-set is that exports are a positive entry in a country’s “economic well-being” ledger, while imports are a negative entry in the ledger. In other words, exports are intrinsically “good” and imports intrinsically “bad.”
Who hasn’t heard that imports “destroy” jobs while exports “create” jobs? Likewise for imports being “dumped” on Americans. Ditto for imports being likened to “invading foreign armies.” In international trade negotiations, countries grant import “concessions” only if their trading partners reciprocate with “concessions” of their own. That is, countries grudgingly import in order to export, not the other way around.
In my many years of teaching the essentials of international economics to university sophomores, I found that virtually all of them were afflicted with this mind-set. Against this backdrop, I enjoyed asking students about what Abraham Lincoln’s (who was a lifelong protectionist) northern states did to Confederate seaports during the War Between the States. Despite students’ general historical illiteracy, some were able to correctly respond that the North blockaded these seaports to keep Confederates from importing goods and services. Next question was: did this help or hinder the Confederacy’s war effort? To which the students responded:, “It hurt their war effort.”
At this point the students had fallen into a glaring contradiction. To wit, if imports are harmful to a nation’s economic health, then the northern states’ blockade of Confederate seaports, by reducing Confederate imports, strengthened the Confederacy. Yes, that what it means. Which, in turn, suggests that Lincoln was an unwitting agent for the Confederacy! This is absurd.
Some students, probably attempting to save face, pointed out that the North’s blockade also deterred Confederate exports (primarily cotton). Did this harm the Confederacy? Yes, but not because exports are intrinsically good and less of them would be harmful. Exports, by themselves, represent goods and services leaving the Confederacy. What’s intrinsically beneficial about having fewer goods and services available, particularly when you’re trying to fight a war?
The problem here is that the popular mind-set regarding exports and imports is bogus! Rather than imports being intrinsically bad and exports intrinsically good, the truth is just the opposite. Lincoln escaped this popular mind-set only once in his political career when he undermined the Confederacy by blockading its harbors. In doing so, he anticipated the late 19th century economist Henry George’s observation that nations do to their citizens when peace prevails what they do to their adversaries during wartime.
None of the politicians/ commentators, together with their business/labor allies, who peddle this economic nonsense about exports and imports behaves in their personal lives as they suggest the nation posture itself with respect to the rest of the world. Indeed, their income earning activities (their exports) enable them to buy things produced by others (their imports). Hopefully, lots of imports. The more the better, in fact. Their exports—that is—their incomes, are what enable them to do this. The bottom line is that people in their private lives export in order to import.
If actions speak louder than words, we should look at what our politicians/commentators and their business/labor cohorts do when managing their own affairs, not the affairs of the nation. It demonstrates Adam Smith’s insight in his 1776 classic, The Wealth of Nations: “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”
By the end of March, Presidents Donald Trump and Xi Jinping are scheduled to meet at a formal signing ceremony to ratify a historic trade agreement between the world’s two largest economies . It has been one long year since the United States fired the first salvos in the trade war, leading to months of tit-for-tat tariffs, endless deliberations, and investors riding their hopes up and down with every little report, comment, and analysis.
Should this prolonged strife receive its final curtain, millions of Americans would have survived the trade war – and all they got for it was a lousy T-shirt. However, for the nation’s farmers, it might be a case of too little too late as they have been the primary casualties in this conflict.
It was a bloodbath out there for the farms that feed this country. But just how bad was it?
Debt, Delinquency, and Death When China, the European Union, and other important trading partners announced that they would cease or scale back their imports of U.S. agricultural products, prices spiraled down. By September 2018, soybeans had cratered 20%, corn had tumbled 12%, and wheat had fallen 10%. While these commodities have slightly recovered, they are still below their pre-trade-war levels.
Farmers had two main issues throughout the summer: They had nowhere to sell their goods. If they did sell their products, they took a steep loss in lower crop prices.
Hoping to weather the storm, farmers had no other choice but to store their immense inventories of soybeans and grains. They were optimistic, reading every report that claimed a trade deal was imminent. What they got instead were rotting storages and a $12 billion government handout , an insult to these men, women, and families who prefer to partake in commerce rather than depend on the state.
The trade battle began to take its toll on these farms once autumn arrived.
In November, the Federal Reserve Bank of Minnesota found that farm belt bankruptcies had surged. It was reported that nearly 100 farm businesses in Minnesota, Montana, North Dakota, South Dakota, and Wisconsin filed for Chapter 12 bankruptcy. Overall, according to The Wall Street Journal , the Seventh Circuit Court of Appeals processed double the number of insolvency filings from farmers last year; the Tenth Circuit witnessed a 56% jump in 2018.
This trend was inevitable after U.S. farm debt topped $400 billion, a figure not seen since the 1980s, when Chapter 12 bankruptcy was established to assist farmers in coming up with ways to pay off their debts within five years. Moreover, the Department of Agriculture estimated that the typical American farmer household lost more than $1,500 last year, and their incomes are 35% lower than in 2013.
Agriculture Secretary Sonny Perdue recently told the House Agriculture Committee that firm land values and historically low interest rates have helped “vulnerable” farmers. Although the Federal Reserve has hit the pause button on normalizing monetary policy, it is inevitable that rates will go higher, affecting deeply indebted farmers.
Simply put, the domestic agriculture sector may take years to recover fully. Perhaps this alone is contributing to the increasing suicide rates in the profession. It is true that the rate was already high before the trade war – 84.5 per 100,000 people – but experts contend that this bad situation might get worse.
Jennifer Fahy, communications director with Farm Aid, said in an interview with CBS News:
“The farm crisis was so bad, there was a terrible outbreak of suicide and depression. [Today] I think it’s actually worse. We’re hearing from farmers on our hotline that farmer stress is extremely high. Every time there’s more uncertainty around issues around the farm economy is another day of phones ringing off the hook.”
Who Wins? Does anyone ever win a trade war?
In April 1975, Col. Harry Summers was part of a post-war delegation in Hanoi, where he met his counterpart, Col. Tu. The two men sat down and discussed the Vietnam War. Summers told Tu that the United States never lost a battle during the conflict, to which Tu responded: that’s irrelevant.
When President Donald Trump, also known as the Tariff Man, proclaimed on Twitterverse that the United States would win the trade war, someone should have told him that it’s irrelevant. The agricultural industry has been decimated, farms are witnessing the decay of their inventories, and families are going bust. This isn’t a victory, it’s unnecessary suffering, based on a misunderstanding of basic economic principles; it could have been avoided. The American people are paying a higher price (literally) to the tune of $3 billion a month, but farmers are forking over a bigger cost: professional and personal ruin.
Originally published by Liberty Nation.
Trade is a key to a rising standard of living in society, especially for those at the bottom of the economic ladder.
In every exchange, both sides benefit from their own individual subjective perspective. That’s because at the moment of the trade, they are both giving up something they value less for something they value more. Thus, trade enables people to improve their standard of living. The greater the ability of people to trade, the better off they are.
A simple example: Suppose John has 10 apples and George has 10 oranges. John would like some oranges and George would like some apples. They decide to enter into a trade. What would be a “fair” trade? 5 apples for 5 oranges? We can’t say that. It is impossible to say what would be “fair.” That’s because trades are always based on the subjective valuations of the traders. It depends on how much value that each of the traders places on what he is giving up and on what he is getting in exchange.
Suppose John and George reach a deal in which John gives George 9 apples and George gives John 1 orange. Would that be an “unfair” trade? Of course not because John is voluntarily giving up something he values less (9 apples) for something he values more (1 orange). And George is giving up something he values less (1 orange) for something he values more (9 apples). Both sides have increased their own standard of living through the mere act of exchange.
It stands to reason, therefore, that the wider the ambit of possible trades, the better off people are economically. They have more opportunities to improve their standard of living if there are 1,000 people with whom to trade as compared to, say, 10 people.
A corollary to this principle becomes obvious: To the extent that government interferes in any way with people’s freedom to trade, to that extent the government is suppressing the ability of people to improve their standard of living. The harsher the restrictions, the bigger the trade “wars,” or the more brutal the sanctions and embargoes, the worse off the government is making its own citizens in terms of economic well-being.
Thus, among the greatest things that could ever happen to the American people would be the U.S. government’s liberating them, fully and completely, to travel wherever they want and trade with whomever they want. No more tariffs, trade restrictions, trade wars, sanctions, and embargoes.
What if other countries refuse to follow suit? So be it. The fact that some foreign government is imposing restrictions on the freedom of its own citizenry to trade with others should not serve as an excuse for U.S. officials to “retaliate” by doing the same to American citizens. If a foreign regime restricts the ability of its citizens to trade with Americans, that is something American sellers and consumers will have to deal with it. It is no business of the U.S. government.
Finally, and much more important than the utilitarian arguments for free trade, we should always keep in mind that trade involves the exercise of fundamental, natural, God-given rights. Such rights include the right to private property, the right to do what one wants with his own money, economic liberty, freedom of travel, liberty of contract, and freedom of association.
God has created a consistent universe, one in which freedom, including free trade, is the moral system and also works to improve the lot of mankind.
[Originally published by the Future of Freedom Foundation.]
President Trump’s trade approach seems to be telling foreign producers and countries, “Do what I demand or I will punish you with higher tariffs that will make you wish you had.” The fact that such tariffs would largely burden American importers, rather than foreign producers, as he repeatedly claims in his errant focus on trade imbalances, however, makes this a highly questionable strategy for helping Americans. Harming my own citizens, and threatening to hike that harm unless others comply, in order to force others to treat my citizens better, has seldom actually helped citizens, while risking escalation into a trade war that will multiply the harm to all involved.
Perhaps we would do better if we stuck to “we will jointly reduce the restrictions on voluntary trade we impose” as a means to benefit all consumers, without the “or else” of doing the opposite if I don’t like the deal. And that is especially so, as such “or else” threats increase the risk all others will face in trusting us in future dealings as well as present ones, which can easily break many deals in our complex international supply-chain world.
The new BMW auto plant that just opened in Mexico provides an interesting illustration of the alternatives.
In anticipation of building that roughly billion-dollar factory, that would produce the next generation 3-series sedan, in 2017, the Trump administration threatened to impose a 35 percent import duty on BMWs it shipped into the US to try to force production to our side of the border. But that protectionist extortion attempt failed, precisely because Mexican producers have freer trade with other countries than do American producers, which is also why Nissan and Volkswagen have also increased their Mexican production.
Because Mexico has pursued far more free trade agreements than the US, its producers are able to sell, tariff-free, to countries that make up roughly three-fifths of world GDP. And avoiding such duties on sales to other countries is worth far more than US tariff threats can impose.
To illustrate, consider that Mexican vehicles can be sold in the EU duty free, but those imported from the US must pay a 10 percent import tax, a tariff hangover that goes back to the 1960s “Chicken War,” which involved a very Trump-like tit-for-tat mutual imposition of harm.
Given that even the base MSRP of a BMW Model 3 exceeds $40,000, avoiding a 10 percent tariff would save over $4,000 per vehicle sold from Mexico into the EU rather than from the US. That is an even greater per-car savings than what helped lure the production of VWs and Nissans to Mexico. And that is over and above the $600 to $700 per unit labor cost advantage Mexico has over the US, that has led to GM recently becoming the leading auto producer in Mexico.
As Tim Mullaney described the results, even before the escalation of President Trump’s “my way or I won’t let your vehicles onto my highways” approach, “car companies are building in Mexico rather than the United States, largely because it has freer trade than the United States does with the rest of the world.”
Despite Trump’s complaints about every previous trade arrangement struck without his “art of the deal” skills and his beyond-belief promises for what his approach would provide, it is very hard to see much difference from long-refuted mercantilist protectionism, which results in mutual burdens rather than mutual benefits. As the global vehicle market is demonstrating to us now, if we would only pay attention, the mutually beneficial arrangements that reducing trade restrictions provide are more effective than mutually punitive trade threats in advancing American interests.
In 1765, a writer at The Boston Gazette complained about the seemingly endless stream of protectionist laws imposed on the colonists by the British Empire:
A colonist cannot make a button, a horseshoe, nor a hobnail, but some sooty ironmonger or respectable button-maker of Britain shall bawl and squall that his honor's worship is most egregiously maltreated, injured, cheated, and robbed by the rascally American republicans.
In other words, if a colonist attempted to export any manufactured goods that might compete with tradesmen back in England, Parliament was sure to get an earful from local protectionists about "unfair" trade.
And Parliament was often happy to oblige.
Setting the Stage for Rebellion Beginning at least as early as the seventeenth century, Parliament had placed a wide variety of restrictions on what the colonists could trade, and where. The British state limited both imports and exports. Under these "trade laws," Americans had to ship tobacco, pitch, tar, turpentine, masts, and other specified items to England only. According to Charles Beard in The Rise of American Civilization, "commodities of ...manufacture, as a rule, they could buy only through English factors. — the idea being to add to the prosperity of English merchants."
Other regulations put restrictions on colonial manufacturing: "woolen goods and hats could not be made for the general trade; mills for slitting and rolling iron and furnaces for making steel were forbidden."
These laws were, according to Beard, "the result of specific protests made by interested parties [in England]."
And then there was the hated Molasses Act of 1733 which was a protectionist measure designed to drive up the price of foreign-made molasses. It was passed at the insistence of wealthy owners of plantations in the West Indies, many of whom were said to be sitting members of Parliament at the time.
The Act was a grave threat to the standard of living in New England, where a large rum-production industry thrived. The Act led to widespread smuggling and opposition from colonists, which eventually led to nullification of the law. Historian John C. miller writes in Origins of the American Revolution:
Against the Molasses Act, Americans had only their smugglers to depend upon — but these redoubtable gentry proved more than a match for the British. After a brief effort to enforce the act in Massachusetts in the 1740s, the English government tacitly accepted defeat and foreign molasses was smuggled into the Northern colonies in an ever-increasing quantity. Thus the New England merchants survived—but only by nullifying an act of Parliament.
In many ways, the opposition to the Molasses Act would prove to be a sort of rehearsal for the acts of disobedience that would lead up to the American revolution decades later.
And when revolution finally did come, trade would indeed be in the forefront of the debate over British abuses of power.
After all, with every tariff and with every trade restriction must also come enforcement.
In a lecture on the American Revolution, Lord Acton noted how the British, in the name of protectionism, slowly tightened the screws on the Americans. Faced with such relentless smuggling and flouting of the Empire's tariffs and trade controls, the monarchs took to ever greater interventions:
The right of searching houses and ships for contraband was conveyed by certain warrants called writs of assistance, which required no specified designation, no oath or evidence, and enabled the surprise visit to be paid by day or night. ... [I]t was now intended [under George III] that they should be efficacious, and should protect the revenue from smugglers...
Acton tells us the American jurists argued vehemently that the writs were an abuse of power, but eventually,
The court decided in favor of the validity of the writs; and John Adams, who heard the judgment, wrote long after that in that hour the child Independence was born.
Modern Protectionists As Heirs of British Mercantilists Unfortunately, when the war of Independence ended years later, the revolution was followed by the counter-revolution: American nationalists like Alexander Hamilton and John Adams wanted revenue for a large and powerful central government of their own. And they got what they wanted, over the protests of the Anti-Federalists — and the taxpayers.
As a result, in the early years of the Republic — much like today — protectionists would "bawl and squall" about supposedly unfair trade, as did the whining English tradesmen in the days of yore. Then as now, American protectionists think themselves "egregiously maltreated, injured, cheated, and robbed" by foreigners who dare to sell trinkets or tools to willing American buyers. Often, the tactic has worked to gain government favors for certain influential industries.
And with protection must come taxation and enforcement. Thus, the protectionists tacitly or explicitly approve of fines and prison terms against their own fellow Americans who might be so bold as to disobey the authorities in the tradition of the American revolutionaries. And, of course, protection means higher taxes for everyone.
Indeed, modern protectionists have returned many Americans to the status of the colonists of the eighteenth century. Today, a distant government hundreds or even thousands of miles away in Washington, DC can impose tariffs and quotas and restrictions of enormous variety. These protectionist measures might benefit only a tiny number of industrialists of farmers living halfway across the country. All at the expense of everyone else.
To justify this, the protectionists invent fantasies, such as the one in which all taxation is now justified because there is "representation." This is, of course, a fantasy based on an absurd notion that a few hundred millionaires in Congress could possibly "represent" 320 million Americans spread across a varied geography of more than three-and-a-half million square miles.
In practice, however, the reality of protectionism today is little different from what it was in the days of the Revolution: as freedom to trade is restricted, human freedom is likewise restricted. Thus, as Thomas DiLorenzo observed "whenever human freedom advances, as it did with the growth of trade, state power is threatened. So states did all they could then, as now, to restrict trade."
A study last year by Germany’s Halle Institute estimated a no-deal Brexit would cost 12,000 jobs in the UK, and 422,000 jobs in the other 27 EU members, of which 100,000 are in Germany and 50,000 in France. Recently, Ireland’s central bank forecast a loss of up to 100,000 jobs in the medium term in Ireland alone, on a no-deal. Clearly, the EU’s negotiators risk losing the wholehearted support of its two largest post-Brexit paymasters and others. But for Brussels, giving in on Brexit encourages rebellion from disaffected populations in other member states. Rather like the Soviets ruling Eastern Europe in the late eighties, the Brussels establishment finds itself struggling to keep its non-democratic political model intact.
It is increasingly likely Brussels will find events are spinning out of its control. For the UK, this introduces collateral damage, necessitating even more urgent separation from the EU. In a paper published at end-June, Bob Lyddon points out that a Eurozone financial crisis (which is becoming increasingly likely, as argued below) could cause the UK’s contingent liability as an EU member to be as much as €441bn. “This derives from the near-criminal irresponsibility by the UK’s negotiators”.
Whatever the numbers, there can be no doubt that this is an extremely serious issue. Furthermore, in the event of a financial and systemic crisis in the Eurozone, the UK will face its own crisis, if only because of cross-liabilities through the two banking systems. And the cyclical economic downturn that always follows the failure of a period of credit expansion is coming up on the inside rail very rapidly.
The EU economy is left badly unbalanced, with Germany dominating production and exports. Other populous member states, notably in the Club Med and France, are in a financial mess. They have relied on Germany’s production to provide for their unproductive profligacy. Her production output is now contracting.
Germany has been hit by three adverse developments at the same time. There is President Trump’s tariff war against China, which has undermined Germany’s largest growing markets at the eastern end of the Silk Road, and the threat he will deploy similar tactics against Germany. There is EU environmental legislation, which is making Germany’s motor production obsolete and forcing manufacturers to put a time-limit on existing production while investing enormous sums in electric technology. The damage this has done extends down the whole production chain, undermining the Mittelstand.
Then there is the crisis in Germany’s major banks, most publicly seen in Deutsche Bank because of longtail liabilities from its investment banking division. But all German banks, as well as those throughout the EU, face a lethal combination of margin compression from negative interest rates and a legacy of an expensive branch network when customers are migrating to online banking. The slump in German production now provides an additional threat to their loan books.
In the background, there is the turn in the global credit cycle from its expansionary phase into a periodic contraction, usually resulting in a credit crisis. To understand the transition from credit expansion to a tendency for it to contract is to recognise that the expansion of credit as a means of stimulating an economy depends on tricking economic actors into believing prospects are improving. When the evidence mounts that they are not, monetary stimulation fails, and credit begins to contract. Despite the ECB maintaining negative interest rates, despite the ability of highly-rated companies to raise finance at zero or even negative rates, and despite the ECB’s offer to pay companies to borrow (which is what deeper negative rates amount to) economic actors are now aware that it is all deception.
This is why Germany now has all the appearances of being in the early stages of a deepening economic slump, and there is nothing monetary policy can do about it. Brexit will simply add to these problems, not just for manufacturers, but for their bankers as well, as the Halle Institute report implies.
It is increasingly difficult to see how with escalating budget deficits in member governments Brussels can afford to continue with its head-in-the-sand approach to trade negotiations with Britain. The eurocrats naturally retreat into more protectionism when they see the system threatened. But asking Germany, France, the Netherlands, Austria, Finland, Sweden and Denmark for more money when their tax revenues are slumping is unlikely to cut much ice.
Given the ongoing destruction of liberty and prosperity from President Trump’s trade wars, tariffs, sanctions, and embargoes, it’s time to think at a higher level, one that goes beyond mere criticism of Trump’s trade antics. It’s time to think in terms of individual liberty, free markets, and limited government, all of which translate to the idea of unilateral free trade.
What does unilateral free trade mean? It means that the U.S. government should simply lift, dismantle, abolish, repeal, and end all of its tariffs, trade restrictions, sanctions, embargoes, import quotas, and trade wars. No meetings. No negotiations. No demands. No “free trade” agreements. Just free the American people to travel wherever they want and trade with whomever they want.
Does this mean that other nations will do the same? Nope. Other nations might follow suit but not necessarily. Should that affect America’s decision to adopt a policy of unilateral free trade? Absolutely not! Americans should be liberated to travel and trade with others regardless of what foreign regimes are doing in their particular nations.
First and foremost is the principle of liberty. When people are living under a regime that wields the power to control the economic exchanges they enter into with others, there is no way for those people to be considered genuinely free. Freedom necessarily entails the right to travel wherever one wants to travel and trade with whomever he wants to trade. Any infringement on freedom of travel and freedom of trade, whether through tariffs, import quotas, trade restrictions, sanctions, embargoes, and trade wars, constitutes a severe violation of the principles of liberty.
Secondarily is the concept of prosperity and rising standards of living. It is an axiom that in every trade, both sides benefit, from their own individual perspective. That’s because in every trade, a person is giving up something he values less for something he values more. Every time a shopper buys any item from another person, he has improved his standard of living, and so has the seller. At the moment of the trade, they have both given up something they value less for something they value more.
Thus, whenever the government adopts rules, regulations, policies, or laws that interfere with the freedom of people to trade with others, the government is harming people’s economic well-being and reducing their standard of living.
Throughout history, people have been forced to live under regimes that wield the power to control trade. It’s time for one nation to lead the rest of the world out of this statist morass. I say that that nation should be America. Here is what I propose: A constitutional amendment stating the following: “No law shall be enacted, by either the federal government or the state governments, respecting the regulation of trade, or abridging the free exercise thereof.”
The advantage of a constitutional amendment, as compared to simply repealing, ending, abolishing, and dismantling Trump’s sanctions, embargoes, trade restrictions, tariffs, and trade wars is that the American people would no longer have to concern themselves with some president or Congress imposing, willy-nilly, some new restriction on their freedom to travel and their freedom to trade. If Trump, for example, wakes up some morning and suddenly and impulsively decides to start a wage war against China, someone can quickly file suit in federal court to get his trade war enjoined as a violation of the free-trade clause in the Constitution.
On July 4, Americans celebrated the Declaration of Independence, a document that points out that everyone, including Americans, possesses the natural, God-given rights of life, liberty, and the pursuit of happiness. Isn’t it time for Americans to recapture those rights by prohibiting their own government from infringing upon them? A good place to begin would be the adoption of a policy of unilateral free trade and a constitutional amendment enshrining it into law.
Dr. Lee J. Cohen is a Graduate Faculty member at the Mises Institute. After receiving his PhD in Financial Economics from Boston College’s Carroll School of Management, Professor Cohen served on the graduate faculty of the Terry College of Business at the University of Georgia for eight years, where he taught MBA and undergraduate courses, served as an MBA committee member, and contributed regularly to all parts of the Finance PhD program. He won several awards for his research and teaching impact, including a special Hugh O. Norse MBA Outstanding Teacher Award (as voted by his students).
After receiving his undergraduate degree in Physics from Emory University, Cohen taught Physics and Mathematics at the State University of New York. He then received two Masters degrees, one in Physics and another in Quantitative and Computational Finance, each from Georgia Tech. He worked as an Economic Analyst at the Federal Reserve Bank of Atlanta before pursuing doctoral studies at Boston College.
Professor Cohen’s research focuses largely on regulatory interactions with financial markets and institutions, and more generally on different market intermediation processes. His research has been published in The Journal of Money, Credit and Banking, The Journal of Financial and Quantitative Analysis, and Global Finance Journal.
Ludwig von Mises famously argued that people must choose between outright socialism and unfettered capitalism, because there is no coherent “middle ground” between the two. The allegedly reasonable compromise of a highly interventionist state — where the authorities retain nominal private property but issue edicts regulating how legal owners may use their property — is unstable. Mises argued that one round of interventionism invites consequences that are even worse than the original problem, leading to yet more interventionism.
During the debates over Obamacare, I pointed out just how relevant Mises’s lesson was: we couldn’t get the “good parts” of Obamacare (such as universal coverage) without the “bad parts” (such as the individual mandate and massive tax hikes). When it comes to today’s controversies over trade with China, once again Mises’s insights are valuable. You can’t levy punitive tariffs on China but leave other trading routes relatively free, because then the Chinese will simply ship their exports via a more circuitous route. China hawks need to decide if they are going to abandon attempts to coercively manage trade, or if they are prepared for even more extensive top-down planning of global commerce.
Mises and Milk Mises’s standard example for the phenomenon of one intervention leading to another was a price control on milk. Suppose the government wants to make milk more affordable for poor families. It can enact strict price controls on milk. But if this isolated price ceiling is imposed in the context of an otherwise free market economy, the immediate result will be a shortage of milk. Now, rather than poor families struggling to afford milk for their children, the stores won’t carry any milk, period. At this point, the government can either admit its error and retreat back to pure laissez-faire, or it can impose further price controls, this time on cattle feed etc. in order to coax dairy farmers into once again supplying the market with milk. Yet this second round of intervention leads to even more undesirable consequences, and so on.
Mises’s Lesson Applied to International Trade In the debate over free trade, we see a similar phenomenon. The Trump administration has been engaged in a low-level trade war with China, levying targeted tariffs on its imports in an effort to bring Beijing to the bargaining table. Yet the remaining pockets of free(r) trade are stymying the effect, because of the phenomenon of “transshipment” — in which China exports its goods to a third country, from which they can be sold to the United States without penalty. As a recent article in the WSJ, entitled “American Tariffs on China Are Being Blunted by Trade Cheats,” pointed out,
Billions of dollars' worth of China-made goods subject to tariffs by the Trump administration in its trade fight with Beijing are dodging the China levies by entering the U.S. via other countries in Asia, especially Vietnam, according to trade data and overseas officials.
And thus we see the relevance of Mises’s warning. The goal of the initial intervention — the levying of tariffs on Chinese imports — was to hurt Chinese exporters and thereby convince Chinese government officials to concede to American demands. But much of the intended effect has been muted because of transshipment.
At this point, American officials can admit that their approach was ill-advised, and stop using taxes as a way to make America great again. Or, they can expand the trade war with China to include an extensive monitoring of the content of goods coming from every other country on Earth.
“Rules of Origin” in Trade Agreements This isn’t hyperbole on my part. As Ryan McMaken explained on this site over the summer, special trade agreements — such as the US pact with Central America — have clauses signifying that only qualified goods can escape duties. McMaken linked to this relevant passage from an FAQ on the CAFTA-DR (Central America-Dominican Republic-United States-Free Trade Agreement):
How can my product qualify to take advantage of the CAFTA-DR?
The product must qualify as an “originating” good under the terms of the Agreement. This means that the product must have sufficient U.S., Nicaraguan, Guatemalan, Honduran, Salvadoran, Costa Rican, and/or Dominican content or processing to meet the criteria of the Agreement. If goods contain only U.S. or Central American or Dominican Republic inputs, they qualify. If they contain some inputs from other countries, they still might qualify if they meet specific criteria set out in the Rules of Origin of the Agreement. Each product has a unique rule, based on its tariff classification. Most of the rules require either that the non-originating inputs undergo a specified transformation through processing in the United States or one or more of the other signatory countries (tariff shift method) and/or that they have a sufficient level of originating content as determined by a formula (regional value content method).
And now we see why a “free trade agreement” in practice isn’t simply an index card declaring, “Tariffs on Country X are 0 percent, three cheers for Bastiat!” These are managed trade agreements, with hundreds of pages devoted to detailed regulations that smack of top-down Soviet planning.
Conclusion As Mises stressed time and again, people must decide whether to embrace capitalism or socialism. There is no third way, where we can enjoy the dynamism of markets while avoiding their “excesses” through strategic interventions. In the case of tariffs, particularly when the goal isn’t a broad-based revenue source but rather the achievement of a bargaining position with a particular country, a simple policy will soon break down, because the targeted country can simply ship its exports via other channels. (This same problem occurs in the case of “carbon tariffs” levied on countries that don’t punish greenhouse gas emitters to the same extent as the original country.)
The only logical end point is a country having to keep track of the entire network of trade flows, and levying the appropriate tariffs accordingly. Rather than this byzantine nightmare, trade hawks would be wiser to throw in the towel and try another strategy to achieve their goals. Unilateral free trade would make Americans richer, and our example might eventually inspire other governments to allow their own people more economic freedom as well.
That there are inherent benefits in diversity is a common article of faith in our democratic/populist times. We hear it in and about universities, businesses, politics, entertainment, etc. Typically, though, we hear about it in terms of forcing more diversity on those whose diversity in a particular dimension doesn’t measure up to someone else’s arbitrary standard.
However, high-volume discussions on the topic often proceed as if diversity was the relevant end desired, while all but ignoring whether that diversity expands our joint possibilities or contracts them by increasing social balkanization. And policies that reinforce divisions between groups by imposing disparate treatment do the latter. The zero- or negative-sum views they represent, and the top-down solutions derived from them, actually divert our focus away from the greatest engine humanity has discovered for turning diversity into mutual benefits—free markets.
Free markets turn diversity into widespread shared gains, facilitating social cooperation, while coerced diversity relies on imposing harms on particular groups, crowding out social cooperation possibilities.
Individuals have diverse tastes, backgrounds, cultures, experiences, circumstances, etc., producing disagreements about the values of goods and services. Market exchange, however, allows all to benefit from those differences. The reason is that voluntary trade provides benefits that exceed costs to both parties. Thus, the divergent values that arise from uncountable differences lead to exchanges that create wealth for all involved. Everyone gains from their diversity, with no one’s desires ignored or overridden simply because they are different in some way. In contrast, coercively imposed diversity benefits whichever groups can politically dominate by imposing burdens on others.
Individuals have diverse skills, abilities, circumstances, climates, traditions, prior investments, etc., that also lead to very different production costs across people and places. Consequently, specialization in production for exchange with others can dramatically lower costs and increase our capabilities to supply what people want, further expanding mutual gains from diversity. But coercive diversity increases our differences rather than better integrating our efforts, short-circuiting the foundation of such gains.
Further, arenas where different ideas and customs, have come into voluntary contact have always been primary sources of new and better ways to do things. “Could what they do work better for me than what I am doing now?” motivates the communication, evaluation, application, imitation, and modification that turn diversity into benefits for others. That is why trade hubs, particularly ports, have always been centers of entrepreneurship and advancement, and why cities have been the incubators of vast amounts of innovation, which no one must or could impose from without. Coercively increasing the separateness of groups, however, undermines this highly creative and productive interaction.
Free market arrangements also produce mutual benefits from dynamic change. Our diversity of time, place, and circumstance means that some of us learn new productive information that others do not yet know. When such discoverers act on that information in markets (e.g., buying more of a good discovered to soon be of greater value) they communicate the resulting changes in relative scarcities faster and more accurately than any other social communication mechanism. Consequently, fewer mistakes are made, benefiting all. However, anything that increases group separatism and distrust, rather than openness to peaceful relationships, depreciates incentives to seek out such information or productively communicate it to others.
Diversity among individuals is a fact. But whether it is a social benefit in fact depends on whether it creates excuses to fight each other for special treatment or offer members mutual benefits. Recent efforts have focused on “solutions” representing the former, overlooking that, as Dwight Lee put it, “politicizing our differences is far more likely to make diversity a source of conflict than a cause of celebration.” Americans would do better to remember British rabbi Jonathan Sachs’s maxim that “it is through exchange that difference becomes a blessing, not a curse,” and focus instead on advancing voluntary arrangements which allow all to peacefully advance their ends, even when they differ.
In the wake of the COVID-19 pandemic and its attendant economic strains, some protectionists and anti-immigration ideologues are trying to take advantage of this opportunity to advance their nationalist agenda. They argue that if the United States had restricted international trade and immigration more thoroughly in the past, as President Trump had fought to achieve, the public health crisis could have been curtailed. Some are also arguing that imposing further restrictions will strengthen the economy and protect Americans from the coronavirus.
Both of these assertions are demonstrably incorrect.
Should Employers Be Allowed to Hire Whom They Want? On April 20, Trump announced via Twitter that in order to combat the “Invisible Enemy” and to protect Americans’ jobs, he was unilaterally suspending all immigration to the United States. His most adoring fans applauded the order, parroting the idea that it would somehow shield Americans from the virus.
As a response to the pandemic, the move was questionable to say the least. The first confirmed case of COVID-19 in the US came not from an immigrant, but a domestic traveler. At the time of Trump’s announcement, there had already been nearly eight hundred thousand coronavirus cases in America, so it is unlikely that prohibiting immigration would have had any effect on the spread of the disease.
As a response to the economic calamity, the immigration suspension was ludicrous. Americans lost their jobs not due to an influx of immigrants, but because of government-imposed lockdowns in response to COVID-19. Obviously, companies forced to shut down are not in the business of hiring anyone.
For those companies that are hiring, an immigration suspension would only make it more difficult to provide vital products. Agricultural firms, such as farms and meat-packing plants, rely on immigrant labor. Immigrants also make up a disproportionate share of healthcare workers; nearly thirty percent of all physicians in the United States are foreign born. In the middle of a pandemic, what sense would it make to prevent the healthcare industry from recruiting more migrant doctors?
Thankfully, it seems that the Trump administration understands that a blanket ban on immigration would be harmful to the country. According to the president’s executive order, the government will continue to process visas for temporary agricultural workers and, most notably, essential healthcare personnel.
Nonetheless, the administration’s ban does not bode well for the future of immigration policy. Tepid though it might be, by stripping American businesses of the right to hire whom they please, the ban represents a major step toward granting the federal government more control over the labor market.
Pandemic Protectionism There is even less reason for optimism when it comes to international trade. Besides a very limited tariff payment reduction and deferral, the president has thus far offered little respite from his protectionist trade policies. Such policies have only served to exacerbate the current crisis.
In 2018, the government imposed massive tariffs on Chinese-produced medical supplies in order to discourage imports, with the ostensible goal of incentivizing American companies to manufacture them domestically. The tariffs had the intended effect: American purchases of Chinese medical products fell, but hospitals also received fewer and more expensive supplies than they otherwise would have. The government thus created a shortage of vital supplies just before the country hurtled into the worst public health crisis in a century.
The administration’s refusal to eliminate tariffs and other impediments to trade is no doubt motivated by an ideological commitment to scaling back American reliance on China. To enact any significant trade reform at this point would be to admit that the president’s prior trade policies were ill advised.
Even now there are those who argue that not only should tariffs be kept high, but we ought to impose more restrictions on imports. Representatives Mike Gallagher and Tom Cotton, for example, have proposed legislation that would completely ban health facilities from purchasing pharmaceuticals and medical devices if they’re produced in China. They would also offer federal subsidies to domestic producers. The bill’s more draconian measures would not go into effect until 2022, but that hardly allows hospitals or American medical suppliers enough time to adequately adjust, especially given that we are currently in the midst of a pandemic.
Of course, that’s not to say that there is no case to be made for reducing American reliance on Chinese-manufactured medicine (though that reliance has been grossly overstated). But to double down on the same ham-fisted protectionist policies that contributed to the country’s lack of pandemic preparedness in the first place may have catastrophic consequences if the virus returns in successive waves.
If we wish to avoid shortages of crucial medicine and hospital equipment, then we need to repudiate the proposals of aspirant central planners, while allowing market actors to figure out where resources would be most efficiently allocated.
For years, I have had a Mises coffee mug that endorses liberty, property, and peace. And it gets a fair amount of use, which keeps reminding me of those essential building blocks of a good society. But the last time I used it, I happened to be reading about Richard Cobden, whose June 3 birthday is coming up. What I was reading made me think, “He probably would have been a leading member of the Mises Institute, if he hadn’t been born too early.”
Instead, Cobden was the spearhead of the nineteenth-century political campaign to end England’s protectionist Corn Law, which he called “legislative murder which denies to the people of the land food in exchange for the produce of their industry.” He became known as “the Apostle of Free Trade,” whose efforts finally overturned the law in 1846 and triggered liberalized trade through much of Europe. His role was so great that some have said that free markets owe him their existence.
Cobden recognized free trade as integrally connected to liberty, property, and peace. It does not require coercion, unlike trade restrictions that try to stop people from using their property and productive efforts as they think will benefit them most. Free trade only requires liberty. And increasing the mutual benefits from voluntary arrangements makes that approach increasingly attractive compared to war. As Jim Powell described it:
Peace prevailed, in large part, because non-intervention became the hallmark of foreign policy.…There was unprecedented freedom of movement for people, goods, and capital.…Trade expanded, strengthening the stake that nations had in the continued prosperity of one another as customers and suppliers. While free trade was never a guarantee of peace, it reduced the danger of war more than any public policy ever had.
It is worth remembering Cobden’s words for liberty, property, and peace as we pass his 216th birthday, because he would qualify as a grandfathered-in Mises Institute member. Consider just some of those insights:
The progress of freedom depends more upon the maintenance of peace, the spread of trade, and the diffusion of education, than upon the labors of cabinets and foreign offices.Protection…takes from one man’s pocket, and allows him to compensate himself by taking an equivalent from another man’s pocket…a clumsy process of robbing all to enrich none, and ties up the hands of industry in all directions.How can protection…add to the wealth of a country?…You may, by legislation, in one evening, destroy the fruits and accumulation of a century of labor; but I defy you to show me how, by the legislation of this House, you can add one farthing to the wealth of the country.…If you attempt by legislation to give any direction to trade or industry, it is a thousand to one that you are doing wrong; and if you happen to be right…the parties for whom you legislate would go right without you, and better than with you.Free Trade! What is it? Why, breaking down the barriers that separate nations…behind which nestle the feelings of pride, revenge, hatred, and jealousy, which every now and then burst their bounds, and deluge whole countries with blood; those feelings which nourish the poison of war and conquest.We are going to set the example of making industry free…giving the whole world every advantage of clime, and latitude, and situation, relying ourselves on the freedom of our industry…carrying out to the fullest extent the Christian doctrine of “Doing to all men as ye would they should do unto you.”Eternal justice… the inalienable right of every man freely to exchange the result of his labor for the productions of other people.The practice of protecting one part of the community at the expense of all other classes [is] unsound and unjustifiable.Carry out to the fullest extent…the true and peaceful principles of Free Trade, by removing all existing obstacles to the unrestricted employment of industry and capital.Look not to the politicians; look to yourselves.Free trade…recognizes the paramount importance of individual action.Peace will come to earth when the people have more to do with each other and governments less.[We] advocated Free Trade, not merely on account of the material wealth which it would bring to the community, but for the far loftier motive of securing permanent peace between nations.Our principle…would bring peace and harmony among the nations.People…must be brought into mutual dependence by the supply of each others’ wants. It is God’s own method of producing an entente cordiale, and no other plan is worth a farthing.The Free-Trade principle…shall act on the moral world as the principle of gravitation in the universe, drawing men together…and uniting us in the bonds of eternal peace.…[T]he effect will be to change the face of the world…to introduce a system of government entirely distinct from that which now prevails.Man…freely exchanges the fruits of one’s labor with his brother man.…[T]the speculative philosopher of a thousand years hence will date the greatest revolution that ever happened in the world’s history from the triumph of the principle. Richard Cobden knew that free trade was the natural result of self-ownership and voluntary arrangements, which produce justice by preventing government-sponsored robbery of some by others. He recognized that it broke down privilege and barriers hindering economic progress and replaced them with mutual benefits. In a world far too distant from that ideal, we should remember his wisdom that “the emancipation of commerce” would be “a beacon for other nations” that would expand liberty, better protect property, and lead to peace, the trifecta that best enables economic and moral progress. As Sir Henry Campbell-Bannerman said, celebrating the one hundredth anniversary of Cobden’s birth:
Cobden spent his life in pulling down those artificial restrictions and obstructions…not merely to commerce, but also to peace and good will, and mutual understanding; yes, and obstructions to liberty and good government at home.…[H]e exploded the economic basis of class government and class subjection.
Listen to the Audio Mises Wire version of this article. In my recent social media discussions on the subject of free trade, a certain thread of argument related to GDP has become more common. The argument, such as it goes, asserts that international trade is not very important as a component of GDP. The net impact of trade is a small impact on GDP, with imports and exports generally “balancing” each other out, leaving just a few percentage points either way. Trade (and immigration) restrictions seem like a small price to pay, economically, according to this framework.
Despite its superficial validity, this is a wholly erroneous way to look at the problem of generating prosperity and rests primarily on two economic fallacies. The first is the use of the GDP aggregate as a viable measure of national prosperity, which has been heavily criticized in other contexts.
Many criticisms of the concept of GDP focus on the concept's formulaic assumption that government spending is inherently productive. This assumption has resulted in many errors, including economists and laymen alike in the 1970s and 80s looking at the growing GDP of the USSR and assuming the Soviets would economically overtake the West as a result. To a lesser degree, the same fallacy has driven concerns about China’s growing economy in the last couple of decades.
In the context of international trade, the aggregate GDP often functions as a metric that fails to measure human welfare in yet another way.
This is easiest to see with small countries, which derive their subsistence mainly from international trade. Hong Kong, for instance, had a trade-to-GDP ratio of 375 percent in 2017. One hundred eighty-eight percent of its GDP was exported out of the country and 187 percent was imported into it. Billions of dollars of goods flow in and out of Hong Kong every year, much of it in trade with China. Much of this trade is not in exclusive goods: roughly 8 percent of imports and exports alike are categorized as broadcasting equipment. Without international trade, Hong Kong would collapse economically; Hong Kong’s great wealth is attributable to nothing but generally free trade. Despite the fact that the net trade deficit/surplus is apparently a small fraction of GDP, the vast majority of the economy is either producing things for export or selling imports.
This remains true of larger countries with more production that ends up in internal markets. Without international trade, which covers a trade-to-GDP ratio of 26 percent in the United States each year, the people of the US would be significantly poorer materially. It would not be a simple marginal loss around the edges, with perhaps clothing or some food items costing a bit more, but a drastic reduction in the standard of living of the average American. Those who erroneously feel they have been most harmed by international trade would, in fact, be the most harmed by its restriction, as increases in prices and supply reductions for various goods would strike them the hardest. Restricting trade with higher tariffs or import quotas might not produce an obvious effect on GDP figures, but it would make the actual prosperity of the country significantly lower.
The second error is rooted in the monetization of trade as a metric. For example, a common interpretation made by critics of free trade is that exporting $100 billion of wool and importing $100 billion of computers is considered offsetting trade. This leads many to miss the mutually beneficial value increases inherent to the activity of trade. Because imports are apparently (but not necessarily) subtracted from GDP and exports are added to it, the naïve GDP approach assumes that there is little impact from ceasing them—the exports (in monetary terms) are assumed to simply replace the imports (also in monetary terms). Thereby, it seems superficially plausible that restricting or banning the import of a good would simply result in production moving “onshore” (as opposed to the “offshoring” common when production is cheaper in foreign countries). This ignores the fact that labor and capital resources have to shift to meet the demand. It is simply not the case that there can be no losses obtained by shifting production away from exported goods into industries that were otherwise imported. Sheep farmers producing wool in Ireland for export could not readily shift to producing computer equipment to make up for lost imports.
What is missed by the naïve GDP approach is the mutually beneficial aspect of trade. If I purchase a good from a Chinese company for $100, I am better off by however much I value that good over the $100 I spent. Likewise if a Chinese person buys something from an American company. The same is true of the purchase and sale of capital goods, which are bought precisely because the company buying them—in any country—considers it a mechanism to increase the value they will produce in the future by more than they'll spend. The capital structure produced thereby is a complex web of inputs and outputs spanning national borders; while dynamic adjustment of capital interchange is constantly ongoing, knocking out pieces of it intentionally as policy makes people on both sides of the transactions worse off in a way that cannot simply be equated in monetary terms.
Exports and imports cannot be simply equated in terms of the money spent on them precisely because the value obtained by the buyers (and thus introduced into their economy) is greater than the money spent, and because the exporter has gained value by accepting the monetary income in exchange. On a broader level, total money spent is not a valid metric of value produced or obtained.
In short, judging the value of free international trade by its apparent effects on GDP is to wholly miss the benefits. In any case, we should leave off the use of aggregate monetary figures to judge the prosperity of a country and instead look to less quantifiable understandings of freedom and capacity to trade. These will prevent us from getting locked on to a measure that is increased by making ourselves, in actual fact, poorer.
Originally published at Disinthrallment.
In 2016, then presidential candidate Donald Trump, noting the US trade deficit with China and other countries, stated, We “have a trade war, and we’re losing badly.” The US trade deficit (also known as the current account deficit) was $67 billion in August of this year, according to the Census Bureau and the Bureau of Economic Analysis. Does this mean the US is continuing to lose on trade?
No.
When it comes down to it, international balance-of-payments figures do not reveal much. The current account (which consists of the value of exports and imports of finished goods and services, factor services, and net unilateral transfers), as a matter of accounting identity, is necessarily offset by the capital account (which consists of the value of exports and imports of assets).
The real question is the actual economic activity behind these numbers. For example, a current account deficit implies a capital account surplus, which can consist of foreign savings being invested domestically in productive enterprises. This means foreigners consider the US an attractive place to invest their money. Most would consider this to be a positive indication of economic health. However, a capital account surplus could consist of foreigners using their savings to buy US Treasury bonds to finance government deficits. If the government is spending these on bailouts and bridges to nowhere, most would consider this type of capital account surplus to be negative. What matters far more than whether the capital account is in surplus or deficit is what it consists of. International balance-of-payments figures are not like a profit and loss statement or a scorecard, though they are often treated as such.
What is telling, however, is that those who treat the balance of payments as a scorecard rarely advocate cutting government spending as a means to reduce the current account deficit. This is probably due to the fact that proposing barriers to reduce imports benefits concentrated domestic producers at the expense of dispersed consumers, so this means of attempting to reduce the deficit is politically attractive, while reducing government spending tends not to be. But perhaps those who wish to reduce the deficit just don’t know about the relationship between government spending and the international balance of payments. Hopefully, should any of them manage to read this article, they will no longer suffer from this ignorance.
To show this relationship, let’s start with the familiar gross national expenditure equation, Y = C + I + G, where
Y = gross domestic income
C = consumer spending
I = investment spending
G = government spending.
In a closed economy without international trade, gross national expenditure equals gross national income. We know that savings (S) are necessary for investment (I), and savings are what is left over after spending. As such,
S = Y – C – G, and S = I
Savings can be further broken down into “private” and “government” saving, SP and SG, respectively.
SP = Y – T – C and SG = T – G, where T = taxes.
That is, private savings are whatever isn’t spent on consumer goods or confiscated through taxation, and government savings consist of taxes not spent. If the government runs a budget deficit (G > T), then that deficit has to be financed out of private savings and crowds out investment.
Now let’s consider an open economy with international trade. The national income equation becomes Y = C + I + G + CA, where CA is the current account, consisting of net exports of final goods, factor services, and unilateral transfers.
Given that S = Y – C – G, we can subtract C and G from the right side of the previous equation to obtain S = I + CA. We can further replace S with the constituent parts of private savings and government savings to get SP + SG = I + CA, which we can rearrange to finally get CA = SP + SG – I.
If the government is running a budget deficit, SG is negative. In that case, private savings have to be greater than the deficit and domestic investment or else foreigners will have to make up the gap and there will be a current account deficit.
Thus, we can see how the perpetual budget deficits the US government runs, and the record deficits this year, are directly related to current account deficits. That spending has to be financed in some way, and if not through taxation (both direct and indirect through inflation) and domestic purchase of government bonds, then it must be through foreign lending (as well as the taxation of foreign dollar holders through inflation), resulting in a current account deficit. Thus, one of the surest ways to reduce that deficit, all else held constant, would be to cut government spending.
But it is hopefully clear that it is silly to treat reducing the current account deficit as an end in itself. The current account deficit may reflect an underlying problem, such as out-of-control government spending, but then it is the spending that is the problem. It could also be a reflection of monetary manipulation, but in that case lack of sound money would be the real issue. As mentioned above, a current account deficit could also reflect an attractive investment environment, but it would be masochistic to attempt to reduce the current account deficit by making your country a place where people do not want to invest.
Ultimately, we would likely be far better off if balance-of-payments figures were not collected at all. As Rothbard explained, “only by statistics, can the federal government make even a fitful attempt to plan, regulate, control, or reform various industries.” But for the collection of these statistics, there would be no “scorecard” aggregating figures of mutually beneficial transactions that individuals made that would lead an outside observer to make the claim that they somehow lost on net. Robert Higgs says it best:
If there were no accounting concept or set of data organized as the balance of international payments, such misconceptions and errors would have nowhere to hide. Trade would be seen as a means of enhancing the wealth of all the traders regardless of the country in which they reside. Nonsense about harmful deficits in the national balance of trade in goods and services (the so-called current account) would evaporate like the morning mist in the rising sun. Politicians would lose powerful rhetorical cover for their schemes to enrich their private-sector cronies (and hence themselves in political pay-back). The best thing that could ever happen in regard to the public’s understanding of international trade and financial flows would be for the balance of international payments to simply disappear. It is greatly to be regretted that this accounting system was not throttled in its cradle.
Listen to the Audio Mises Wire version of this article.
India's farmers have been demonstrating in response to the government's decision to liberalize the agricultural sector. Though economists note that these measures will boost the incomes of farmers, it is unsurprising that the protests have received immense support. Unlike corporate titans, the heavily subsidized farmers of Punjab can weaponize sympathy to further their agenda. Because people rarely equate farming with wealth, these relatively prosperous farmers are well suited to present themselves as victims in need of sympathy. Although downplayed, generating sympathy is a crucial step in the quest to maintain privileges.
If Punjabi farmers had been portrayed as affluent, the media would view them as greedy entrepreneurs. But leveraging the political capital of perceived powerlessness has allowed them to obscure their true status as rent seekers. New legislation provides farmers with the liberty to freely sell their produce without the interference of Agricultural Produce Marketing Committees, also known as mandis. This can potentially raise the incomes of farmers by allowing them to demand prices higher than the fixed minimum support price (MSP) offered by the mandis. Research suggests that farmers are unhappy with the present system preventing them from selling produce outside government-controlled markets. Contrary to the narrative promoted by the media, India’s farmers want free markets in agriculture.
[Read More: "India Takes Small Steps toward Economic Freedom with New Agrarian Reforms" by Sathyajith MS]
But the issue is that Punjabi farmers comprise an influential lobby that has managed to skew the story in their favor. Also missing from the headlines is the fact that earnings from mandi fees are a major source of revenue for the government of Punjab. Because of their role in stimulating India’s Green Revolution in the 1960s, Punjabi farmers have managed to extract government assistance in the form of free electricity and subsidized inputs. Moreover, the system of procurement instituted in the 1960s primarily favors states like Punjab and Haryana. So, they have been able to secure lucrative prices for crops benefiting from the MSP policy. Interestingly, most households are unaware of the MSP policy, and it discriminates against numerous farmers since they do not specialize in cereals. The truth is that only 10 percent of total crops are sold at MSP.
As such, Punjabi farmers are opposing reforms that seek to remove privileges. Economist Ashok Gulati argues that the Punjabi farming household records the highest income in India at nearly 2.5 times the income that an average farming household in India receives, while their annual subsidies average $1,626 per family. It is apparent that Punjabi farmers are defending their interests at the expense of society. Yet globally people are expressing solidarity with their presumed plight. However, we should not be shocked, because this has a psychological basis. Punjab farmers are arguing that in the absence of government regulations the monopolization of the market by big corporations will result in them being exploited. People are naturally skeptical of change, so the farmers have exploited fear of the unknown to generate sympathy for a selfish cause. Even if some admit that regulations are costly, they are reluctant to embrace change. People often prefer the certainty of an inefficient present to the dynamism of an unknown future.
Pius Fischer in a widely cited text clearly explains the role of uncertainty in aiding rent seeking: “Incomplete information and limited rationality create fertile ground for rent-seeking activities…. It can be assumed that rent-seekers find it easier to influence citizens if they are uncertain and do not understand the impact of reform policies.” Citing Robert H. Bates and Anne O. Krueger (1993) he informs us that frequently perceptions are shaped by the activism of rent seekers: “Under conditions of uncertainty, people’s beliefs of where their economic interests lie can be created and organized by political activists; rather than shaping events, notions of self-interest are instead themselves shaped and formed.”
Intriguingly, Fischer also lists identity bias as a major boost to rent-seeking activities: “The identity of losers in contrast to that of potential winners, is better known and thus creates stronger sympathy among the population. Living in a world of incomplete information and rationality, powerful rent-seeking groups may even find support among members of the social classes exploited by them.” Although many sympathize with the Punjabi farmers, the latter have brutally exploited gaps in the public’s grasp of the situation to evoke sympathy, thus making people inclined to assist them in their desire to entrench privileges. However, the reality is that the Punjabi farmers, like crony capitalists, deserve our ire.
Listen to the Audio Mises Wire version of this article.
The American economist Henry George once said protectionism is the way to inflict on ourselves in peacetime what our enemies inflict on us in wartime. Note, in fact, that the American leaders ban American investments in Iran—so the American regime threatens heavy criminal sanctions for those who would invest in the strategic sectors of the Islamic Republic.
Those who implement trade restrictions for punitive purposes do something similar, and they know that a nation's prosperity depends on its ability to accumulate ever more capital, be it local or foreign.
That too many nations shoot themselves in the foot by practicing protectionism is no reason to emulate them. After all, we have never heard a South Korean official claim that North Korea is practicing autarky to encourage the closure of South Korea to foreign investment. This is why South Korea has gone from being a third world country to being a powerhouse of the world economy in sixty years.
Political Posturing Alas, the interests of the nation are of little importance to those who are driven only by low political considerations. This is how French economy minister Bruno Le Maire—who knows nothing about the industries he claims to rule—saw fit earlier this year to veto the proposal by Canadian distributor Couche-Tard to buy French supermarket giant Carrefour.
It would be pointless to seek any logic behind this arbitrary intervention. It only serves to flatter our old protectionist instincts while allowing politicians to don the white knight's costume for a few moments to rescue a national industry allegedly threatened by foreigners. Politically, it is easier to indulge in this kind of posturing than to succeed in the vaccination campaign that would lift France out of the economic and health slump in which it finds itself.
Protectionist and Xenophobic Prejudices Le Maire’s argument sounds like an insult to our Canadian friends. According to him, the takeover of Carrefour by Couche-Tard would pose a risk to the “food sovereignty” of the French. As if it were in the best interests of a Canadian multinational—that makes a living from the sale of goods—to starve the country in which it is located. But Carrefour itself is present abroad. So is it endangering the food security of Taiwanese, Brazilians, or Spaniards just because it is French?
This pretext serves above all as a legal alibi in order to stick as well as possible to the regulations relating to the control of foreign investments. However, by brandishing this motif for populist ends, the French leaders are showing that they are learning nothing from their mistakes. We know that it is this kind of xenophobic reflex that deprived Europeans of abundant vaccines. Indeed, the press reports that the European authorities wanted to favor the laboratories of the old continent over foreign pharmaceutical companies.
Protectionists nevertheless persist in confusing their ideology with economic sovereignty. However, economic security is achieved by preferring the quality, abundance, and variety of goods while ignoring the origin of the supplier's passport. Moreover, a sign of a certain hypocrisy is the fact France has no complaints when its national companies make lucrative acquisitions abroad. One thinks of the acquisition of Bombardier by Alstom. Some would say that the rail industry is of more "strategic" interest than a declining distributor which has less than 20 percent of the French market.
Hurting both France and Carrefour Le Maire's veto is not only an insult to our Canadian friends and an arbitrary obstruction of free trade. It also contravenes the interests of the French economy. It signals to French and foreign savers that they run the risk of not being able to dispose of their capital freely when they invest in France. However, the liquidity of financial investments is one of the reasons for investing in the stock market. It is not by damaging the financial attractiveness of a country that one promotes its prosperity. Unless our leaders like to multiply civic conventions to console a declining people? We can therefore question the usefulness of all these "Choose France" summits if it is to upset all the investors who have the courage to choose to invest in our country.
Of course, the first victim of this interference is the Carrefour Group, which saw the Canadian proposal as a chance to breathe new life into the company. Finally, remember that economists tend to consider takeover bids as a virtuous instrument for regulating capitalism, by allowing well-managed firms to acquire less efficient companies to make them more competitive. Enough to consolidate the only tangible economic sovereignty: that of the consumer. Who really threatens the food sovereignty of the French? In 1960, about 35 percent of mankind suffered from undernutrition. The French spent 35 percent of their budget on food. As a sign of improved food security for humanity, these rates fell to 10.7 percent and 15.6 percent respectively in 2017. This progress has been made thanks to tremendous innovations in the agricultural sectors, distribution, and logistics.
The green revolution has resulted in an incredible increase in yields thanks to mechanization, variety selection, pesticides, and fertilizers. Stimulated by competition, the distribution and logistics sector has also participated in increasing the purchasing power of populations. The increase in the productive capacities of all sectors of the economy is also a product of the opening up of international trade.
Meanwhile, our leaders like to burden these sectors with all kinds of unproductive constraints. The modernization of French agriculture thus comes up against a multitude of political obstacles. We can think of the bans on recent biotechnologies. This same agricultural sector is also in many ways closed to competition from outside Europe, which has repercussions for the wallets of French consumers. Likewise, large-scale retailers are subject to numerous violations of the freedom to trade which force them to inflate their prices, such as the recent increase in the threshold for resale at a loss. Under these conditions, anyone who really cares about French food sovereignty would be ill advised to point a vengeful finger in the direction of Ottawa. Rather, he should be interested in what is happening with the governments in Paris and Brussels.
[Originally Published in Le Figaro. Translated by Ryan McMaken.]
Even some libertarians are under the delusion that regional free trade agreements are motivated by a desire to reduce trade barriers. In reality, states form trade associations to increase their bargaining powers on a global scale. As such, trade agreements are merely tools to promote the agenda of elites. Although Americans may be uninterested in the parochial affairs of Caribbean states, a recent trade dispute among members of the regional trade bloc Caricom aptly demonstrates the ironic effects of agreements purporting to advance trade. Essentially, here we see an international "free trade" agreement being used by a Dominica-based company to demand more limits on trade between Jamaica and a country outside the bloc. A report published in the Jamaica Gleaner on December 11, 2020 puts the issue into perspective:
Dominica Coconut Products Successors [DCPS] Limited, the sole Caricom producer of animal fat and palm oil-based noodles that are the core ingredient for the production of soap bars, wants to lock Jamaican companies into buying its raw material over their current suppliers in Indonesia, in order for the local firms to continue qualifying for “community origin status” and the waiver of the 40 per cent common external tariff, CET, applied to products of non-Caricom origin…Jamaican government trade agencies sought clarification from the World Customs Organization, WCO, which ruled that soap noodles and finished soap products were designated under the same tariff code and should be treated similarly in the application of import duties.
The "problem" here is that it makes more sense for many Jamaican producers to get raw materials from Indonesia—which is outside the trade bloc—instead. The article continues:
The Jamaican producers, once designated by Jamaica’s trade authorities as legitimate manufacturers transforming raw materials into finished products, are allowed under local legislation to import raw materials from any source—including soap noodles from Indonesia—duty-free. This is a regime that Dominica is said to have also challenged, with significant pushback from the Jamaican Government, which has insisted that the Eastern Caribbean country cannot determine Jamaican law and policy.
By following the report, it is obvious that Dominica is seeking to protect its market from competition at the expense of Jamaican manufacturers aiming to secure cheaper inputs. Dominican businessman Yvor Nassief in a piece published by the Gleaner vigorously defends protectionism:
The soap-making process is called saponification….The Jamaican companies do not engage in this process. Instead, they import soap in chip form and skip the saponification process….By way of example, it is like importing chocolate chips used in chocolate chip cookies, heating and extruding those chips into bars and then claiming that you are making chocolates….None of us can ever compete against countries with populations of 70 million. Implicit in the Revised Treaty of Chaguaramas (RTC) is that no territory in this region—Jamaica included—can successfully compete against larger economies given their scale and lower labour costs, and hence the need for the protection as provided by the RTC.
From an economic standpoint, forcing countries to obtain expensive inputs from a designated provider makes no sense. But we should not be surprised, because regional trade agreements are usually a diplomatic form of protectionism. Member states demand duty-free access to regional markets on conditionalities, yet outsiders are often subject to high tariffs. However, when competition becomes really aggressive, the losing party like Dominica in this case will leverage antitrade mechanisms to punish competitors under the guise of breaching trade rules. As Nassief writes: “Why should a country of (more than) 2.5 million people seek, through unfair trade practices, to disenfranchise a small island with 70,000 people from its rights under the RTC? If DCPS can afford to play by the rules, they certainly can.”
Nassief could instead encourage Dominican manufacturers to invest in a sector in which they possess a competitive advantage or innovate. However, expecting protectionists to embrace competition when rent seeking seems more lucrative is foolhardy. The example of Caricom should instruct Americans to be wary of leaders cajoling them into regional agreement in the name of facilitating free trade.
[This article is Part 7 of a series. See Part 1 and Part 2 and Part 3 and Part 4 and Part 5 and Part 6.]
In the previous six articles in this series, I have focused on showing the wide-ranging implications of analyzing the effects of monetary expansion on international trade. A review of the modern mainstream literature leads to the conclusion that for contemporary international economics, money is merely a veil covering barter exchange ratios. Thus, the fact that international economics often falls short of a satisfactory explanation of current events does not represent a series of isolated shortcomings, nor should it come as a surprise. It results from the central assumption of modern economic theory, that money and the money supply are a neutral element in the economic process, whose evolution cannot affect the real phenomena of the market in the long run.
While Cantillon effects are neglected by this entire theoretical corpus, Ludwig von Mises and a handful of other economists give a pivotal role to money in international transactions, and treat the international monetary process as an integral part of the general economic analysis. Money begets the world-embracing division of labor, because economic calculation in monetary terms is essential for entrepreneurial production and trade specialization. Entrepreneurs in this sector are also very sensitive to monetary changes, because they must constantly monitor the evolution of capital markets and exchange rates. Their business decisions are therefore dependent on the availability of working capital loans, trade credit, or on the evolution of commercial and sovereign risks. Unfortunately, however, monetary expansion allows financial institutions to provide new money to these entrepreneurs for little conditionality, for poor collateral, and at artificially low interest rates, such that more firms find international projects profitable, or international transactions less risky or costly.
The new available capital is allocated internationally to the most profitable investment opportunities through flows of FDI, FPI, and trade finance, which brings about an artificial lengthening of the structure of production as a result of lower-than-market interest rates. Consequently, the allocation of the capital stock and labor force throughout the world is modified: raw materials, labor, and capital goods are bid up into the higher stages of production, which only temporarily appear to be more profitable. Furthermore, because international companies are part of global supply chains, or expand vertically and horizontally, the demand and production of capital goods increases, as does the global trade in capital goods. Products in the intermediate stages cross borders to be assembled and sold in different countries. The artificial reduction of risk, which is due to the lower standards for bank loans and trade insurance, boosts trade flows in these capital goods, as well as for consumer goods and services. Existing firms expand their activities and existing trade flows grow in volume and value – the so-called intensive margin growth of global trade. But also, new firms enter global markets, and new commercial partnerships and new trade flows appear—so trade also grows at the so-called extensive margin. Monetary expansion not only entails changes in the volume and value of trade, but also in the structure of trade (biased toward higher order goods) and in the direction of trade (depending on the pattern of entrepreneurial decisions and consumer preferences).
The evolution of global trade over the last decades has thus been influenced to a significant and yet unrecognized extent by the expansionist monetary policies of governments around the world. That said, the monetary explanation for the changes in the pattern of international trade, while of a central importance, should not be used to explain real-world events in a contextual vacuum, but taken in conjunction with aspects concerning international demand, foreign policies, or other social and political considerations. Furthermore, the exact quantitative impact of monetary expansion on trade is difficult, if not impossible to tease out of empirical evidence, because it is often camouflaged by changes coming from the commodity side of the economy—such as changes in technology or demand—or postponed by the particular circumstances of the international monetary system.
These limitations only show, however, that the key implications of Mises’s insight into Cantillon effects carry in their wake a transformed landscape of both international economic theory and policy through understanding the impact of money changes on the structure of prices and wealth, and thus the repercussions of government intervention in international trade. We know that the fiat money fractional reserve banking system represents the linchpin of steadily recurring booms and busts. Its interference with trade and trade finance leads to the falsification of economic calculation, as entrepreneurs are maneuvered into undertaking otherwise unprofitable ventures, and have difficulties accounting for the islands of calculational chaos of governments’ trade policies.
In such a monetary system, financial intermediaries no longer facilitate the coordination of international trade; instead, they become hubs of distortion in the spatial and temporal allocation of economic resources across the globe. As a result, the pattern of international trade and specialization that emerges in this system—and thus, the current pattern of international trade and specialization—is fundamentally incongruent with the most efficient worldwide allocation of resources, and thus with the unhampered-market configuration of comparative advantage.
Article 1, Section 10, Clause 2 in the Constitution of the United States has been instrumental in making the US economy the powerhouse that it is today. How so, you say? It did so by curbing individual states’ ability to impose tariffs on goods and services coming from or going to other states. This has made the United States a free trade area from its founding in 1789.
In fact, next time you’re driving on one of America’s inter-state highways and you notice 18-wheel semis barreling along the highway in either direction, paying no attention to state lines, say a prayer of thanksgiving for the Founding Fathers endowing us with shackled state tax authorities. Your living standards are immeasurably higher as a result.
Abstracting from the effects of international trade, the constitutional clause guarantees that goods and services are produced by their lower cost American producers and consumed by Americans who value them most highly. This is a sure prescription for higher living standards. It is also filled with lessons for US trade relations with other countries.
The founders’ prescience is magnified by the fact that the clause initially applied to thirteen eastern states where inter-state transportation was daunting. However, it soon began to apply to an increasingly large geographic area with diverse resource endowments, and as transportation technology improved, Americans’ economic inter-connectedness increased dramatically. So much so, I wager that most Americans today take it as a given, not even giving it a first or second thought that the United States is a vast free trade area.
Fast Forward to Today — Indiana Apples To grasp the implications of this shackling of state tax authorities, let’s fast-forward to today, casting our discussion in terms of a product widely produced/consumed in the United States-- apples. According to the United States Apple Association (USAA), my state, Indiana, ranks 15th in the country in terms of apple production (Washington is first, producing 50% of US apples). Hoosiers’ apple consumption is about four times its in-state production, meaning Hoosiers “import” apples from other states.
By the way, the United States is virtually self-sufficient in apples, importing only 5% of its consumption from Chile and New Zealand during the off season. There is no tariff on these imports.
Absent the above clause in the Constitution, it is easy to imagine Hoosier apple growers crying crocodile tears to their legislators about a playing field tilted against them, demanding “protection” from apple producers in other states. Indiana legislators would “feel their producers’ pain” and enact protective tariffs against out-of-state apples.
This would raise Indiana apple prices. This cost would be widely dispersed over more than six million Hoosier consumers. Even those following the maxim “an apple a day keeps the doctor away” would probably find the tariff has a minimal effect on their overall budgets. This is why one should not be surprised to see the Indiana legislative agenda manipulated by apple growers.
So individual Hoosier apple orchardists would be better off (by a lot); individual Hoosier apple consumers would suffer (only slightly). Can we say how this balances out? Yes and the answer is not good, sorry to say. Hoosiers, along with Americans in general, should be grateful for the Founding Fathers’ prescience in shackling state tax authorities.
The tariff, by increasing the price of apples in Indiana, would turn some previously uneconomic in-state production into being economic. This means Hoosiers would be substituting higher cost in-state apples for previously lower-cost out-of-state apples. Cost is a yardstick for things we give up to obtain a product. This substitution necessarily lowers Hoosiers’ living standards. Yes, they’ll have these apples either way, but less of other things
In addition, the increase in Indiana apple prices would discourage otherwise economic Hoosier apple consumption. Maybe this will take the form of “an apple 6 days a week is good enough to keep the doctor away.” Or maybe it’ll be smaller servings of apple sauce. This will be another loss.
Final Comment Hoosiers import apples from the state of Washington. Recall that Washington accounts for 50% of US production. Would any of the above conclusions change if Washington were a part of Canada instead of the United States and the US government were to levy tariffs on apple imports?
No. Not at all. The tariff would encourage the same uneconomic production and the same reduction in otherwise economic consumption, spread across the entire country. Why the Founding Fathers’ prescience did not extend to inter-country tariffs awaits another essay.
T. Norman Van Cott, an adjunct scholar with the Indiana Policy Review Foundation, is professor of economics at Ball State University, Muncie, IN.
On January 10, Secretary of State Mike Pompeo and Secretary of the Treasury Steve Mnuchin announced new economic sanctions imposed on Iran in response to its missile strikes against US forces in Iraq. The sanctions target enterprises operating in the manufacturing, textile, construction, and mining sectors. President Trump said that “These punishing sanctions will remain until the Iranian regime changes its behavior.”
The Iranian strikes were in retaliation to the US drone attack that killed Qasseim Soleimani, the powerful Iranian general and leader of the Quds Force. Thankfully, President Trump has chosen not to respond with any military action so as to avoid a full-blown war.
Nevertheless, new sanctions on Iran probably won’t change much. A long history of failed sanctions, which weren’t able to change the opposing regimes, can attest to that.
The Unintended Economic Consequences of Trade Sanctions Almost ten years ago, Jonathan Catalán wrote an article on this same issue for the Mises Wire. Things haven’t changed since then. Governments continue to enforce trade restrictions on rival nations. Catalán explained that:
Trade sanctions are meant to destabilize regimes, forcing them to compromise with the aggressing government. Sanctions do this by threatening the regime's survivability, by undermining any support it may have amongst the population.
Indeed, the target of these measures is the population of the nation, not its government. In a weakened economy, people may turn against the regime they live under. In Iran this has not occurred, although the regime has had embargoes placed on it since the Revolution of 1979.
Sanctions weaken these nations’ economies, because they prevent exchanges that would have been made otherwise. Since any exchange is only made because it’s mutually beneficial, both parties end up worse off. We can illustrate this in terms of a trade between two individuals. Suppose Jim works for the textile industry in Iran and wants to buy cotton from Josh, who grows it in New Zealand. With the new embargoes, Josh’s cotton becomes too expensive, and Jim is forced to buy from a less productive national dealer. If Jim can’t cut costs, he must raise prices and his business might even become unprofitable outright.
Josh is also worse off in this scenario. He has lost a client, perhaps a long-time and trustworthy one. Both sides of the transaction lose with a prohibition such as this. Not only do Iranian importers lose their ability to buy cheaper and/or better products from abroad, but foreigners likewise lose their ability to buy Iranian products.
Sanctions destroy the international division of labor, which, as Ludwig von Mises explained, is the foundation of civilization itself. If the division of labor allows for specialization in an economy, the resources tend to shift to those locations where they are more value productive, and sanctions hamper this wealth generation and distribution mechanism.
Of course, the size of the harm is proportionate to the strength and scope of the embargo. In Iran, we have seen various cases of the consequences of disrupting these individuals’ and enterprises’ position on the global market. Catalán continues:
trade sanctions that have been in place since 1979 have made it too difficult for Iranian airlines to modernize their aircraft fleets, or to procure the spare parts necessary to maintain them. The unfortunate result has been an increasing rate of aerial accidents, leading to the injury and death of at least dozens—if not hundreds—of individuals. It could not possibly be the fear that spare parts meant for Iranian civilian airlines may be used to maintain Iranian combat aircraft. It's doubtful that two very complex and very different machines use the same parts.
In addition to that, the most recent sanctions on financial institutions have caused medicine shortages. Although the trade of humanitarian goods is still allowed, many foreign banks and outside suppliers are breaking off their relations with Iranian partners, which endangers the importation of vital goods and equipment used in the treatment of serious illnesses.
In an article written for the medical journal The Lancet, three doctors working at MAHAK Pediatric Cancer Treatment and Research Center in Tehran noted that the establishment of sanctions have caused a “scarcity of drugs due to the reluctance of pharmaceutical companies to deal with Iran.” They also warned that
Within the next 3 months, shortages of vincristine and ifosfamide will prevent proper treatments of CNS tumours, lymphomas, Wilms' tumour, sarcomas, and retinoblastoma. An unsustainable situation will rapidly develop because essential medicines for paediatric cancer treatments in low-income and middle-income countries listed by WHO are the 30 most prescribed drugs in our hospital. The purchase of any medical equipment…will become all but impossible and further jeopardise treatment conditions. During the previous embargo, radiation treatments in our hospital were interrupted for 2 months until spare parts could be imported.
The Failed History of Trade Sanctions But what if, from the point of view of the US government, the trade sanctions meet their objectives? Couldn’t these undesired consequences just be the opportunity cost of a peaceful and prosperous Iran of the future, when the current regime is dethroned and a democratic regime instituted for the rest of time?
Historically, this hasn’t been the case at all. Iran is itself a great example. The first embargo, as we have discussed, was issued in 1979, when a terrorist group held hostages at the US embassy in Tehran. This embargo froze Iranian assets in American banks and developed into a full trade sanction. It lasted until 1981, when a deal was signed with the Iranian government.
But sanctions were again instituted in 1987, in 1995, in 2011, and in the last couple of years as well. The United Nations also imposed sanctions in 2006, 2007, 2008, 2010, 2011, 2012, and 2015. Iran hasn’t transitioned to a democratic regime since 1979, and it doesn’t seem to be happening any time soon. The government’s nuclear program isn’t being tossed out, either.
Another example of failed sanctions is Cuba. It has been the target of embargoes since 1960 as a response to the expropriations of Americans citizens and companies by the Cuban revolutionary government. According to Nelson Rodríguez Chartrand:
In 1992, the embargo turned into a law and, in 1996, the United States Congress passed the so-called Helms-Burton Act, which prohibited American citizens from doing business within the Island or with the Cuban government—although the justification for the embargo has been, for long, the lack of civil liberties and the human rights violations by the Cuban regime.
Besides having to endure the regime's imposed collectivist economy, the population has to live with an additional strangulation of wealth caused by sanctions. Of course, the main cause of Cuba’s poverty is socialism, which makes capital accumulation and a rational resource allocation impossible. But the embargoes do help keep Cubans poorer. Yet, there's no reason to believe the Cuban population is any closer to overthrowing the Cuban state than it was in 1960. And if the population does rise in revolt, there's no reason to assume the uprising is due to American sanctions.
Free Markets and Free People If the history of sanctions is a thoroughly failed one, then what could be a way out for Iran? We have to exchange war, restrictions, and prohibitions for peace, trade, and information.
If history has taught us a lesson, it certainly is that interventionism doesn’t work. In the economic arena it causes impoverishment, and on battlegrounds it causes death, suffering, and unnecessary harm. Now is the time to end impoverishing and ineffective economic sanctions in all their forms.
[Chapter 3 of Rothbard's newly edited and released Conceived in Liberty, vol. 5, The New Republic: 1784–1791.]
Every depression generates a clamor among many groups for special privileges at the expense of the rest of society—and the American depression that struck in 1784–1785 was no exception. If excess imports were the culprit, then voluntary economizing could help matters, and the press was filled with silly fulminations against ladies wearing imported finery. Less foolish and more pernicious was a drive by the beleaguered and often sub-marginal artisans and manufacturers for the special privilege of protective tariffs.
As early as July 1783, a group of manufacturers from Philadelphia met to petition the Assembly for protection against foreign imports. The following year, a group of Boston manufacturers submitted a similar plea. During the depression year of 1785, the urban artisans banded together in earnest. The Boston manufacturers in twenty-six trades formed The Association of Tradesmen and Manufacturers of the Town of Boston in the spring of 1785 to agitate for a protective tariff in their state, and they were followed by the formation of a General Committee of Mechanics in New York, which soon merged with the Manufacturers Society of New York to fight for protection. Mechanics from Philadelphia, Baltimore, Providence, and Charleston were also active though not formally organized. In particularly hard-hit New England, he town of Nantucket actually asked the state legislature in 1785 for permission to secede and rejoin Great Britain in order to try and regain prosperity. In Philadelphia, the master cordwainers, the shoemakers of the city, decided in March 1785 to engage in concerted economic pressure to try and block further imports of boots and shoes. They agreed not to buy, sell, or mend any imported shoes, and they obtained the support of their employees, the journeymen cordwainers.
Since the bulk of the country’s imports came from Great Britain, it was easy for the protectionists to employ anti-British demagogy and denounce American economic troubles as a British plot. For their part, the urban merchants were of course happy to ban British importers or British ships, but did not want any restrictions on British goods; in short, each group sought its own special privileges. Thus, when the Boston merchants agreed to boycott all British merchants, the Boston manufacturers bluntly pointed out that they didn’t care whether British goods were imported by British or American merchants, and they petitioned for a comprehensive protective tariff in Massachusetts. Finally, in the summer of 1785 the Massachusetts General Court passed a protective tariff for artisans and a navigation act for the merchants. The navigation act banned any exports from Massachusetts in a British vessel, and goods imported in all foreign vessels were to pay double duties as well as a special levy. Import duties, for their part, were raised to a new high and were levied on almost every type of manufactured good; excise taxes were also levied on the consumption of luxuries. While the merchants chafed at the protective tariff, the Boston artisans maintained their organization as a pressure group and a vigilance committee to check upon local merchants. In August 1785, the Boston artisans wrote to “tradesmen and manufacturers” of the other large towns, urging them to put equivalent pressure for a protective tariff upon their legislature. Massachusetts raised the tariff rates again the following year. However, because its navigation law had also injured French shipping while all French ports were open to American vessels, Massachusetts was pressured into repealing her navigation act in 1786.
Rhode Island levied a schedule of protective tariffs in 1785; New Hampshire levied import duties in 1784, forbade exports of goods on British ships the following year, and added a protective tariff schedule in 1786. Much lower tariff duties were levied by Virginia, the Carolinas, and Georgia.
Most important was the drive for a protective tariff in the most industrialized and populous city in the United States, Philadelphia. Under artisan pressure the radical-dominated legislature passed a protective tariff in the autumn of 1785, as well as an anti-British navigation law. The conservatives, it may be noted, were far more enthusiastically in favor of a tariff than were the radicals. By 1786, indeed, virtually every state had passed a navigation law against British shipping. However, there were sharp differences in degree, with Connecticut, New Jersey, Delaware, South Carolina, and Georgia only discriminating against British shipping to a slight extent.
It soon dawned upon the manufacturers and the merchants, however, that state tariffs and state navigation laws were not as effective a grant of privilege as they desired. For while most of the manufacturing states of the North imposed high protective tariffs for the benefit of their manufacturers, the South, with less manufacturing, understandably imposed lower tariffs upon themselves. The growing manufacturing of Pennsylvania and the rest of the North now wanted to secure the large southern market for themselves. Even enjoying the mild tariffs of the South, they could not successfully compete with the more efficiently produced and lower-cost English goods, or with English shipping. Hence, the northern manufacturers concluded that a nationalist system in which only the federal government could set a uniform tariff was important for monopolizing the southern market—at the expense, of course, of the southern consumers and any of the consumers of the low tariff states. Hence, the urban artisans in the North began to look with favor on the old nationalist idea of a strong, overriding central government and began to ally their important mass support with the longstanding schemes of the northern financial oligarchy.
Merchants, too, began to long for a uniform national navigation law. For those states which taxed or restricted foreign vessels very heavily (e.g., New Hampshire, Massachusetts, and Rhode Island) soon found that they lost substantial trade to those that retaliated very lightly against British shipping (e.g., Connecticut, New Jersey, Delaware, South Carolina, and Georgia) and they even had to abandon their much stronger laws. Hence, the merchant’s drive for a nationally imposed privilege to close the “loophole” of relative freedom and consumer choice in the other states. Again, a strong central government began to loom as a particularly attractive goal.While Connecticut taxed imports from Massachusetts, and New York in 1787 moved to tax foreign goods imported from neighboring states, the specter of disunity and disrupting interstate tariffs was more of a bogey to sell the idea of a powerful national government than a real factor in the economy of the day.
In April 1785, merchants and traders (retailers) of Boston turned to Congress for depression remedies, and Boston, a few months later, urged Congress to repel foreign merchants and shipping. In fact, James Bowdoin, the ultra-conservative governor of Massachusetts, urged that state to call a constitutional convention to endow Congress with greater powers, a plan endorsed by the Massachusetts legislature and by John Adams, then Minister to England. New Hampshire quickly followed suit. Also early in 1785, the New York merchants in the New York Chamber of Commerce urged congressional action against foreign traders, and the manufacturers and traders of the city joined in calling for greater power to Congress. Citizens of Philadelphia, in June 1785, asserted that only full powers to Congress over the commerce in the United States could bring relief from the economic depression; the Council of Pennsylvania followed with a plea for stronger congressional power. The Virginia and Maryland legislatures, as early as 1783, urged authorization for a congressional navigation act, and they were followed by the merchants of Philadelphia.
On April 30, 1784, Congress responded by asking the states for the authority to enact a navigation law for fifteen years, prohibiting British vessels from engaging in the United States coastal trade or from importing any goods not produced in Britain. In order to be ratified, nine states had to agree to this measure. Virginia agreed at once, but other states balked at the centralized control and the domination of the carrying trade that the law would grant to New England merchants. Delaware, South Carolina, and Georgia particularly balked at the restrictions of the law, and the attempt to gain agreement by the states failed.
No sooner was the Congress rebuffed than its power-seeking nationalist forces began anew. Early in 1785, the young Virginia lawyer James Monroe headed a congressional committee that urged an amendment to the Articles for perpetual congressional power to regulate interstate and international trade, and to levy duties on imports and exports. State powers were to be safeguarded, for all duties were to be collected by state authority and the funds were to accrue to the states where they were collected. The proposal, however, was defeated in the Congress, largely by southerners understandably reluctant to place a monopoly of the carrying trade in the hands of American merchants, a monopoly that at the same time would raise the price of imported goods and lower the prices of southern exports. The redoubtable Richard Henry Lee, back in Congress as its president, led the libertarian forces in staunchly opposing any sweeping powers for federal regulation of trade and managed to defeat the Monroe amendment in August 1785. A year later, a similar amendment again failed to pass the Congress.
A determined movement for national power was also welling up in Massachusetts. Governor Bowdoin’s scheme, propounded during mid-1785, for a new centralizing constitutional convention was stopped in its tracks by the refusal of the Massachusetts delegates to Congress to press for the plan. Writing sternly to Bowdoin in early September 1785, the delegates, headed by the redoubtable liberal Elbridge Gerry, blasted the schemes of the centralizers: “plans have been artfully laid, and vigorously pursued, which had they been successful, We think would inevitably have changed our republican Governments, into baleful Aristocracies. Those plans are frustrated, but the same Spirit remains in their abettors.”Edmund Cody Burnett, The Continental Congress (New York: W.W. Norton and Co., 1964), p. 637. The Massachusetts legislature was forced by this rebuff to rescind its resolutions for a new centralizing convention.
Even more important to the nationalists than regulation of commerce was the acquisition of the taxing power. In the last gasp of nationalist dominance, Congress in April 1783 had accordingly proposed a new impost after the last one failed in 1782.[Editor’s footnote] For more on the failed imposts of 1781 and 1783, see Rothbard, Conceived in Liberty, vol. 4, pp. 1514–17, 1521; pp. 400–03, 407. This time, the impost power was only to be granted for twenty-five years and the states were to administer the collection of duties. The accompanying message sent by Congress to the states on behalf of the impost was drawn up by Virginia’s nationalist congressman James Madison. Around this proposed federal impost of 1783, there raged the most important political controversy of the postwar Confederation period. Here was the rallying ground for both the nationalist and the radical-liberal forces. In Congress, Jonathan Arnold and John Collins of Rhode Island had led the opposition to the impost. Now, first to raise public voice in opposition among the citizenry was the great George Mason. Drafting the Fairfax County (Virginia) resolutions, Mason found both in the impost plan and in Madison’s plea “strong proofs of the lust for power.” Trenchantly, Mason likened the plan to the arbitrary measures of the Stuart monarchs in England. Any congressional taxing power spelled disaster: “Congress should not have even the appearance of such a power. Forms generally imply substance, and such a precedent may be applied to dangerous purposes hereafter. When the same men or set of men, holds both the sword and the purse, there is an end of liberty.” To the nationalists’ plea for taxing power to pay the public debt, the liberals proposed that the debt be divided up and paid by the several states, according to their realistic depreciated value. Thus, there would be no amassing of centralized power.
Unanimity of agreement by the states was again required to adopt the impost of 1783. New Jersey, North Carolina, and Delaware, with little direct import trade, were willing enough to have national revenue derived from tariffs, and consented readily. New Jerseyites, furthermore, had invested large sums in federal securities. One of the few opponents in North Carolina was the old Regulator leader, Thomas Person.[Editor’s footnote] Thomas Person was a North Carolina assemblyman and later a prominent Antifederalist. The Regulators of North Carolina was a movement in the late 1760s and early 1770s upset over the colony’s arbitrary land grants, corrupt tax officials, and high taxes and quitrents. Murray Rothbard, Conceived in Liberty, vol. 3: Advance to Revolution, 1760–1775 (Auburn, AL: Mises Institute, 1999), pp. 997–1009; pp. 233–45. South Carolina followed suit in support of the impost, and Pennsylvania, still under the iron control of the right-wing, soon followed also, over weak objections by the Constitutionalists.
Massachusetts ratified the impost in the fall of 1783, but only after a tight struggle. Old radicals like James Warren and liberal merchants like Stephen Higginson led the opposition, but in general the commercial eastern and the Connecticut River towns favored the impost by a large majority while interior and especially western Massachusetts was bitterly opposed. Despite Massachusetts’ narrow approval in 1783, the urban towns continued to be restive, and the towns of western Suffolk County urged a county convention in 1784 against the impost, a request that was angrily turned down by Boston. As late as 1786, the country town of Rochester, in southern Plymouth County, attacked Congress’ half pay for army officers, and attacked the impost as eliminating “the Constitutional Check which the General Court had on Congress.”
The struggle was also intense in Connecticut, where agricultural opinion brought the impost to defeat, while Tory Fairfield County voted for it. The intense rural opposition to the impost in these states was not surprising since these were precisely the people who would have to suffer the burden. But after insisting that the revenue be paid only for public debts and not for any pensions, to which New England was bitterly opposed, the impost finally passed the Connecticut legislature in 1784.
Debate was more heated in Virginia, following that state’s crucial role in blocking the previous impost plan of 1781. Such powerful figures in Virginia as Thomas Jefferson lobbied for the plan, and Patrick Henry came out in its support. The opposition was led by George Mason and Richard Henry Lee; Lee, too, denounced the thirst for power and aristocracy exhibited by the plan, as well as the breakdown of the limits which the Confederation had hedged around federal encroachment on the liberties of the states. Patrick Henry’s sudden shift into opposition seemed to doom the impost, but open pressure by George Washington, combined with the surrender of Mason, secured Virginia’s approval of the impost at the end of 1783.
The story was similar in South Carolina. The state had first turned down the congressional request but, after pressure by George Washington, was finally persuaded to approve the impost. In Georgia, the opposition was so great as to delay approval until 1786. One by one, however, the states fell into line; even Rhode Island, over the bitter opposition of David Howell, who led the resistance against the 1781 impost, approved the impost in early 1786. Rhode Island’s shift was propelled by the change of heart of Nicholas Brown of Providence, one of the leading merchants of the state, and previously one of Howell’s major backers. Owner of $50,000 of federal securities, Brown decided that these securities were being “neglected,” so he swung over to the impost. As in Massachusetts, the opposition to the impost rested with the inland towns, while the urban interests, merchants, and mechanics favored the tax.
By August of 1786, every state but New York had approved the impost. While the oligarchs and the urban artisans united to favor the impost, the opposition was led by Abraham Yates, the Albany lawyer and cobbler who had risen to leadership of the radical forces in New York State. Yates stressed the thirst-for-power theme and, along with other opponents of the impost, cited the English theorist James Burgh in warning of the inner tendency toward the expansion of government power.[Editor’s footnote] James Burgh was a Scotsman known in the colonies for his Political Disquisitions (1774). He wrote in the tradition of John Trenchard and Thomas Gordon of Cato’s Letters and criticized taxation without representation and Britain’s stern actions against her colonies. Rothbard, Conceived in Liberty, vol. 4, pp. 1262–63, 148–49. Unerringly, Yates centered on the central importance of the taxing power and warned that it “is the first, nay, I may say the only object of tyrants. … This power is the center of gravity, for it will eventually draw into its vortex all other powers.”Jackson Turner Main, The Antifederalists: Critics of the Constitution, 1781–1788 (Chapel Hill: University of North Carolina Press, [2004] 1961), p. 79. [Editor’s remarks] For more on Abraham Yates and the liberals in New York, see Rothbard, Conceived in Liberty, vol. 4, pp. 1389–90, 275–76. Yates also warned that true republicanism can only be preserved in small states, and keenly pointed out that in the successful republics of Switzerland and the Netherlands the local provinces retained full control over their finances. A taxing power in Congress would demolish state sovereignty and reduce the states, where the people could keep watch on their representatives, to mere adjuncts of congressional power, and liberty would be gone.
In New York the struggle was over congressional versus state control of collecting the proposed impost. In the critical vote in the spring of 1786, and again the following year, the New York legislature refused to grant Congress any control over collection, and insisted that New York’s paper money be accepted in payment of duties. Congress refused to accept these conditions, and the impost of 1783 was defeated. Thus, the unanimity principle under the Articles of Confederation had made all attempts to impose a congressional taxing power impotent.
The votes of the New York legislature aligned with the merchants of New York City and Albany, led by Alexander Hamilton and Philip Schuyler, and the bulk of urban mechanics, in favor of the impost, while the followers of Governor George Clinton from the other upstate counties, led by Abraham Yates, were overwhelmingly opposed. Similar lines would be drawn in the ratification debates over the Constitution.[Editor’s footnote] Merrill Jensen, The New Nation, pp. 225–27, 282–301, 400–13; Main, The Antifederalists, pp. 72–102; Nettels, The Emergence of a National Economy, pp. 69–75; Burnett, The Continental Congress, pp. 633–53.
Foreign policy commentators live in their own bubble. The WTO’s credibility is gone and its survival uncertain due to its lack of impact on world trade over the last two decades. A China vs. USA trade war is still growing and the economic community of European states is in its worst-ever shape. Yet no one stops to wonder if all these failures have anything to do with the kind of economic integration they propose. In fact, the media is now childishly excited about the ASEAN-led Regional Comprehensive Economic Partnership (RCEP), a Trans-Pacific Partnership surrogate many years in the making.
What no one recognizes is that the common reason for the breakdown of world economic relations is the combination of interventionist domestic policies and government-led, top-down, faulty trade integration, which serves only interest groups and is subject to perverse incentives. The positive effects of inter-governmental multilateral trade agreements are minor at best. Their negative effects, however, such as stifling global trade, diversion of trade flows, or increasing red tape, have been growing at an alarming rate.
Trade agreements have thus become obsolete tokens of negotiation in larger geopolitical disputes, protectionist tools for managing and interfering with global trade flows. RCEP’s tentative provisions serve as a great illustration of the adulteration and vitiation of trade deals. For example, RCEP would allow and encourage poorer members to “proceed cautiously and gradually in lowering tariffs on manufactured goods… [over] adjustment periods of up to 25 years” (The Economist, 2019). However, it is precisely the poorer members of such agreements who benefit from reducing their tariffs to zero. According to Mises (1990), “their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?”
RCEP would also allow India to “impose some sort of ‘safeguard’ tariffs if imports surged too sharply” (The Economist, 2019). In other words, India could easily withdraw their already weak commitment to this economic partnership without incurring any direct consequences — allowing them to have their managed trade cake and eat it too. However, despite this mollification, India remained reluctant to commit and Narendra Modi refused to sign the current draft agreement, citing the trade deficit with China, the danger to Indian farmers, Ghandi, and his own conscience.
Lastly, the text of the RCEP is littered with “non-committal phrases… [such as] "members shall endeavour to" rather than "members shall’” (The Economist, 2019). As The Economist argues, “in these sort of agreements do and do not are not the only options. There is plenty of "try" (The Economist, 2019). But no rose-colored glasses can make free trade anything but a black and white issue. To reference Yoda again, this is why you fail. Either trade is entirely free, and thus works to bring about prosperity and economic growth, or it is government-managed, thus not free, and bound only to bring about more intervention and economic distortions. In matters of economic freedom, there is no try.
Preparations for the Regional Comprehensive Economic Partnership are now 8 years old and 30 negotiation rounds have already taken place. A fantastic leap of faith is necessary to imagine that, once signed, this agreement will have any beneficial impact, or will indeed be managed efficiently. A leap of faith that should be impossible for any minimally informed and honest commentator. Sadly, much like true free trade agreements, there are few such left.
There is a lot to learn from the slow and painful post-hurricane recovery that is going on in Puerto Rico right now.
One of Puerto Rico's biggest problems is that it is by far, one of poorest areas of the United States. The median household income in Puerto Rico is approximately $18,600. The median household income in the United States, by contrast, is around $57,000. As we've recently discussed here at mises.org (see here and here) it is generally far more difficult for low-income areas to weather storms, than it is for high income areas. The amount of capital at hand for repair and recovery is less in poor areas, as is the wealth available for constructing high-quality infrastructure.
Repeating this fact to Puerto Ricans, however, does them little good in the short term. So we must explore ways that Puerto Rico could be helped right now in gaining greater access to badly needed goods and services.
One: Repeal the Jones Act Unbeknownst to many Americans, shipping in the United States exists under the shadow of highly protectionist and archaic regulations passed as part of the Jones Act. The Jones Act was originally passed in 1920 as part of an effort to increase the number of merchant marine vessels produced by the United States. It restricts trade between American ports to vessels built and owned by Americans, and to vessels whose crew is at least three-quarters American. Unfortunately, as Gary Galles notes, the Act "works against its stated goals, and does so at a steep cost."
The Jones Act drives up the cost of goods and services by restricting shipping options for merchants. As Galles explains, this can be especially damaging in times of natural disasters:
In the aftermath of Hurricanes Katrina and Sandy, Jones Act restrictions were suspended because they hindered emergency responses. In 2014, New Jersey was not allowed to use a foreign ship to bring rock salt from Maine in time to respond to a snowstorm. A Jones Act-eligible ship required far more time and added $700,000 to the cost. And such problems extend beyond emergencies. Maryland imports rock salt from Chile rather than Louisiana, because shipping it all the way from Chile is three times cheaper than Jones Act domestic transportation.
These issues can be especially damaging to places like Puerto Rico and Hawaii. Galles continues:
In 2014, shipping a forty-foot container from Los Angeles to Honolulu reportedly cost more than ten times shipping it to Singapore. Dependent on Jones Act shipped petroleum for three-quarters of its electricity generation, Hawaii’s electricity prices are almost double the next most expensive state.
A 2012 report found that sending a container of household goods from the east coast to Puerto Rico cost more than double that to nearby Santo Domingo. A GAO study found that some Puerto Rico companies had shifted sourcing from America to Canada, due to cost savings from escaping Jones Act restrictions.
The Jones Act's effects on cutting resources for places like Puerto Rico are so undeniable that the Act was suspended early in September to allow for Puerto Rico to stock up on fuel and other necessities in preparation for the storm. The waiver expired after September 22, however, greatly diminishing the supply of fuel coming into the island.
Even John McCain, rarely quoted as one of the good guys in these pages, has urged the total repeal of the Jones Act, calling it an "archaic and burdensome act." McCain is right.
Only after substantial pressure did the Trump administration finally relent, and it granted a new waiver on Wednesday.
Total repeal should be next on the agenda, as it's absurd to wait for a highly destructive hurricane before allowing Puerto Ricans to access goods and services at lower cost.
Two: Declare Puerto Rico a Free Trade Zone Why stop with just a repeal of the one protectionist measure that is the Jones Act?
Puerto Rico is subject to American customs and trade laws, and thus importing goods and services into the island is limited by tariffs, quotas, and other protectionist measures — thus driving up the costs of goods and services.
Given Puerto Rico's desperate need for supplies in the wake of Maria, the humane thing to do would be to grant trade autonomy to Puerto Rico allowing it to engage in total unilateral free trade in order to attract merchants from all over the world.
Unilateral free trade, of course, is beneficial always and everywhere. But in the short term, Congress and the administration can begin small and simply declare Puerto Rico to be an open port in which all goods can be imported duty-free. This would end the need to restrict trade and collect tariffs in Puerto Rico to remain in accordance with US law. A look at US customs policies reveal restrictions fall on a variety of highly-useful products in times of emergency including ethyl alcohol, dried milk, and peanuts.
Other disastrous trade restrictions include the Trump administration's new tariff slapped on lumber earlier this year. The end effect will be to drive up the cost of construction for everyone, but this will be most felt in hurricane-devastated areas.
Needless to say, this policy of open trade would be most effective if both national and territorial officials allow merchants and importers to charge prices without fear of any restrictions on so-called price-gouging. Such restrictions would act to reduce the total amount of goods and services being brought to the island.
Three: Remove Restrictions on Physical CashIn times of emergency, when the electricity is out, access to physical cash becomes extremely important in facilitating a functional economy. In the wake of Hurricane Maria, ATMs ceased to function and armored car services had difficulty reaching banks. "Demand for cash [in Puerto Rico] is extraordinarily high right now," a Federal Reserve spokesman noted on Wednesday.
While it is a good thing that the Fed believes it can soon ensure a working amount of cash in the region, the problem would have been largely avoidable were United States banking regulations not so geared toward restricting the use of physical cash.
Prior to a looming natural disaster, of course, it would be wise to take out a significant amount of cash to make sure one can purchase goods and services even when power is out, and banks are closed.
In the US, however, removing even a few thousand dollars from one's accounts is likely to raise eyebrows and trigger greater surveillance from banking regulators. Technically, it is legal to withdraw cash amounts up to $10,000, but doing so can trigger government charges of "structuring" in which it is actually illegal to withdraw cash amounts under $10,000 total. In other words, its unclear as to how much cash one can actually withdraw without asking for trouble from federal banking regulators. Nor is this an especially huge amount, especially when power is expected to be out for months in some areas.
Both banks and their customers, however, are repeatedly discouraged from engaging in sizable cash transactions by federal regulators.
A more reasonable government would seek to facilitate the use of physical cash in large amounts, especially in the lead up to natural disasters, so as to ensure residents need not resort to barter and other types of highly-inefficient transactions.
Moreover, in a post-disaster situation, where communities have become more isolated, and access to resources on the mainland becomes limited, residents will become more dependent on short-terms loans, micro loans, and informal loans during the process of rebuilding. In many cases, these loans will be risky. Policymakers could help ensure that cash and capital reaches those who need it most by reducing banking restrictions and regulations on so-called usury, same-day lending, and other types of short-term and emergency loans.
It's at times like these that the effects of government interventions, intrusions, and regulations come to be felt most. As resources become scarce, and established institutions may not be present or reliable, it becomes all the more important to facilitate a nimble and inventive marketplace in which solutions can be pursued quickly and in an unrestricted manner.
As with all Americans nationwide, Puerto Ricans are subject to trade restrictions, taxes, and other regulations that cripple markets and impact their standard of living. Much of the time, these effects can be better tolerated because an abundance of goods continues to be available — even if made unnecessarily expensive. In the wake of a natural disaster, however, accessing goods and services becomes much more difficult, and it is at times like these that economic freedom is needed most.
The German election is a month away and with that also comes a real rarity: a party getting into parliament which is on the “right” of Angela Merkel’s CDU and its Bavarian partner, the CSU. Over the last decades, this has been a no-go zone in German politics, too severe were the memories of the Nazi era. But come September, the Alternative für Deutschland (Alternative for Germany), or AfD, will set a landmark, beating the 5 percent threshold to get into parliament in all likelihood (currently they are polling between 7 and 10 percent).
As we have seen throughout the years, those considered as “right-wing populists” in the mainstream are by no means a homogeneous group, from Brexiteers in the UKIP and on the fringe of the Tories as somewhat favorable examples to more frightening ones like Marine Le Pen in France. But what kind of party is the AfD?
The AfD was founded in 2013 by a bunch of economics professors — at first they were mockingly called “Professorenpartei” (“professor’s party”) — who were fed up by the crisis in Greece and demanded a German exit from the eurozone. Among them were economists like Joachim Starbatty and Roland Vaubel, known in Germany for their free-market ideas. The goal was to found a party which would reconcile the cultural conservatism that was lost in the conservative CDU and the liberal economic policies that were lost in the classical-liberal party, the FDP. However, the AfD focused increasingly on refugees instead of the euro, which led to the departure of many of its founding members in 2015, including the leader up to that point, Bernd Lucke.
Despite their departure, the influence of the ordoliberals can be felt to this day. In the party program for the upcoming election, the AfD still demands to exit the eurozone and until this happens, to end the excessive monetary policy by the ECB. They are opposed to bank bail-outs, want to abolish the inheritance tax, and lower sales and income taxes. Subsidies should be cut, rent control is criticized, and the policy on quotas and anti-discrimination laws is to just have none. The position is that freedom of contract should come first instead.
Sure, there are some weak points: They want to fight Islamic terrorism by virtually any means (despite the blowback effect of such actions actually causing it), and overall on Islam, their positions are rather excessive: “Islam is not a part of Germany,” they write and by that come up with proposals such as a prohibition of burqas and niqabs in public spaces, mandatory-German sermons in mosques, and an abandoning of all Islam theology chairs at universities. Furthermore, the party has adopted positions asserting that “consumer protection should be a national task,” and that the minimum wage be retained. Trying to be family-friendly, they promise to give numerous handouts to parents. Perhaps worst of all, they want to reinstate the draft.
On balance though, the program still comes out as a document that hardly is extremist by German standards. What makes the party problematic is the unlikelihood that any of the good parts would be implemented — while the bad parts are more likely to be adopted. Here we arrive at the personnel of the AfD. Yes, there are some classical liberals left for sure. Beatrix von Storch, member of the Hayek Society and one of the two MEPs from the AfD in the European Parliament, has opposed any cooperation with the Front National in France — because they are too socialist. Furthermore, one of their two leading candidates for the election, Alice Weidel, considers herself a “conservative libertarian” and tries to get the AfD back to talking more about the euro and the ECB and less about how awful refugees are.
Nonetheless, the great majority of the members and supporters have no relation whatsoever with liberal ideas — which is shown by the fact that many AfD voters would vote for Die Linke (The Left), the socialist party, as second-choice. Alexander Gauland, the other leading candidate next to Weidel, has called Adam Smith’s theories “unchristian” and has faulted markets for the 2008 financial crisis: “The invisible hand turned out to be exactly what it actually is: ideology. Private self-interest has developed into a full catastrophe.”
Björn Höcke, probably the loudest member of the party, thinks that “materialistic [classical] liberalism has led to a cultural co-optation of this country.” He is known for having gone full-on nationalist in numerous of his speeches, for example: “The Syrians who come to us still have their Syria. But if we — through the Syrians — lose our Germany, we will not have a homeland anymore.” And in reference to a Holocaust memorial in Berlin he had to say: “We Germans are the only people in the world who have planted a memorial of shame in the heart of their capital.” This can only be beaten by chairman for the state of Saxony-Anhalt, André Poggenburg, who has wondered if it’s possible to enlarge the German territory at some point in the future.
This drift to the collectivist right is also noticeable in the program. There was a time when the AfD wanted to privatize unemployment insurance — now the position is those benefits for the unemployed should be handed out for a longer period than is now the case. One no longer hears words from the party about reducing economic barriers. Instead we hear a call for more government actions if “free trade is failing.” Explanations on deregulation plans and tax cuts are much vaguer (for example, the claim that corporate taxes should be “fair”). Sentences like “only small government can be good government” or mentions of Wilhelm Röpke and Ludwig Erhard, which were still found in the previous program, are now notably missing.
To be sure, the AfD is a long way from resembling a Nazi party. It's not even the Alt-Right of Germany, despite having some members like Höcke who definitely can be put in this camp. But overall, liberty-minded people shouldn’t get their hopes up too high when it comes to the Alternative for Germany.
The Federal Reserve this week raised the Federal Funds Rate a quarter point to 1.25 percent, bringing the rate to the highest it's been in eight years. One might now say monetary policy has progressed from a policy of "ultra low" rates to simply a policy of low rates.
How this will play out over time continues to depend quite a bit on how much the Fed shrinks its balance sheet and how soon a recession descends on the economy.
Not surprisingly, then, many continue to discuss the best ways to reform the Federal Reserve. But, there's definitely a wrong way to do this.
This week on Mises Weekends: Arguments for a "rules based" Fed are gaining momentum on both the political Left and Right — and even among some libertarians. Would ideas like NGDP targeting and the "Taylor Rule" really make the Fed less dangerous? Would they be an improvement on the Fed's current discretionary approach? Can monetary rules" really contain booms and busts, or would Yellen and company simply break them at the first sign of the next crash? Professor Peter Klein joins Jeff to discuss How Not to Reform the Fed.
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: government backed monopoly and protectionism, crazy foreign policy, Mises's influence in the EU, deregulation of the airline industry, and does it really pay to get a college education anymore.
Government as the Source of Monopoly: US Airlines Edition by Peter G. KleinFractional-Reserve Banking and Money Creation by Frank ShostakWith Cuba Policy, Trump Strikes Another Blow Against Economic Freedom by Ryan McMakenHow We Should Name Business Cycles by Mark ThorntonTerry McAuliffe's Fuzzy Math on Gun Homicides by Ryan McMakenWhat If Taxpayers Could Choose if Taxes Went to the State Level or Federal Level? Ryan McMakenFour Reasons Why College Degrees Are Becoming Useless by Jonathan NewmanJune FOMC Announcement: Rate Hike and Balance Sheet Plans by C.Jay EngelThe US Taxpayers Have Spent Enough on the War in Afghanistan by Tim HaffnerMobility and Nobility by Theodore DalrympleMises-Influenced MP Becomes Brexit Minister by Tho BishopJeff Deist Joins Power Trading Radio to Discuss the EconomyThe Myth of Infrastructure Spending by Ryan McMakenLet's Fully Deregulate the Airline Industry by Stephan F. GohmannWages and Subsistence by Ludwig von MisesCould Donald Trump Save the Internet? by Tho BishopFed Officials Can't See What's Right In Front of Them by Jonathan NewmanGovernment Guaranteed Income is Not a Solution by Henry HazlittThe Collapse of Penn Station: Another Failure of Government "Enterprise" by Gregory BresigerThe US Government Punishes People for Helping Dying Children by Jacob G. Hornberger
A recent episode of the Human Action Podcast dealt with Mises’ Omnipotent Government, written between 1939 and 1943 and first published in 1944.
Besides its treatment of German national socialism, Mises’ Omnipotent Government also contains an analysis of the various suggestions for "world government" toward the end of the second World War. This article is a short commentary on Mises’ analysis of proposed international economic frameworks, their shortcomings and their subsequent outcomes.Readers may also refer to Mises’ commentary on these subjects in Liberalism, published in German in 1927.
A Type of World Government After maintaining the distinction that he makes earlier in Omnipotent Government between the terms "socialism" and "interventionism," Mises correctly foresees what later became the most important post-war technique of international economic planning. Namely, international agreements between sovereign states:
The more realistic suggestions for world planning do not imply the establishment of a world state with a world parliament. They propose international agreements and regulations concerning production, foreign trade, currency and credit, and finally foreign loans and investments.
After the second World War, these international agreements took the form of "three pillars":
the Final Act of the Bretton Woods Conference, entering into force in 1945, which gave birth to the World Bank and the International Monetary Fund;the General Agreement on Tariffs and Trade (later becoming the WTO Agreements) of 1947;the Havana Charter for the International Trade Organization of 1948, which failed to enter into force after the United States refused to ratify it. After the failure of the Havana Charter, the issue of international investment protection was the subject of several thousands of state-to-state bilateral and multilateral investment treaties (BITs and MITs), which specify the substantive rights of foreign investors and applicable dispute resolution mechanisms. A good example of such a treaty is Chapter 11, titled ‘Investment’ of NAFTA, which may be soon replaced by Chapter 14 of the USMCA.
Other important international agreements include the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations and other, "soft," law such as the World Bank’s Guidelines on the Treatment of Foreign Direct Investment and the FATF Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation.
International Government Planning is Government Planning all the Same Regardless of its form, Mises points out that the concept of planning, whether national or international, remains antithetical to the concept of free enterprise. This is well understood by our readers. Moreover, while planning cannot decrease the price of one good without increasing the prices of others, it can be used to increase prices by creating monopolies:
The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.
This is a foreseeable scenario in the context of international agreements dealing with environmental issues. An example of what lies in store can be found in what has been called the "Renewable Energy Explosion" in Spain. After expanding subsidies for the production of renewable energy from 2004 to 2007, Spain was forced to eliminate these incentives in the wake of the financial crisis, leading to a substantial increase in energy costs and severe losses to previously subsidized enterprises.
Mises also identifies the no true Scotsman fallacy, which is invariably used to justify further planning after the initial plan fails:
[…] some of these schemes worked only for a short time and then collapsed, while many did not work at all. But this, according to the planners, was due to faults in technical execution. It is the essence of all their projects for postwar economic planning that they will so improve the methods applied as to make them succeed in the future.
Do Free Trade Agreements Promote Free Trade? Mises was very skeptical of the outcomes of post-war foreign trade agreements, arguing that ‘the ultimate goal of every nation’s foreign-trade policy today is to prevent all imports’, and that "an international body for foreign-trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism."
It might be safe to say that Mises was too pessimistic on this subject. Arrangements between developed and developing nations after the second World War have substantially increased cross-border trade and and reduced protectionism. The trend was further strengthened in the 1990s after the collapse of the Soviet Union and the adoption by erstwhile Soviet Republics of more liberal approaches to foreign trade.
It is not clear, however, that this expansion can be attributed to the conclusion of international trade and investment agreements, and the question remains the subject of much debate.Footnote: See Sachs, Lisa and Sauvant, Karl P., ‘ BITs, DTTs, and FDI Flows: An Overview ’ (2009) in Karl P. Sauvant and Lisa E. Sachs, eds., The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties and Investment Flows (Oxford: Oxford University Press, 2009), pp. Xxvii-lxii. In any case, Mises correctly identifies the state’s ability to circumvent restrictions on protectionist policies by taking recourse to other forms of interventionism:
If pressure or violence is applied in order to force Atlantis to change its import regulations so that greater quantities of cloth can be imported, it will take recourse to other methods of interventionism. Under a regime of government interference with business a government has innumerable means at hand to penalize imports. They may be less easy to handle but they can be made no less efficacious than tariffs, quotas, or the total prohibition of imports.
International investor-state tribunals, constituted on the basis of international investment agreements, have successfully dealt with these forms of intervention since the 1990s, particularly by applying international law concepts of indirect expropriation and fair and equitable treatment.
These decisions, may, however, be regarded as unexpected developments, and have caused a significant backlash by states against the very concept of investor-state dispute settlement. For instance, in January 2019, 22 member states of the European Union undertook to terminate all intra-EU bilateral agreements providing for investor-state arbitration.
These decisions have also lead to the adoption by states of new treaties containing wider exceptions for economic regulation. India, for instance, announced in 2016 that it was terminating 58 of its 83 bilateral investment treaties, after publishing a new, more stringent draft treaty for future negotiations. In a striking illustration of the "planning mentality," the draft treaty provides, inter alia, that:
Investors and their Investments shall strive, through their management policies and practices, to contribute to the development objectives of the Host State.
The Gold Standard, the Cantillon Effect, and "World Money" It is interesting to note that just a few decades after the end of the belle époque, the "undesirability" of stable foreign exchange rates seems to have evolved into gospel truth for the governments of the 1940s. After observing that ‘the Keynesian school passionately advocates instability of foreign exchange rates’, Mises finds that "stability of foreign exchange rates was in [governments’] eyes a mischief, not a blessing."
While the various excuses that lead to the abandonment of the gold standard are familiar to our readers, it may be noted that in the international context, protectionism provides another excuse for states:
The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports.
Mises notes that any return to the gold standard would not require elaborate international agreements or international planning. All that would be required is "the abandonment of an easy money policy and of the endeavors to combat imports by devaluation." Evidently, it is not necessary that the state re-establish the gold parity that previously existed:Footnote: A recent and detailed treatment of this issue may be found in Saifedean Ammous, The Bitcoin Standard (Wiley 2018)
[…] every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.
Finally, Mises dismisses the idea of an international fiat currency, issued by an international monetary authority acting as the lender of last resort. After dealing with what is commonly known today as the "Cantillon effect," Mises explains that nations could never agree upon the basis of distribution of this new form of central bank money:
The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent […]
Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution.
Could these observations give us some clues regarding the future prospects of the IMF’s SDR scheme?
For decades, politicians and pundits in political media alike have said that the American farming and ranching industries are vital to our nation and must be protected from "unfair" competition and the threat of going out of business. This belief often materializes in the form of legislative or executive action undertaken by the government.
The federal government has long sought to promote the health of these industries, employing pro-farming policies since the days of FDR's New Deal. These programs survive to this day, being expanded from their initial scope or their original sentiments reimposed through new acts of Congress. Strangely enough, this bureaucratic expansion occurs despite American agriculture output declining over the course of America's existence.
Output Declines, Government Grows Since 1900, the number of American farms in operation has fallen 63 percent. In 1930, agricultural GDP as a share of total GDP sat at a sizeable 7.7 percent — by 2002, agricultural GDP as a share of total GDP was a mere 0.7 percent. This 7 percent decrease signals the adoption of a new role in the world economy by the US.
The US now imports a large percentage of the fresh vegetables and produce it sells — while in 1975 the proportion of fresh fruit sold in the United States that was imported was 23 percent, it reached 51.3 percent in 2016.
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Source: New York Times
Domestic vegetable and fruit producers are being supplanted in the market by producers from countries such as Argentina, Chile, and Mexico. The City University of New York's Urban Food Policy Institute reports: "...since the NAFTA Trade Agreement in 1994, U.S. consumption of tomatoes, peppers, cucumbers, limes, berries, avocados and mangos imported from Mexico is way up and still rising."
Clearly, increased trade is impacting America's agriculture sector. Surely then, the government's relationship with the industry must be changing as well. Logic would suggest that the USDA and its subordinate agencies are laying off employees and reducing their size and scope in response to the decline of America’s beloved industry.
In reality, this is not the case. In 1900, 11 million Americans were employed on farms and 2,900 employed by the USDA. A century later, 3 million were employed on farms, while the USDA employed 105,000 workers. This increase in agency size represents the Federal government's increasingly regulatory stance in the US economy.
Agriculture's Death is Good News How could an industry's death spell prosperity for a nation? While the number of people employed in farming and similar occupations dwindled from 11 million in 1900 to 2.6 million in 2017, employment in STEM (science, technology, engineer, and math) occupations has grown 79 percent between 1990 and 2016 — increasing from 9.7 million to 17.3 million. The US economy is transitioning away from producing in primary and secondary level industries like agriculture and related enterprises such as food processing and packaging.
The reduction in the number of people employed in agriculture and related jobs shows that America is actually abandoning low paying jobs. Compared to STEM jobs, occupations in the primary or secondary sectors of the economy tend to pay a very low wage. Farm hands and field laborers, who are often poor immigrants, are paid below minimum wage to perform tasks that take a significant toll on their bodies. Difficult manual labor poses both short-term and long-term risks to workers’ health, compared to the almost complete lack of health detriments presented by jobs in STEM fields. These agricultural jobs tend also to be seasonal. Workers will only have a secure source of income for between 3 and 6 months per year, depending on where they work, due to the fact that crops cannot be grown year round.
As the economy sheds the last remnants of its agricultural-centric past, new jobs are being created in new industries at a rapid pace. Occupations in the tertiary and quaternary sectors are far more beneficial to society and individuals, as they provide higher wages, a more stable source of income, and employment year round. In a bid to attract workers to fill positions, companies often offer benefits such as childcare and healthcare plans as part of an offer of employment. It is very obvious that we should seek to employ as many people as possible in tertiary and quaternary sector industries.
Primary and secondary products will never lose value. Humans will always have a need to consume agricultural products and build devices and structures from raw materials that are finished through secondary sector activities. As the US economy begins to be largely constructed of tertiary and quaternary economic activities, these lower-level processes will simply be outsourced to less developed countries.
Outsourcing: Oppression or Opportunity? Since their ideology became a force in the mainstream a decade ago, the rallying cry of political leftists has been to stand for those being oppressed, exploited, or victimized by the status quo. The advancement of technology has meant that industrialization, combined with other factors, has left certain nations behind. Third world economies are not nearly as developed as their first world counterparts, with a bulk of their economic activity taking place in the primary and secondary sectors. These leftists take an anti-trade stance, positing that the outsourcing of production to less developed nations is capitalistic exploitation.
"Exploitation" Actually Benefits All Parties Involved While it is true that a business owner may outsource simple manufacturing processes to countries where they may hire workers at cheaper wages, it is also true that the workers hired benefit from this self-interested move. The reason workers choose to work in these plants and industries is that they provide the best possible way to make money to the worker. If a corporation goes to a less developed nation and is able to hire 5,000 workers to work for them, it means that the firm is now offering the best employment opportunity in the country to 5,000 workers. Prior to the company's arrival, laborers were likely making less money than they now do and working in worse conditions. Otherwise, why would they choose to work for the new company? Their condition has obviously been improved by the opening of a plant by a foreign capitalist.
Just as the worker in the third world country benefited by the opening of a multinational corporation's facilities in their country, the citizens of first world countries benefited at the same time. Countries in the business of producing primary and secondary products tend to hold a comparative advantage in their production because they are able to produce more efficiently and at the lowest cost. They can manufacture, farm, ranch, and fish more efficiently than their counterparts in economically and socially advanced nations.
Instead of allocating resources to the production of goods that firms in other countries can make at a cheaper and more efficient rate, developed nations should be pursuing the expansion of tertiary and quaternary industries. Engineering, health science, computer science, and entertainment are all industries the US should find itself at the forefront of. The US is far better equipped to produce these goods and services, and these industries provide the best jobs to the nation.
Dole should be producing its crops in Panama. It provides jobs to the locals that are more secure, safer, and better paying than the ones they previously held, the goods are produced at a cheaper and more efficient rate than if they were grown here, and allows individuals in the US to be employed in higher paying sectors. Instead of working as a farm hand in the Hawaiian fields of a Dole plantation, a person could be employed as an accountant or sales executive in one of Dole's corporate offices. While it may take some time for a former field hand to learn the skills needed to be employed in a higher income industry, the goal is achievable and future generations will be better off for it.
Step Aside Mr. Government The government must take policy positions that encourage the boom of tertiary and quaternary industries such as computer and software design, legal professions, financial institutions, and healthcare. Subsidies to farmers and other outdated, primary and secondary economic activities should be cut, paving the way for a transition to a more advanced economy. Corporate tax rates should be drastically reduced to fuel the growth of firms in these sectors. The US must also abandon its protectionist stance on trade. Tariffs increase costs on domestic consumers and prevent producers in third world nations from bringing their goods to market in developed nations, who more often can afford the products.
Within a decade or less, those displaced by the closing of companies in the agriculture industry, among others, will find themselves in new, higher paying fields. Better yet, their children will too. Leave the agriculture to those who can do it best, and let advanced economics revolutionize the higher paying industries.
Nostalgia seems to be very popular in Washington. While the neocons and Democratic Party hard-liners have succeeded in bringing back the Cold War with Russia, it looks like President Trump is determined to take us back to a replay of the Bay of Pigs!In Miami on Friday, the president announced that he was slamming the door on one of President Obama’s few foreign policy successes: easing 50 years of US sanctions on Cuba. The nostalgia was so strong at Trump’s Friday speech that he even announced participants in the CIA’s disastrous 1961 Bay of Pigs invasion of Cuba in the audience!President Trump said Friday that his new policy would be nothing short of “regime change” for Cuba. No easing of US sanctions on Cuba, he said, “until all political prisoners are freed, freedoms of assembly and expression are respected, all political parties are legalized, and free and internationally supervised elections are scheduled.”Yes, this is the same Donald Trump who declared as president-elect in December that his incoming Administration would “pursue a new foreign policy that finally learns from the mistakes of the past. We will stop looking to topple regimes and overthrow governments.” Now, in another flip-flop toward the neocons, President Trump is pursuing regime change in Cuba on the pretext of human rights violations.While the Cuban government may not have a spotless record when it comes to human rights, this is the same President Trump who just weeks ago heaped praise on perhaps the world’s worst human rights abuser, Saudi Arabia. There, he even participated in a bizarre ceremony to open a global anti-extremism center in the home of state-sponsored extremism!While President Trump is not overturning all of President Obama’s Cuba policy reforms – the US Embassy will remain open – he will roll back the liberalization of travel restrictions and make it very difficult for American firms to do business in Cuba. Certainly foreign competitors of US construction and travel companies are thrilled by this new policy, as it keeps American businesses out of the market. How many Americans will be put out of work by this foolish political stunt?There is a very big irony here. President Trump says that Cuba’s bad human rights record justifies a return to Cuba sanctions and travel prohibitions. But the US government preventing Americans from traveling and spending their own money wherever they wish is itself a violation of basic human rights. Historically it has been only the most totalitarian of regimes that prevent their citizens from traveling abroad. Think of East Germany, the Soviet Union, and North Korea. The US is not at war with Cuba. There is no reason to keep Americans from going where they please.President Trump’s shift back to the bad old days on Cuba will not have the desired effect of liberalizing that country’s political environment. If it did not work for fifty years why does Trump think it will suddenly work today? If anything, a hardening of US policy on Cuba will prevent reforms and empower those who warned that the US could not be trusted as an honest partner. The neocons increasingly have President Trump’s ear, even though he was elected on promises to ignore their constant calls for war and conflict. How many more flip-flops before his supporters no longer recognize him?
[Adapted from "Landlordism and Liberty: Aristocratic Misrule And the Anti-Corn-Law League" by Richard F. Spall in the Journal of Libertarian Studies.]
From the time of its formation in 1839 until the repeal of the corn laws seven years later, the Anti-Corn-Law League agitated virtually without interruption for the total and immediate repeal of those laws which restricted by high import duties the importation of foreign grain into Britain. Headed by prominent northern industrialists including Richard Cobden, J. B. Smith, George Wilson, and John Bright, and centered in the cloth-manufacturing capital of Manchester, the League was the best financed and the most highly organized political pressure group that Britain had ever witnessed. It made its appeals not only to middle-class manufacturers but also to industrial workers, agricultural laborers, and tenant farmers as well. The League sent lecturers and delegations all across the country to proselytize, raise funds, organize, and petition. It published and distributed scores of tracts, pamphlets, handbills, circulars, and books, and regularly issued a succession of its own newspapers: The Anti-Corn-Law Circular, Anti-Bread-Tax Circular, and The League. The ACLL organized debates, public lectures, conferences of ministers of religion, mass meetings, highly successful petition drives, and canvasses of constituencies in numerous parliamentary elections. Though the ACLL concentrated its efforts upon repeal of the corn and provision laws, the League, as individuals and as an organization, look considerable interest in a great many other reform issues of the 1830s and 1840s.Works frequently cited have been identified by the following abbreviations: ABTC Anti-Bread-Tax Circular. ACLC Anti-Corn-Law Circular. AD-MCRL Archives Department, Manchester Central Reference Library. SSL-MCRL Social Science Library, Manchester Central Reference Library. WS-PRO West Sussex County Public Record Office.The organizational structure, parliamentary tactics, and methods of propaganda of the Anti-Corn-Law League were the subject of Norman McCord's The Anti-Corn-Law League, 1838-1846 (London: Allen and Unwin, 1958), and for these features of the ACLL, McCord's study remains the standard work. Archibald Prentice's History of the Anti-Corn-Law League, 2 vols. (London: Cash, 1853), an insider's account written just after the dissolution of the ACLL, is devoted to explaining in considerable detail how the League triumphed in getting the corn laws repealed in 1846. Much of Prentice's account is given over to a narrative of election and agitation tactics, and there is very little discussion of issues apart from free trade. Several other studies, including Augustus Mongredien's History of the Free Trade Movement in England (London: Cassell, 1881) and G. Armitage-Smith's Free Trade Movement and Its Results (London: Victorian Era Series, 1898), focus on parliamentary activity and methods of agitation rather than on the reform ideas of the ACLL. Surveys of the corn laws in English history, such as those by Donald Barnes in History of the English Corn Laws from 1660 to 1846 (New York: Routledge, 1930) and Charles Ryle Fay's Corn Laws and Social England (Cambridge: Cambridge University Press, 1932), are so broad in scope as to devote only a single brief chapter to the issue of repeal; they do not consider corollary issues. Studies of the ACLL have given too much attention to the structure of the organization and the nature of its agitation activities at the expense of examining more closely the meaning of the doctrine of free trade in its implications and corollaries. Biographies of prominent members of the Anti-Corn-Law League including Cobden and Bright — John Morley, Life of Richard Cobden (London: Chapman and Hall, 1881); G. M. Trevelyan, Life of John Bright (London: Constable, 1913); Herman Ausubel, John Bright: Victorian Reformer (New York: Wiley, 1966); Keith Robbins, John Bright (London: Routledge and Kegan Paul, 1979); and Donald Read, Cobden and Bright: A Victorian Political Partnership (New York: St. Martin's, 1968) — properly treat the participation of their subjects in the activities of the ACLL as only one aspect of the public lives of these men, and several do not have the period of the ACLL as their central focus. Biographies of league leaders have from time to time taken up the theme of aristocratic misrule and class legislation, but such discussions have been generally intended to provide insights into personal character or as part of a general context rather than as an outgrowth of free-trade ideology or as an explanation of the views on liberty held by members of the Anti-Corn-Law League. The present discussion is intended to outline the main elements of aristocratic misrule and landlordism as seen by members of the League and to illustrate how opposition to the foundation of landlordism-monopoly-led quite naturally to criticism of a "system" of landlordism itself.
The members of the Anti-Corn-Law League were very much interested in liberty though they did not often discuss the concept in abstract philosophical terms. The members of the League were practical men, better able and more willing to identify and condemn specific political, social, or economic impediments to freedom than to enumerate its philosophical hallmarks. One of the themes found most frequently among the reform ideas of the ACLLers is their abiding distrust and disdain for what they termed aristocratic misrule and class legislation. The members of the League regarded the corn laws as the most glaring example of aristocratic misrule, but in their opposition to this perceived foundation of landlordism, they often found themselves expressing opposition more broadly to what they termed the vestiges of feudalism or the legacy of the so-called Norman Yoke. Their desire to rid Britain of aristocratic misrule and class legislation prompted many Leaguers to oppose not just the corn laws but landlordism, the established church, and all the traditions and privileges that in their view restricted liberty.
The members of the Anti-Corn-Law League tended to view aristocratic privilege and influence in political and social institutions as well as economic relationships as forms of monopoly, and monopoly was something Leaguers opposed in all its variations. This fact is central to an understanding of the nature and scope of opposition to aristocratic misrule by the ACLL. Leaguers were pan of an emerging liberal consensus that placed a very high value on freedom from the constraints of the state, particularly with respect to economic affairs; they opposed the legacy of medieval restrictions and regulations on manufacturing and trade, and deeply resented the continued influence of a privileged landed aristocracy. This developing and cardinal liberal doctrine is in many ways summed up in opposition to monopoly in all its manifestations, and the ACLL was no small contributor to this tradition. Leaguers sometimes recognized monopoly in facets of life that seemed removed from economics.
The Anti-Corn-Law League regarded free trade as an issue of liberty no less than as a matter of economic practicality. Edward Baines, a prominent spokesman for the ACLL and editor of the Leeds Mercury, linked free trade and liberty in The League when he declared:
"Free Trade" means perfect freedom for every kind of industry; and it includes liberty to every man to employ his money or his labour in the way that he himself thinks most advantageous, and to buy and sell wherever he can do so with the greatest profit.
This freedom is man's natural right. Of course it ought not to be invaded in society, unless such invasion can be shown to be necessary for the general good of the community. ... It is obvious that this must be the general rule and practice in every community. ... And upon this rule all Governments do and must act in 999 out of 1000 cases. This rule of Freedom of Industry — which contains in it, when practically applied. an admirable self-regulating and self-adjusting principle — determines how many men shall engage in each particular employment, so as to keep the wants of the community duly supplied."To the Right Honourable The Earl of Harewood, President of the Yorkshire Society," The League, 16 March 1844.
In his argument Baines advanced two important and related ideas: that freedom was a matter of natural right and that it was economically sound. He accused landed protectionists of inflicting a great and oppressive evil upon the country by violating the principle of freedom of industry with the continuation of the corn laws.Ibid. In his declarations Baines echoed the assertions of Adam Smith who had concluded that protectionism was harmful economically, internationally, and socially. Smith had argued that Britain's protectionist policies were posited upon two fallacies: (1) the balance-of-trade fallacy or the notion that it was always better to make goods at home, and (2) the political assumption that a government-led economy would progress more rapidly than a natural one.Frank Fish Walker, Jr., "British Liberalism: Some Philosophical Origins: The Contributions of Adam Smith, Thomas Robert Malthus, Jeremy Bentham, and Herbert Spencer'' (Ph.D. diss., Stanford University, 1957), pp. 35-38. Walker provides an analysis of Smith's Lectures of Justice, Police, Revenue and Arms. Smith believed that mercantilism not only slowed economic progress but also produced domestic social inequalities. In his view, the solution to an intolerable system of privilege was a self-regulating system of natural liberty.Ibid., pp. 37-38.
Richard Cobden, J. B. Smith, and Joseph Brotherton were other League leaders who shared the views of Baines on the relation between natural right and natural law. As early as 1837 J.B. Smith expressed on behalf of Brotherton, who was then a candidate in the Salford parliamentary election opposition to the entire "system of the Corn Laws," as well as "all other monopolies which interfere with & obstruct the general prosperity of the country.""To the Inhabitants of the Borough of Salford," Election Address of Joseph Brotherton, 28 June 1837, J. B. Smith Papers, AD-MCRL. The manuscript is in Smith's hand, and his daughter, Lady Durning-Lawrence, states that her father wrote the address on behalf of Brotherton. Cobden emphasized the inexorable power of freedom of trade as a matter of natural law in his early pamphlet, England, Ireland, and America, arguing that "violence and force never prevail against the natural wants and wishes of mankind; in other words that despotic laws against freedom of trade can never be executed."Richard Cobden, England, Ireland, and America (London: Simpkin, 1835), p. 3. Cobden provides an analysis of the effectiveness of Napoleon's Continental System. See also John MacCunn, Six Radical Thinkers (New York: Russell, 1907), pp. 88-95. The League expressed a quite similar view in "Exportation of Machinery. Effects of the Corn Laws," ACLC, 2 July 1840. Cobden not only equated restrictions on commerce with tyranny but also believed that free trade marked the rebirth of man's right to exchange freely the products of his labor, intelligence, and capital rather than serving the interests of the privileged classes."Liberte et protection, lettres de M. Richard Cobden,'' offprint from Journal des économistes, pp. 235-39, Cobden Papers, WS-PRO.
The agitation against the corn laws embodied by the Anti-Corn-Law League gave a focus to the sentiment opposing all forms of monopoly; many Leaguers believed that the corn laws were the foundation of an entire system of economic, social, and political privilege and that the whole edifice of aristocratic misgovernment and landlordism would be undermined if the corn laws were removed.On the general theme of the corn laws as the focus of a variety of reform interests, see William Cunningham, Rise and Decline of the Free Trade Movement (Cambridge: Cambridge University Press, 1905), pp. 67-74; Alexander Llewellyn, The Decade of Reform: The 1830s (New York: St. Martin's 1971), pp. 142-43; and McCord, Anti-Corn-Law League, pp. 15-21. The Bread Eater's Advocate, the organ of the short-lived National Daily Bread Society, which the League attempted to launch in 1841, made explicit the view that the corn law was "the keystone by which other monopolies are upheld, monopoly in trade, monopoly in legislation, monopoly in religion,""Address to the Council of the National Anti-Corn-Law League," Bread Eater's Advocate, 1 September 1841; see also Fay, Corn Laws and Social England, pp. 402-3. and hailed the repeal of the corn laws as "the first of a series of deep and searching reforms."Ibid. See R. B. McCallum, The Liberal Party from Earl Grey to Asquith (London: Gollancz, 1963), pp. 46-47; G. S. R. Kitson Clark, "The Repeal of the Corn Laws and the Politics of the Forties,'' Economic History Review, 2nd Series, 4 (1951-1952): 12-13; Fay, Corn Laws and Social England, pp. 396-402; and the contemporary pamphlet, Joseph Barker, Blessings of Free Trade . . . and How They May Be Increased and Made Lasting (N.P.: n.p., 1846), pp. 10-11. Opponents of repeal feared the truth of such assertions; see, for example George Calven Holland, Suggestions Towards Improving the Present System of Corn Laws (London: Ollivier, 1841), p. 3. Referring to the corn law, Holland wrote, ''It is the keystone of the arch on which rest the present orders of the state, and to disturb its position would ultimately introduce insecurity and anarchy.'' See also Robert M. Stewart, The Politics of Protection: Lord Derby and the Protectionist Party, 1841-52 (Cambridge: Cambridge University Press, 1971), passim. Opponents of the Anti-Corn-Law League charged that the organization regarded repeal as the first step toward the redistribution of property and republicanism. The League denied such charges, which had appeared in the Berkshire Herald, in "Groundless Alarms, Who's Afear'd?" ABTC, 5 May 1841.
...
The League regarded free trade as being ordained by both natural and divine law, which superseded the artificial restrictions of selfish aristocratic lawmakers. At one League meeting the corn laws were described as outmoded and contrary to the one principle of nature that would ensure harmony: "Freedom — universal freedom."''Weekly Meeting of the League,'' ABTC, 27 December 1842. The speaker was identified only as Mr. Bayley; it is not clear whether this was Henry, William, or Charles Bayley, all of whom resided in Stalybridge and were members of the League Great Fund General Committee. Reflecting the widest possible application of the principles of laissez faire in an unmistakably male fashion, the League speaker, Mr. Bayley, implied that use of such artificial restrictions as the corn laws impeded the operation of natural law in such a way as to obstruct the divine will, and he suggested that the corn laws were ridiculous as the belief once held by "our ladies" that "their bodies would not grow out to their proportions, unless squeezed in here and enlarged there, (Laughter) just as the Chinese have adopted."Ibid.
The League regarded the corn laws as an instrument of despotic power, and Thomas Milner Gibson argued before an aggregate meeting of the League in 1843 that Leaguers had taken up their struggle not under the pressure of momentary distress of the country,
but on the solemn conviction that the Corn Law is that invasion of our civil rights as free citizens, that whether there be poverty or plenty, we have an equal right to demand their repeal. (Loud Cheers.)"The National Anti-Corn-Law League,'' The League, 28 October 1843; and "Monopoly Viewed in Connexion with Despotism," The League, 25 November 1843.
Gibson told his listeners that the cause of the ACLL was more than the revival of trade; it was the cause of the citizens of England and of liberty itself.Ibid.
Perhaps the clearest statement by a member of the League on the fundamental nature of freedom of industry and trade came from John Bright in a speech before the Liverpool Anti-Monopoly Association during the summer of 1843. Bright asserted that the freedom to exchange the produce of one's labor for that of his fellows anywhere in the world was the most fundamental of rights. Bright argued that
there was no liberty without this liberty, which was simply the liberty to live. The right of voting for members of parliament, the right of electing members of the legislature, the right of electing even the crown, if that were so, — all this liberty was a very small value without the liberty to live by their industry. (Cheers.) Civil liberty was nothing, religious liberty was nothing; the liberty of the press was nothing, for so long as an increasing population was allowed to labour under restrictions on the means of living, all this liberty would be insufficient to give them prosperity. to enable them to advance in the career of improvement, to enable them to become what they were destined to be. ..."Great Free Trade Demonstration in Liverpool Amphitheatre," ABTC, 5 September 1843.
The Anti-Corn-Law Leaguers associated their cause with the cause of liberty. To many opponents of the corn laws, political, religious, and civil liberties were to some extent dependent upon freedom of exchange, or at the very least, they were liberties that could not be fully enjoyed without freedom of industry and exchange."To the Right Honourable The Earl of Harewood, President of the Yorkshire Society," The League, 16 March 1844; "Review," The League, 30 March 1844; and "The Anti-Corn-Law Conference," ABTC, 14 July 1842. For a discussion of the primacy of liberty in all things in the mind of P. A. Taylor, see J. Morrison Davidson, Eminent Radicals In and Out of Parliament (London: Stewart, 1880), pp. 29-38. For a discussion of Cobden's belief in individual liberty, free markets, freedom of opinion, and free exchange, see Francis W. Hirst, Richard Cobden and John Morley (Swindon: Swindon Press, 1941), pp. 36-37. For an assertion of the Christian origins of Joseph Sturge's views on liberty, see Stephen Hobshouse, Joseph Sturge: His Life and Work (London: Dent, 1919), pp. 51-56. See also the interesting contemporary treatise by John Francis Bray, Labour's Wrongs and Labour's Remedy: Or, The Age of Might and the Age of Right (Leeds: David Green, 1839), esp. pp. 12-18. Leaguers opposed monopoly in all its variations, and monopoly was the antithesis of freedom of exchange. The Leaguers' opposition to the corn law monopoly led them to oppose landlordism wherever it was to be found: in the military, the universities, the established church, the traditional relations between landlord and tenant, and the political life of the nation. In the eyes of the members of the Anti-Corn-Law League the battle for the repeal of the corn laws was a fight against aristocratic misrule and class legislation; it was a crusade against the vestiges of feudal privilege which restricted progress, economic well-being, and freedom.
This week America celebrated its Independence day, a holiday dedicated to honoring, as Ryan McMaken noted, "a document that promotes secession, rebellion, and what the British at the time regarded as treason." In spite of our own government's attempts to hijack it for simply another celebration of sterile patriotic pride, the success of America's inherently radical revolution is a moment of history that must not only be remembered, but emulated in the future. After all, as Jefferson said, at times "it becomes necessary for one people to dissolve the political bands which have connected them with another," remains as relevant today as they were in the 18th century.
Our old friend Richard Ebeling joins Mises Weekends to discuss the health of, and future prospects for, the Austrian school. There are far more Austrian and Austrian-friendly thinkers in academia, business, and the financial industry than ever before. Richard attended the famous South Royalton conference, so he knows just how far we've come. But are Austrians making real progress against the dominant neo-Keynesian orthodoxy? Are we growing on a per-capita basis? And what would Hayek, Rothbard, and Margit von Mises — all of whom Dr. Ebeling knew and spent time with — think of Austrian economics today?
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: various types of government protected monopolies; politically incorrect American history; the idiocy of central bankers, home and abroad; the misinformation surrounding minimum wage law enactment; and what we is July 4th really about.
The Flint Water Disaster Shows Why We Need Markets by Christopher WestleyTestosterone and the Madness of Central Bankers by Doug FrenchThe US Is Not "One Nation" — And it Never Was by Ryan McMakenWe Don't Need a Presidential Commission on Voter Fraud by Ryan McMakenLew Rockwell on The Origins of the Mises Institute by Lew RockwellThe Left/Right Crack-up Over Seattle and the Minimum Wage by John TamnyMoney, Keynes, and History by Friedrich A. HayekThe Great War, 100 Years Later by T. Hunt TooleyThe Austrians, the Mainstream, and "Mainline" Economics by Nicolai J. FossWhy Civilization Needs Money by Ludwig von MisesTrump's Maoist Steel Obsession by Jonathan Newman3 Things to Remember on Independence Day by Ryan McMakenFive Articles for the FourthThe Death of the European Banking Union by Louis RouanetWe Must Declare Independence by Ron PaulBeware the Predictions of "Experts" Like Janet Yellen by Ryan McMakenHere's an Easy Way to Add Some Market Competition Back into Healthcare by Mark Thornton
The North American fur trade began in the seventeenth century, and though many think of it as history, it continues to this day, contributing almost $1 billion to Canada’s economy. Although there is global demand for fur—the US, China, and Hong Kong are the largest markets for Canadian fur—the industry is in decline. Prices have dropped significantly and overproduction relative to demand has led to a glutted market.
In particular, the wild fur industry is suffering. Improvements in farming techniques have allowed fur farms to conquer the market, and now two-thirds of Canadian fur is farmed. Although this is a boon for consumers, who now have a more steady and affordable supply of furs to enjoy, as well as for fur farmers, trappers are hurt by the change, which has recently manifested itself in two major players (the North West Company and the North American Fur Auction) moving to back out of the industry.
Unfortunately, many think that the solution to the issue of the ailing trade is for the government to step in to “protect” trappers from “market fluctuations” rather than allowing the market to change and reabsorb the trappers in new capacities. Although the trapping interests affected are still shopping around for private fur buyers, they’re also trying to involve the only entity that would ever consider pumping money into a declining industry: the state.
Private Responses to a Changing Market On December 10, 2019, the Canadian Broadcasting Company (CBC) reported that the North West Company had decided to stop buying furs at its Northern Stores. The decision would affect trappers across the Canadian North, who would lose an important source of income since the company is often the only fur buyer in remote areas. The company’s reasons for suspending purchases were market based: declining fur prices—sometimes by 50 to 70 percent—and high inventories of unsold furs. (Fur buyers often pay trappers for their pelts in advance, shouldering market risks in the hopes of turning a profit later.) Just three days later, the company reversed its decision after receiving much criticism from “disgruntled customers” and trappers, interests that overlap in northern Canadian communities, where the Northern Store can be the only store.
Although of course the reversal does not change the facts of the market, it is an example of how private interests react and adapt to changing market conditions. In order to continue buying the furs, the company has partnered with the Fur Harvesters’ Auction (FHA), the largest wild fur auction house in the world. The North West Company, ideally situated to purchase wild furs, will act as an agent for the FHA, which is located in North Bay, Ontario, accepting the furs at its Northern and NorthMart stores and continuing to give trappers advances against auction sales.
The company’s initial decision to stop buying furs seems to have been spurred by the pending dissolution of its main buyer, the North American Fur Auction (NAFA), a major fur marketer that was originally part of the Hudson’s Bay Company. The Toronto-based NAFA decided to close up shop in November, having lost its primary lender after a long refinancing struggle. But when the announcement was made, the affected interests had already been mobilized to find a solution to the widening fissure in the market.
When the NAFA’s financial troubles became known, the Saskatchewan Trappers Association reached out to the FHA to see if it would be interested in filling the gap created by NAFA’s imminent failure. The FHA responded enthusiastically, allegedly “assur[ing] all the trappers across Canada here that they can handle the fur volume.” Knowing that there are multiple remaining buyers trying to fill an enduring consumer demand for fur, the association had turned to the Canadian fur marketer that arguably stands to gain the most from the gap created by the NAFA’s volatile circumstances, setting in motion a reorganization of the wild fur industry.
The FHA’s voluntary involvement in the North West Company’s reinstatement of fur sales suggests that there are still worthwhile profits to be made in wild fur in spite of the industry’s decline. No government force or groveling on the part of the fur producers was necessary to get the FHA to swoop in for the NAFA’s share of the fur market. This shows that, to some extent, trapping and wild fur production is still a productive enterprise—yielding a product that increases many people’s psychic profits.
For its part, the North West Company’s decision to accept furs again is more than a charitable PR move. Although Director of Business Development David Reimer allegedly “said the company acknowledges its responsibility to communities,” the reality is that a bunch of disgruntled customers would have had significant ramifications for business. Though fur sales represent “a very small percentage in terms of revenues” for the company, one of its primary business activities—as a retailer specifically to remote communities in the Canadian North (Read: places where trappers and their families live)—might have been severely impacted by local ill will.
Moreover, although the details of the North West Company’s deal with the auction house are not known, it’s likely that the latter’s business prospects have been brightened considerably by the NAFA’s pending demise—perhaps enough that it ventured to offer the North West Company a commission that makes accepting furs lucrative once again. Whatever the case may be, private interests at various stages of the fur production process—producers and marketers—are engaged in a natural (if trying) process of reconfiguration in response to a major change in the market. (Remember, the NAFA’s operations date to the Hudson’s Bay Company’s 1670 founding.)
Calls for the “Protection” of the Trappers’ Industry But, as in other industries, there are voices clamoring for government involvement to “protect” the industry, in spite of its evident ability to respond to changing conditions, and they’ve already had some success.
On October 31, the Ontario Superior Court of Justice granted the NAFA creditor protection status, which prevents creditors from collecting their rightful property from borrowers who have defaulted on their obligations—a shameless act of corporate welfare. Specifically, the order “prevents the company from paying creditors with outstanding payments from before [October 31],” buying it more time to dispose of worthwhile assets, such as its “ranched mink portfolio,” which it is selling to Saga Furs.
In light of the industry’s near loss of the North West Company as a fur buyer—often the only one in remote northern communities, as mentioned—some have called for the Canadian government to buy the furs. In the Northwest Territories such a program is already in place, and nearly 650 trappers sell their furs to the state.
Francois Roussow, a fur marketer with the territorial government’s traditional economy division, thinks that “every jurisdiction should be running something like this especially in their northern communities to assist trappers to get out on the land.” Even if all the rural provinces instituted such programs, though, Roussow thinks the company should continue buying furs because it “owes it” to the communities, and because it allows them to get quick money to spend at the stores.
In the same interview, however, Roussow admitted that the North West Company’s original decision aligns with the fur industry’s trend and mentioned several factors contributing to it, including competition from the ranched fur market, a saturated market, and changing tastes.
Roussow’s contradictory remarks reflect the dangers of central planning. He’s asking for the state to use its apparatus of legalized violence and theft to funnel indefinite amounts of money from Canadians’ pockets into fur-buying programs across the nation simply to “assist trappers to get out on the land.” He has the gall to say this knowing that the market is glutted with pelts and that the industry has virtually abandoned trapping as an inferior method of production (and possibly in keeping with some customers’ ethical concerns about wild fur and furbearer populations). Neither consumer demand nor costs make an appearance in his reasoning. The end is practically trapping for the sake of trapping: northern Canadians have made their living a certain way for a long time, so the Canadian government must supply them a buyer if there are none, rewarding that living over and above the vociferous preferences of consumers, who have voted wild fur down on their value scales.
Although the Saskatchewan Trappers Association clearly knows how to hunt for new fur buyers of its own accord, as its communications with the Fur Harvesters’ Auction shows, it too seemed to push for government intervention, albeit indirectly. The association reached out to the Ministry of Environment in its search for more auctioneers to replace the NAFA’s market share, not only seeking referrals but asking the department to do the legwork of connecting them with new buyers. Trappers also expressed concerns to the ministry about employment and compensation for unpaid furs provided to the NAFA, some of which were probably voiced through the association.
By directing their concerns to the state and asking for its assistance, trappers and trappers’ associations are tacitly calling for state intervention in the fur market. They are calling for insulation from market forces and for special privileges at the expense of other Canadians. Indeed, the Saskatchewan Trappers Association’s About statement shows this:
Composed of trappers and other interested persons, working for trappers and the fur industry in general…
We defend your right to trap and to harvest fur…
We speak…to Government resource related industries and the public in general…
We believe that the fur bearers of Saskatchewan should be properly managed for the benefit of everyone.
Although lightly cloaked in a rhetoric of public benefit, it is clear that the association’s goal is to prolong the lifespan of its industry by securing special favors from the state and pushing for barriers to entry for outsiders (such as trapping permits), as the final sentence implies. Attracted by the opportunity to coopt the power of the state, its goal is not merely to make a living, but to rig the industry in trappers’ favor by making economic failure impossible.
Instead of calling for the state to put a declining industry on life support at massive taxpayer expense, trappers and their allies in related industries should work to adapt to the changing market. Whether this will mean pursuing commercial trapping part-time or abandoning it altogether, creating fur farms, trying to influence consumer tastes, or simply hustling to find new buyers, as recently occurred, cannot be said for sure. The only thing that is certain is that uncertainty and change are facts of entrepreneurship and of human life, and that “protection” from market fluctuations is achieved only through a human shield put in place through coercion. It is no benign proposition, and it comes at the very real expense of others.
The fur trade has seen a lot of change in the past several centuries. The primary fur traded has varied, shifting from beaver (1600–1870s) to white fox (1900s–50s). The industry has also seen the expansion of its scope to include small furbearers such as ermine, as well as polar bears and seals. The division of the production process has varied, with the Hudson’s Bay Company once seeing a fox from its traps through the auction house, a process that market conditions eventually divided up, as we’ve seen. The stages of production themselves have evolved, as the dominance of fur farms indicates. If wild fur really brings consumers joy, satisfying the ends of their diverse value scales, the trade will transform again and see a new century.
Protectionism will only freeze the industry in its enervated transitional state and turn it into a stagnant affair, useful only to trappers—and arguably harming them simultaneously as they become dependent on rent seeking rather than their own resilience. Worst of all, it will be costly to taxpaying Canadians and to consumers, both due to the actual cost and the missed opportunity for greater human fulfillment through the natural (re)allocation of resources with shifting value scales.
Luxembourg citizens voted in an election last year. But as The Economist has noted, "48% of those who live there were not allowed a ballot-paper."
This is because a great many immigrants live in Luxembourg, but few of them quickly become citizens — which means few can vote.
According to the Migrant Integration Policy Index (MIPEX):
LU remains one of the most exclusive national democracies in the developed world, with the largest share of adults disenfranchised in national elections. According to 2013 OECD data, after 10+ years in the country, LU citizenship had been granted to only around 20% of the foreign-born, including among the non-EU-born, who are generally most likely to naturalise and see the benefits.
Not surprisingly, The Economist thinks this is a bad thing.
Nevertheless, few are claiming that immigrants are treated poorly in Luxembourg. Because of Luxembourg's small size and integration into the European economy, Luxembourg is quite open to migrant workers, both from neighboring countries, and from further abroad.In Luxembourg, as in much of the EU, naturalization law is a two-tier affair. Migrants who are already EU citizens have easier access to naturalization than non-EU citizens from places like Africa and Asia.
Nevertheless, immigrants continue to flock to the country, and make up approximately 45 percent of the population. Moreover, 160,000 workers commute daily into Luxembourg from France, Belgium, and Germany — "Luxembourgers are only the majority in their country when the sun goes down." In recent decades, many have become permanent residents.
Aware of complaints about a lack of more widespread suffrage in Luxembourg, voters in 2015 were given an opportunity to vote on expanding voting rights to foreigners in a referendum. 80 percent rejected the idea.
It should not be surprising, though, that many Luxembourg citizens are concerned that a sizable expansion of citizenship could bring about radical changes in Luxembourg through demographic shifts. A key strategy in slowing and managing this situation — while still allowing migration — is limiting access to citizenship.
A Case Study in Citizenship vs. Residency The case of Luxembourg is helpful in illustrating how naturalization and immigration are two different phenomena. Clearly, experience suggests Luxembourgers are open to inviting in immigrants and working with them in a variety of economic ventures. Many live permanently in the country. The immigrants enjoy property rights and legal due process. A lack of access to political participation does not imply that it is legally or morally permissible in Luxembourg to treat immigrant property rights as forfeit. After all, immigrants have usually entered into legal contracts with employers and landlords to secure income, housing, and other types of property. Abolishing these legal rights could be disastrous for the local economy.
Moreover, the fact that the economy in Luxembourg depends on this openness to immigrants means the voting citizens are incentivized against enacting laws that might severely limit immigration or which would induce immigrants to avoid the country. Many Luxembourg voters likely are aware that — for practical reasons, if nothing else — it is not to their advantage to begin cutting off immigrants from their property. (It's important to note virtually no one claims this widespread denial of voting prerogatives in Luxembourg constitute any sort of humanitarian crisis.)
Nevertheless, the response to Luxembourg's practice of relatively open immigration — coupled with restricted citizenship — has some observers claiming the policy is tantamount to a violation of rights. Hence we hear charges of "taxation without representation" or the use of the often-loaded terms "disenfranchisement" and "democratic deficit."
Should Citizenship Be Based on Location or Origin? The idea that residents of a place ought to be quickly afforded full citizenship based on their current physical location, however, is far from universal.
Historically, policymakers, kings, and bureaucrats have long debated the criteria to be met in determining how quickly or how easily new residents ought to be offered naturalization.
For example, citizenship has been historically based on various criteria including residency, ancestry, promises of military service, and sworn oaths between individuals.
These criteria often fall into one of two legal traditions of naturalization: jus soli and jus sanguinis. Jus soli ("the right of soil") is the principle that naturalization ought to be based on where one is located, and this often includes "birthright citizenship." Conversely, jus sanguinis ("the right of blood") is the principle that naturalization is based on one's marriage, parentage, or origins.
Graziella Bertocchi and Chiara Strozzi have summarized the development of these two traditions in Europe and the AmericasSee working paper: "The Evolution of Citizenship:Economic and Institutional Determinants" by Graziella Bertocchi and Chiara Strozzi. December 2005. (http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.540.4022&rep=rep1&type=pdf):
In 18th century Europe jus soli was the dominant criterion, following feudal traditions which linked human beings to the lord who held the land where they were born. The French Revolution broke with this heritage and with the 1804 civil code reintroduced the ancient Roman custom of jus sanguinis. Continental modern citizenship law was subsequently built on these premises. During the 19th century the jus sanguinis principle was adopted throughout Europe and then transplanted to its colonies. ... On the other hand, the British preserved their jus soli tradition and spread it through their own colonies, starting with the United States where it was later encoded in the Constitution.
The rise of jus sanguinis in Europe, perhaps not surprisingly, coincided with the spread of ethnicity- and language-based nation states in the nineteenth century. This in turn led to greater concern over whether or not migrants could integrate into each nation's linguistic or cultural majority.
Thus, jus sanguinis requirements became an attractive means of slowing down the process of integrating new citizens and of ensuring that new migrant groups would integrate through native parentage, marriage, or through long terms of residency.
Europe vs. The Americas The situation was very different in the Americas, however. It's not a coincidence that we find the Americas to be far more reliant on the concept of jus soli.
Bertocchi and Strozzi note:
At independence, most of the incipient states [in Latin America] chose jus soli as a way to break with the colonial political order and to prevent the metropoles from making legitimate claims on citizens born in the new countries.
This is true enough. But it's also true that far lower levels of population density, coupled with perennial labor shortages, made jus soli both more practical and more attractive to states in the Americas.
As Edward Barbier illustrates in his book Scarcity and Froniers, the Americas have long been characterized by a strong need for more laborers to take advantage of the vast natural resources present across the regions often sparsely populated lands. This led to a variety of immigration policies in the Americas designed to increase immigration. Argentina and Brazil, for example, paid migrants from Italy to settle in South America. Via the Homestead Acts in the nineteenth century, the US government offered free land to new migrants. And across the Americas, of course, many laborers were imported by force via the institution of African slavery.
The most-preferred strategy, however, was often to simply offer easy citizenship to new migrants, and to guarantee citizenship for the children of migrants via jus soli provisions.
At the same time, migration across borders has often been a challenge in many areas of the Americas. Many South American states are separated by deserts, mountains, and dense jungle areas. During the nineteenth century, crossing the Andes mountains was not a simple affair. Similarly, the borderlands between the US and Mexico were largely unpopulated prior to the twentieth century. Mexico's population was concentrated in the southern regions of the country, and migration north required significant effort. It wasn't enough to simply reach the border, either. Access to jobs and capital usually required an even longer journey north or west in the American interior.
Thus, by 1929, legal scholar James Brown Scott could write: "there is no American country which accepts that principle [i.e., jus sanguinis] as the sole test of nationality." Since then, as the relative ease of migration has increased in the Americas, some regimes in the Americas — including the United States — have been pressured to pare back the dominance of jus soli provisions, although little have been done in terms of substantive change.
On the other hand, post-World-War-II Europe began to move away from jus sanguinis provisions. While Scott could conclude that just sanguinis was largely absent in the Americas, he also found "There are at present seventeen countries in Europe in which jus sanguinis is the sole test of nationality."
Part of this was due to the higher population density and geographic compactness of Europe. Moving between political jurisdictions has long been relatively easy in Europe, compared to the Americas. Since the mid-twentieth century, however, the trend has moved toward greater use of jus soli. As of 2010, according to a study by Iseult Honahan,
Ius soli citizenship is widely but by no means universally available in Europe. 19 European countries from 33 studied awarded ius soli citizenship at birth or thereafter. 10 of these countries grant ius soli citizenship at birth, and 16 after birth. ... [I]us soli in its pure (or unconditional) form is not found in Europe since its abolition in Ireland in 2004.
There are, of course, a number of conditional jus soli provisions that exist. These can include automatic birthright citizenship for foundlings and stateless children. But many states have at least some weak jus sanguinis provisions requiring birth to at least one native citizen. Naturalization can occur outside of these conditions, but these provisions often require years of permanent residency, citizenship classes, and other mandates.The extent to which jus soli provisions are adopted is not necessarily synonymous with ease of naturalization. For example, the United States could abolish birthright citizenship while also expanding naturalization through other means. On the whole, however, the degree to which jus sanguinis requirements are employed generally reflects a regime's overall openness to expanding citizenship quickly and easily. Notable exceptions exist, such as Sweden, which is restrictive in terms of just soli, but has permissive naturalization-by-application policies.
Honahan concludes that the trend in Europe "is towards the wider availability of jus soli citizenship" but with many conditions attached in most cases. Europe-wide, jus soli provisions occur across a spectrum, with more strict provisions present in Eastern Europe and Switzerland:
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Returning to our Luxembourg example, we can note that Luxembourg employs a "double jus soli" standard in which children born in Luxembourg receive automatic citizenship only if one of the parents was also born in Luxembourg. Honahan thus classifies Luxembourg as a jus soli country, but as we have seen, the situation in practice is one in which citizenship remains significantly restricted.
It is important to keep in mind, moreover, that the relative restrictiveness of naturalization law does not necessary reflect the restrictiveness of immigration law.
After all, Luxembourgers are frequently outnumbered by migrants, even if citizenship is restricted. Similarly, Switzerland has one of the largest populations of foreign-born residents in the world, yet is highly restrictive in terms of naturalization. Norway is similarly restrictive, although its foreign-born population is equal to that of the United Kingdom, which employs a more liberal jus soli standard.
This mismatch between immigration policy and naturalization policy highlights for us the fact that immigration has never been merely a matter of economic relationships. For example, among laissez-faire liberals, both Ludwig von Mises and Murray Rothbard recognized that there is no economic argument against immigration. The situation is different, however, when we consider matters of citizenship and political participation. In these cases, migrants expand their role beyond the private sector and into the political sphere. As Mises noted, this fact — that fact that immigrants are not merely consumers or workers — carries with it a variety of complicating factors around the question of who shall be in control of the state. The smaller the state, the less relevant this question is. But in the presence of a robust state apparatus — especially one that controls educational institutions and social-welfare programs — this question becomes far more important.
Apparently, Luxembourgers are quite aware of these facts and have decided to maintain and expansive immigration apparatus while limiting citizenship. On the other hand, thanks to geography and the legal traditions of the New World, many Americans have a skewed view of the alleged inseparability between immigration and citizenship. This has clouded the American debate over birthright citizenship.
The headline was unambiguous: "Brexit Is Done: The U.K. Has Left the European Union." As of January 31, the European Union (Withdrawal) Act of 2018 has become law and the United Kingdom has begun the withdrawal process from the European Union. The transition process will continue throughout 2020 as the UK and EU governments negotiate the nature of the future relationship between the UK and the EU.
Now that the British exit from the European Union is a legal reality, the economic situation in the UK has been surprisingly sedate.
This will be a surprise for those who believed the assurances of media pundits and economic experts that the UK's economy would become every more crippled as Brexit edged closer.
Yet economic turmoil has been sparse. Certainly, markets and companies have moved to adapt to the new coming reality of the UK as largely outside the EU's common market. But it is hardly clear that the country is poised on the edge of a Brexit-caused economic disaster. This is true even though Brexit has clearly been all but inevitable since December's general election.
Predictions of Doom It wasn't supposed to happen this way.
Opponents of a British exit—and the economists they employed—insisted that not only would the eventual withdrawal be disastrous for the UK economy, but that even the market uncertainty associated with an eventual withdrawal would cripple the British economy.
For example, the UK Treasury released a report in May 2016 stating:
A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.
According to the report, this economic disaster didn't require a completed exit from the EU. The mere act of voting in favor of leaving, Brits were told, would trigger enormous economic problems.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) in an April 2016 report predicted that Brexit would cost Britain the equivalent of more then three thousand pounds per household and "would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD."
More nuanced analyses debated the effects of "no-deal Brexit" as opposed to a more "soft" Brexit. But in the lead-up to the election—and in the years following—the message was clear: Brexit is going to make Britain significantly poorer.
Yet investors, entrepreneurs, and consumers, appear unconvinced that the barriers to international trade raised by Brexit will be sufficient to send the UK economy into a tailspin. Investors have not abandoned UK investment opportunities, and entrepreneurs are not anticipating a crushing tariff burden. Even if the EU insists on being petulant, the UK has other important trading partners. Accordingly, by January of this year, The Telegraph reported, "The strength of the British economy is defying predictions of post-Brexit doom," and Bloomberg reports that in spite of predictions of massive losses in the financial sector, "London has extended its lead in foreign exchange and interest rate derivatives trading since the referendum." The Telegraph has also noted that as a finalized Brexit edges closer, hiring has increased and economic growth—as measured by economists' usual methods, has increased.
"Transaction Costs" Include More Than Trade Barriers The claim that Brexit would make everyone poorer was premised on an obsession with the idea that Brexit would drive up so-called "transaction costs" for British businesses in terms of tariffs and other barriers to the free movement of labor and goods. The assumption was that business with the Continent was streamlined and basically frictionless, while withdrawal from the EU would raise many new barriers.
This is a common argument among economists and politicians who favor greater streamlining of trade and migration through international agreements.
Certainly minimizing transactions costs in this way is always a good thing, all else being equal. It's good when trade increases, and when countries—and the individuals within them—are able to take advantage of the the division of labor. It's also good when consumers and entrepreneurs are left to choose for themselves what products they wish to buy and from where.
But the problem with economic integration of the EU sort is that it also tends to come with political integration.
Thus, economic integration comes with a host of strings attached in the form of bureaucratic management from above. That management has been extensive, and the regulatory burdens associated with it are significant.
Ralph Peters at the Hoover Institution refers to the EU as "a bureaucratic monster" that interferes absurdly with "the structures of everyday life."
Even worse, trying to reduce this bureaucratic burden is extremely difficult for any single member of the EU. Any significant change to Europe-wide bureaucratic edicts requires an enormous amount of effort in marshaling support from other member states and pushing through reforms. The weight imposed on smaller businesses and entrepreneurs is especially damaging. As Peter Chapman noted at Politico, "the EU's general antipathy towards entrepreneurs remains a huge barrier" to economic improvement. Although the nominal benefits of membership in the EU may be easy to see in terms of reduced trade barriers, the net benefits are far less clear to those who are aware of the true cost of the EU bureaucracy. Not only does EU membership come with high transaction costs in terms of added regulations, but the nature of the EU's unelected and foreign institutions likely made the bureaucracy less responsive, less flexible, and more permanent. That in itself is an added burden above and beyond the regulations themselves.
Some anti-Brexit commentators have noted the obvious: namely that Brexit does not automatically bring relief from regulatory burdens. This is certainly true, but all this means is that British entrepreneurs and consumers are presently banking on the idea that at least some regulatory relief will come, and that the cost of international trade will not rise to crippling levels. But it also means that if UK policymakers want to change or reduce these bureaucratic burdens, it's not necessary to go to Brussels to beg for relief. In other words, the private sector appears to be taking a long-term view while the anti-Brexit pundits are obsessing over the immediate future.
So, those who are anticipating economic advantage from Brexit are not without reason to be optimistic. As was noted by numerous pro-Brexit observers, the UK's trade relationships are global, and not lopsidedly reliant on favorable terms with the EU bloc. In many ways, membership in the EU has restricted UK trade with the outside world. China and eastern Asia are quickly becoming more important to a global trade strategy than the EU. This is true even for core EU countries such as Germany. Moreover, should political coalitions of entrepreneurs, taxpayers, and consumers seek regulatory relief, they will have greater ability to seek change in London than in Brussels.
Economists Can't Predict the Future So what happens next?
Admittedly, the fact that a severe economic slide in the wake of Brexit hasn't happened so far doesn't mean that it can't happen. But then again, even if the UK's economy goes downhill, how much of that is attributable to Brexit? Boom-bust cycles are still a reality, and they can be triggered by many factors beyond leaving a trade bloc.
But there's one thing we do know: the same "experts" who predicted immediate economic chaos following a "leave" vote are unlikely to accurately accurately predict any coming effects of Brexit.
Indeed, the complexity of the coming changes in the legal, political, and international landscape is such that any responsible economist should admit that he or she doesn't know what's going to happen.
In an article titled "Mission Impossible: Calculating the Economic Costs of Brexit," Roch Dunin-Wasowicz writes at the London School of Economics:
As a matter of fact, estimating the costs surrounding a future stochastic event (or structural break) is as easy as predicting next year’s weather. Financial mathematicians know this matter better than anyone. Considering that there has not been a previous exit from the European Union (nor in any highly integrated economic area), estimating the full costs was never going to be possible. The attempts that were made prior to the referendum involved many and heavy assumptions, including strong premises regarding the reaction of the other economies and trading partners within the EU, and beyond. Moreover, the issue involves a multitude of aspects beyond those strict[ly] trade-related, such as productivity and competitive edge, labour mobility, education, firm complementarity across borders, macroeconomic interdependence, (macroeconomic) policy alignments, financial interdependence, financial market flexibility, financial innovation, liquidity, systemic risks and financial stability, or prudential policy effectiveness.
This reality, however, won't stop anti-Brexit activists from blaming every negative development in the UK in coming years on Brexit—or on the people who supported it.
[From The Freeman, September, 1995] Governments were threatening trade wars with retaliatory tariffs and quotas, belligerents suffered currency devaluations and balance of payments deficits, and everyone threatened legal action. The United States and Japan in 1995? No, this situation described the relationship between the states in 1780.
Prior to ratification of the Constitution, states had their own development policies. Some, like Virginia, tried to stimulate their existing agricultural cash crops; others, like Connecticut, tried to stimulate industrial development at the expense of agriculture. Each state had its own paper currency which appreciated or depreciated against those of other states, increasing uncertainty and therefore inhibiting interstate trade. Large and unequal government debt existed from state to state. Some, like Rhode Island, inflated it away and suffered a boom-bust cycle; others, like Massachusetts, raised taxes to pay it, squelching economic activity and spawning open rebellion.
Delegates from the states sent to Constitutional Convention in 1787 put high priority on solving these problems of interstate trade. That’s why the U.S. Constitution authorizes Congress “to coin money” and forbids the states from printing or coining money; it forbids the states from erecting trade barriers and authorizes Congress “to regulate commerce with foreign nations and among the several states.”
By allowing the market to broaden, the integration of state economies had immense benefits. A uniform money removed the inefficiency of bartering different monies and the uncertainty of currency fluctuations. Elimination of trade barriers allowed the division of labor to develop unimpeded, thereby greatly increasing productivity by an efficient allocation of factors of production.
A dairy farmer in Pennsylvania could obtain a cigar more cheaply from a tobacco farmer in Virginia than by growing his own at the sacrifice of dairy products. Likewise a textile operator in New England could obtain milk more cheaply from the Pennsylvania dairy farmer than on his own efforts at the sacrifice of clothing.
Only on a free market where production is determined by consumer preferences can those preferences be satisfied to the greatest extent. Dairy farmers, tobacco farmers, textile operators, and all individuals not only obtain the highest quality products at the lowest prices but receive the greatest income for the use of their factors in producing goods according to comparative advantage.
The Role of Government All that government need do to foster wealth creation is protect private property and contract. By enforcing a legal code requiring restitution by criminals to property owners for theft, fraud, and other violations, government is using its power to foster trade.
When using its power to violate property and contract, however, government is managing trade. Domestically, such a policy is called regulation; internationally, it is called mercantilism. Or it was, until recently, when apologists have taken to calling it “free trade.” Both NAFTA and the Uruguay round of GATT were widely but mistakenly called free-trade agreements.
Similarly, the ink was barely dry on the Constitution when the Hamiltonians began to embody their view that centralizing, i.e., monopolizing, power over money and both interstate and international trade in the national government should be the fountainhead of a system of domestic regulation and international mercantilism.
Instead of adopting either a gold or a silver standard as a free market would, Congress opted for the Hamilton-Jefferson bimetallic standard, an unworkable hybrid that vacillates between gold and silver. Worse yet, the legality of banking with fractional reserve notes and the imposition of the Hamiltonian central bank were accepted.
Later, as Civil War emergency measures, the national government issued fiat paper money, forced its acceptance with legal tender laws, and established a federal regulatory system for banks in the National Banking System. This halfway-house to total national government control over money and banking was completed with the Federal Reserve System, which has given us the chronic inflation and business cycles of the twentieth century.
A False Dilemma Whether or not the full exercise of national power over money in the Fed has been better than the devolution of that power in the states is an open question. But the dilemma the Founders saw is false. The way of escaping the detrimental consequences of power centralized in the national government or decentralized in the states is to choose the free market. To argue that such power cannot be denied to government is to surrender to despotism. The concept of limited government necessarily implies that valuable powers can be denied to government.
In monetary affairs this means government protection of, and absence of intervention into, private property and contract in money production. Entrepreneurs left to their own devices, within a system of private property protection, will best satisfy consumers with a pure gold standard—money as gold coin and notes and deposits 100 percent backed by gold. Such a system provides the benefits of uniform money without the drawbacks of arbitrary inflation.
The benefits of eliminating state-erected barriers to trade were increasingly offset by the Hamiltonian policy, enunciated in 1791 in his “Report on Manufactures,” of mercantilism and regulations. In it he called for tariffs, quotas, prohibitions, inspections, regulations on foreign imports and prohibitions of agricultural exportation, and subsidies for domestic manufacturing to encourage domestic industrial development.
Acceptance of Hamilton’s pro-industrial, anti-agricultural, anti-British foreign policy led to a series of international trade barriers, like the Embargo Act and the Non-Intercourse Act, that culminated in protectionist measures. Beginning with the tariff of 1816 these measures mushroomed into the Tariff of Abominations in 1828 that galvanized the agricultural South against the industrial North. South Carolina led the way in nullifying the Tariff Acts of 1828 and 1832, and threatening secession if the national government trumped its hand.
Having their agricultural economy disabled for the benefit of manufacturing interests was a primary grievance the Southern states used to justify secession from the Union. The national government’s war effort was used as reason for a vast expansion in national government power, and victory provided the excuse to consolidate it at the expense of the power of the states. It is doubtful that delegates from Southern states who signed the Constitution in 1787 granting limited powers to the national government could have imagined in their worst nightmares what their creation would eventually do to their states.
Since Reconstruction, this power has been used increasingly to regulate economic activity. The late-nineteenth century saw passage and enforcement of antitrust laws and regulatory agencies such as the Interstate Commerce Commission. The Progressive Era extended the regulatory framework, as did World War I. New Deal legislation, war powers during World War II, civil rights laws, and Great Society programs; all of them furthered the march of the Leviathan state.
Whether or not the full exercise of national power over the economy has been better than the devolution of that power in the states is often hotly debated. But it too poses a false dilemma. America need not accept either centralized regulatory power in a national government nor decentralized regulatory power in the states. The free market, based on protection of private property, will secure the blessings of liberty without government regulation of any kind, from any source.
The lessons from American history for deciding current foreign economic policy are clear. American prosperity depends on enacting a policy of free trade at home and abroad. Just as the states are forbidden to manage interstate commerce, the national government should be forbidden to manage international commerce. Then the advantages of the division of labor could be extended to Pennsylvanians and Virginians not just between themselves, but with Germans and Japanese as well.
Americans could have their standards of living raised by purchasing less expensive, higher quality Japanese cars, expanding the production of export goods where they have comparative advantage and surrendering the production of goods where they do not have comparative advantage.
Far from being detrimental, giving up tasks where one has a comparative disadvantage to move into those where one has comparative advantage raises income. A Pennsylvania farmer who now devotes his land to growing tobacco will increase his income by shifting to dairy farming. Just as he has no worry about being an “unemployed tobacco farmer,” auto producers have no unemployment worries provided they are willing, like the rest of us, to accept employment in areas of their comparative advantage.
The transition of employing factors in different production activity is a normal, necessary part of any system that satisfies changing consumer preferences. In fact, the difficulty of transformation of production out of autos and into other activity exists only because past mercantilist policies have artificially built up domestic auto production. Because of this, any move to free trade would entail a large, rapid re-allocation; but if free trade had always prevailed, the re-allocation would have been smooth and gradual.
If Americans choose a political solution to the current international economic problems, they will face a disastrous dilemma. Maintaining the status quo forces America into the same role as one of the original 13 states in the late eighteenth century. We will continue to suffer the ills of managed trade: trade wars, balance of payments deficits, currency devaluations, and stagnating standards of living. Accepting the logic of centralizing political power, as with the GATT-created World Trade Organization, will lead to international regulation. Supranational institutions will come to command the economies of different countries in the way that the national government came to command the economies of the various states.
We must heed the lesson that so many Americans have paid so dearly in liberty and prosperity for us to learn. America must reject the false dilemma of managed versus regulated trade and choose free trade. That means that government at all levels must step aside and allow markets to work.
When it comes to the immigration debate, very few people advocate for either totally closed borders or totally open borders. However, as soon as it is admitted that at least some movement across borders ought to be allowed — or that at least some of the migrants are to be regulated — the question quickly arises: which migrants are to be allowed, and which are to be prevented entry?
Rhetorically, this problem is often dealt with today by an appeal to government authority. Namely, it is often stated that "legal" immigrants are fine, but "illegal" immigrants are bad.
This, of course, misses the point. The question still remains: which immigrants ought to be considered legal and which illegal? What ought to be the standard of determining legality?
The History of "Undesirable" Migrants In the nineteenth century, immigrants were said to be either desirable or undesirable based on specific traits. Immigrants that were determined to be unable to work, mentally ill, prone to criminality, or likely to become dependent on state assistance were deemed undesirable. This was — at least in theory — applied across the board, regardless of country of origin. Prior to the 1880s, this determination was usually made by state or local authorities. And those who were deemed undesirable could also be deported.
These sorts of laws go back to pre-Revolution times and even back to England in some cases, where "poor laws" were introduced to regulate vagrants and what we would today call "welfare recipients." Local governments were empowered to prevent the local poverty-relief funds from being overwhelmed by new residents looking for what we'd today call "social benefits."
State-based restrictions on movement, for example, were written into the Articles of Confederation which noted interstate movement was not guaranteed to "paupers, vagabonds and fugitives from justice."
Later, states that received large numbers of foreign migrants, such as Massachusetts and New York, focused on refusing entry to people suspected of being mentally ill, physically disabled, potential paupers, or criminals.
Note, however, that these laws set out specific criteria for individual persons. Those who were deemed able to support themselves and be no burden on the public purse were allowed to stay.
Even national policy — most of which failed to gain passage in Congress — directed federal officials to ensure that new immigrants "were not paupers, nor convicts."
Thus, it is not surprising that Gerald Neuman concludes in his survey of nineteenth-century immigration policy: "Neither Congress nor the states attempted to impose quantitative limits on immigration" [emphasis in the original].
Later Attempts at Quotas The Chinese Exclusion Act of 1882 signaled the first attempt by the federal government to enact general peacetime exclusions of people based on group membership.
But even that idea did not work its way into the first broad national policy found in the Immigration Act of 1891. The 1891 legislation continued to stick to the policy of excluding people based on undesirable traits found in individuals. Historian Hidetaka Hirota lists the criteria:
The 1891 law also expanded the excludable category to cover people with mental defects and insanity, paupers and people "likely to become a public charge," people with contagious diseases, people convicted of a felony of other crime involving "moral turpitude, polygamists, and assisted emigrants" — making all of them deportable.
It was only in the twentieth century that federal policies then turned toward quota systems.
The Immigration Act of 1917 expanded bans on immigrants from Asia, above and beyond the Chinese exclusion. Sticking to the policy of individual litmus tests, however, the new legislation also required literacy tests of new immigrants.
With the 1924 Immigration Act, however, true quotas were introduced for the first time. The quota was
set at three percent of the total population of the foreign-born of each nationality in the United States as recorded in the 1910 census. This put the total number of visas available each year to new immigrants at 350,000.
The restrictions did not apply to migrants from the western hemisphere.
But why set the quota as a percentage of foreign born as recorded in the census? Is this based on any objective standard?
Of course not. It's a number pulled out of thin air by politicians. Moreover, adopting an arbitrary number for the "correct" number of immigrants from a certain country is akin to declaring a quota for the "correct" number of shoes to be imported into the country. Nor are government agents qualified to determine the "correct" number of tons of steel or pounds of sugar allowed into the country.
[RELATED: "Only the Private Sector Can Determine the 'Correct' Number of Immigrants" by Ryan McMaken]
Those who support such quotas will nevertheless often attempt to mask their arbitrary nature by claiming anyone who opposes quotas is for totally open borders.
But, as Neuman noted, the border-control scheme that prevailed during the nineteenth century — one that refused entry to presumed paupers and criminals — was anything but an open-borders situation.
There is no denying that the border controls were difficult to enforce. Much of this was due, however, to the technological limitations of the time.The tools available to states and towns in identifying those who were ill or disabled were extremely limited. Moreover, it was difficult to determine ahead of time if new migrants were likely to become dependent on state services.
To deal with this state governments began to require bonding from those involved in the importation of migrants. Neuman writes:
Beginning in 1820 ... Massachusetts returned to the colonial system of demanding security from masters of vessels when their passengers seemed likely to become paupers. The 1820 statute required a bond to indemnify the town and the Commonwelath for expenses arising within three years with respect to any passenger lacking a settlement in the Commonwealth who was considered liable to become a public charge.
This law was later modified in 1837, including new provisions under which
the master was forbidden to land without bond any alien passenger found upon examination to be within a group of categories of persons presenting a high risk of becoming a public charge, including those with mental or physical disabilities.
The bonding requirement went even further in 1852 when:
the state authorized officials to demand bond or a higher commutation payment to cover passengers whom they judge to present an intermediate risk of future indigence ... [after the bonding requirement for intermediate-risk migrants was abolished in 1872] Bonding of high risk passengers continued ... as did a newer requirement of bonding by corporations importing labor into the state.
Similar laws were adopted in other port cities, especially New York, and applied in attempts to minimize costs associated with new migrants turned paupers.
The focus, of course, was not on overall numbers, but on avoiding costs associated with new migrants who were unable or unwilling to support themselves.
Unlike a blanket quota system, the targeted approach is more rational, non-arbitrary, and attempts to get at the true heart of most political objections to immigration — namely, that new migrants will become a drain on public amenities or engage in criminal behavior.
Given the problems and expense of general enforcement, however, it's easy to see why the Massachusetts legislature turned to bonding as shifting the burden of pauper immigrants to those who "sponsored" them in some way.
The Individual Approach Is Better Indeed, a system of sponsoring migrants through bonding has potential as a far more reasonable means of insuring that new migrants are actually being invited into the destination country, and will not become public charges.
Tho Bishop, for example, has examined this issue in light of refugees, but it can be applied to all sorts of migrants. Ryan Khurana has also written on the potential for sponsorship-based migration policies.
After all, if an employer, family members, or church organization wishes to invite a new migrant into the country to work or live, a basic respect for the rights of private property and free contracting would prohibit the state from interfering. However, if there remains a concern that the new migrants might live off the public purse, the strategy of bonding would be far less disruptive and arbitrary than government-invented quotas on how many migrants are to be allowed entry.
If migrants go on the public dole, or engage in criminal behavior, bonding would allow for the taxpayers to recover their costs from the sponsors. The migrant in question would presumably be deported for breaking the bonding agreement.
The superiority of this system over the general quota system is evident since it would allow for private organizations to freely engage with employees, contractors, and family members who would be arbitrarily excluded under a quota system — even if they did not engage in criminal behavior or fail to support themselves financially.
Some anti-immigration hardliners might nevertheless take exception to this, claiming that it is administratively too costly. By arguing this, however, they would essentially be making the collectivist claim that private property rights can be voided for entire groups of people based on assumptions about one small portion of the group. We hear similar arguments when opponents of physical cash claim cash ought to be abolished because some people use cash for criminal enterprises. There's no denying that some criminals use cash. Is this therefore justification for destroying the property rights of all users of cash? Clearly not. Nevertheless, arguments in favor of broad quotas or outright bans on migrants based on group membership employ this essential logic.
After unleashing a disruptive trade conflict with China, the Trump administration has also escalated the lingering “cold tech war” between the two rival powers. Over the last two years, the US has passed new rules limiting China’s investments in the US, restricting bilateral information and communications technology (ICT) trade and controlling exports of sensitive and emerging technology to China. The US has also restricted research access and university exchanges with China and is aggressively lobbying international allies to lock the Chinese ICT leader HuaweiNew Huawei-related restrictions issued in May 2020 stipulate that nothing produced overseas with US parts or technology can be sold to Huawei, effectively preventing major companies in third countries from doing business with Huawei. out of US markets, suppliers, and global 5G networks. The radicalization of the US stance against China invites two questions: Has China become such a real threat to the West’s technological superiority? And who stands to win or lose from the heating up of the US-China “tech war”?
Shortly after the Soviet Union launched its Sputnik satellite in 1957 and seemed to lead the US in the race to be first in space, Murray RothbardMurray N. Rothbard, Science, Technology, and Government (Auburn, AL: Mises Institute, 2015). questioned the alleged superiority of Soviet centrally planned science. He claimed that science and technology advance best in a free market because governments cannot allocate resources efficiently in any activity, including research. He also emphasized that the outcome of centrally planned science in the Soviet Union was to replace scientific goals and criteria with political agendas, further reducing innovation efficiency. Rothbard concludes by advocating for a more free market stance in science and technology in the US rather than emulating the Soviet Union’s gargantuan state-supported scientific effort. Three decades later, the Soviet Union collapsed and history proved Rothbard right.
China is the West’s new technological challenger. However, China stands in contrast to the former Soviet Union as it began the transition to a partial market economy four decades ago. The communist leadership still keeps a tight grip on the economy via state-owned enterprises (SOEs), which play a key role in strategic sectors, four major public banks directing credit in the economy; exclusive land ownership by the state; and massive regulatory discretion of both central and powerful local governments. Yet, unlike in the Soviet Union, a buoyant private sector has emerged that accounts for about 60 to 80 percentSenior Chinese government leaders repeatedly stated that domestic privately owned enterprises contribute “more than 60% of GDP.” However, some analysts argue that this figure does not include foreign invested companies and private households in agriculture, which would increase the private sector share to about 77 percent of GDP. See Chunlin Zhang, How Much Do State-Owned Enterprises Contribute to China's GDP and Employment? (World Bank, July 15, 2019), http://documents1.worldbank.org/curated/en/449701565248091726/pdf/How-Much-Do-State-Owned-Enterprises-Contribute-to-China-s-GDP-and-Employment.pdf. of total output, contributes nearly two-thirds of the country’s growth, and accounts for about nine-tenths of exports and new jobs. In addition, the stock of foreign direct investment (skyrocketing from $186 billion in 1999 to $1.77 trillion in 2019 [United Nations Conference on Trade and Development (UNCTAD), 2020]) has been instrumental in moving China up the global value chains. Since China joined the World Trade Organization (WTO) in 2001, its share of global exports has risen about thre-fold and its share of global manufacturing has surged from below 10 percent in 2004 to above 28 percent in 2018 (graph 1). More important, China’s share of higher-value exports, such as machinery and electrical equipment, accounts for almost one-third of total global trade today (graph 2).[[{"fid":"91654","view_mode":"default","fields":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":"US China Exports","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":"US China Exports","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"US China Exports","class":"media-element file-default media-wysiwyg-align-center","data-delta":"1"}}]]And yet the Chinese leadership was not satisfied with the rapid pace of the market-driven innovation progress and pushed for more government intervention to accelerate it. In 2015 it launched the “Made in China 2025” strategy, aiming at bringing China to the top of world economies in innovative sectors such as robotics, aerospace, and energy-saving vehicles. The plan builds on earlier government policies to spur “indigenous innovation” and relies on heavy government support for public and private investments in research and innovation and targets for local manufacturing content. It is not surprising that the large government funding brought R&D (research and development) spending above 2.2 percent of GDP in 2018, which is still less than in the US. China climbed in international innovation rankings, such as the Global Innovation Index (graph 3), and has also become the world leader for the number of patent applications filed,In 2018, about 1.5 million patent applications were filed in China, almost equal to the next ten countries combined, and Huawei was the largest filer in the world. WIPO IP Facts and Figures 2019 (Geneva: World Intellectual Propert Organization, 2019), https://www.wipo.int/edocs/pubdocs/en/wipo_pub_943_2019.pdf. academic papers,In 2018, 528,263 scientific articles were published in China vs. 422,808 in the US (World Bank 2020). and STEM graduates.In 2016, China had 4.7 million graduates in science, technology, engineering, and math (STEM), vs. 0.6 million in the US. Niall McCarthy, "The Countries with the Most STEM Graduates, Statistica, Feb. 3, 2017, https://www.statista.com/chart/7913/the-countries-with-the-most-stem-graduates/. However, most of China’s success indicators capture primarily the input effort, while the efficiency and quality of China’s innovation output remain questionable. China may have gone up the value chain relatively quickly, but, in many cases, the high-tech products it exports are only assembled in China by foreign multinationals like Apple, Intel, Foxconn, Cisco, and Samsung. Chinese leading ICT companies such as Huawei, Alibaba, Baidu, and Tencent are not technologically independent either. They must rely on key international inputs, such as higher performance chips. In addition, Chinese SOEs remain notoriously inefficient, heavily indebted, and a drag on the economy’s overall productivity. 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It is pretty clear why China’s interventionist push for technological autonomy and world supremacy has fallen short of expectations. First, “Made in China 2025” exaggerates the importance of innovation in moving up the value chain. According to Rothbard, production may be limited by technological knowledge, but it is even more limited by capital accumulation.Murray N. Rothbard, Man, Economy, and State with Power and Market, 2d scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2009), p. 542. The proof is the large pile of scientific ideas that remain idle because there are not enough factors of production to help them materialize. Second, subsidizing and championing key industries and companies distorts the market allocation of factors of production, hampers capital accumulation, and wastes valuable resources. Advanced economies are based on highly complex and interlinked production processes in which the whole structure of production must be capital intensive, not just a few chosen activities.A good example is China’s inability to develop a competitive commercial aircraft or semiconductor industry as long as other domestic industries cannot provide state-of-the-art intermediary inputs. Another one is Korea’s plight in its 2019 trade spat with Japan. The Korean economy is more technologically advanced than China's, and yet it cannot be “independent” either. When Japan imposed restrictions on the export of chemicals vital to the Korean semiconductor and electronics industry, severe anxiety and supply disruptions followed. Third, China’s autarchic industrial policy has reduced imports of equipment and technology, which has weakened the overall capital intensity of the economy, undermining its own efforts. Ultimately, China’s geostrategic ambitions and uncompromising political stance backfired and the country is facing an international boycott on sensitive technologies today.
Several arguments suggest that although China has reduced its tech gap with the West it nevertheless remains far behind. Despite the high number of Chinese patent applications, only a small portion are filed abroad due to higher cost, suggesting that the applicants themselves doubt the need to protect their rights in other countries (graph 4Triadic patent families are a set of patents filed at three major patent offices: the European Patent Office (EPO), the Japan Patent Office (JPO), and the United States Patent and Trademark Office (USPTO).). With only 2.4 researchers per thousand employed, China has about four times fewer researchers than the US, and of these, 20 percent work for the government compared to only 5 percent in the US (Organisation for Economic Co-operation and Development [OECD] 2018). As a result, China remains a major importer of intellectual property. In 2018, China paid about $36 billion in royalties and licensing fees, recording a net deficit of around $30 billion compared to the US, which had a surplus of $73 billion.See data at Index Mundi, https://www.indexmundi.com/facts/indicators/BX.GSR.ROYL.CD. Only about 16 percent of the semiconductors used in China—a key component of electronic products—are produced domestically. Moreover, only half of those are manufactured by Chinese firms, which technologically are at least a decade behind their main competitors from Taiwan, the US, and Korea.See also Jane Li, Why a Taiwanese Chip Maker Is at the Heart of US-China Tech Fight," Quartz, May 24, 2020, https://www.msn.com/en-us/money/companies/why-a-taiwanese-chip-maker-is-at-the-heart-of-us-china-tech-fight/ar-BB14vgXF. Commercial aircraft is another sector where China has failed to deliver, given both the technical complexity of engines and avionics and the fact that an SOE was put in charge of leading the production breakthrough. At the same time, the heavily subsidized and regulated electric car sector, which is by far the world’s largest, with 1.2 million cars produced by over four hundred manufacturers in 2019, suffers from overcapacity (Kennedy 2020). Finally, China’s GDP per capita and associated productivity was still only about 15 percent of the US levelOr 25 percent if measured in PPP (purchasing power parity) terms (World Bank 2020). in 2019, reflecting much lower capital endowmentChina’s capital stock could have been much higher absent its policy of accumulating more than $3.1 trillion of foreign exchange reserves and of investing abroad more than $2.1 trillion in FDI (foreign direct investment), largely driven by the state-run Belt and Road Initiative. and technological knowledge.
If China is much less of a technological threat than it seems, then what explains the drastic reaction from the US government? The US anti-China campaign is not guided by market principles, but by fighting mercantilism with mercantilism and reluctance to recognize the reality of a multipolar world. Unfortunately, this is not to the benefit of innovative US businesses. The latter make dozens of billions of dollars by selling technology and licences abroad every year and government restrictions would reduce their revenues and incentives to innovate. The US Semiconductor Industry Association has already spoken against the possibility of losing access to manufacturing in China by arguing that this would reduce the US international competitive edge at the high-value end of the supply chain (Hammer 2020). A survey conducted by the American Chamber of Commerce in Beijing showed that for hundreds of US companies in China the issues of forced technology transfers and weak protection of intellectual property—alleged reasons for the “tech war”—are relatively negligible and the situation has notably improved. In general, very few US companies plan to relocate out of China. As a final point, Danni Rodrik noted that economists complaining about China’s damaging industrial policy are not very consistent when they either claim that market intervention does not usually work or argue in favor of emulating China’s approach. After all, trade and tech protectionism are convenient instruments to mask the bad effects of labor regulations and inefficient welfare states in the Western economies.
“Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals.”Ludwig von Mises, Human Action: A Treatise on Economics, scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 1998), p. 157. This is how Mises introduces the concept of division of labor in his magnum opus, Human Action. Labor division and specialization (both within country borders and internationally) are more beneficial than autarchic production for all individuals. This is not limited to the production of goods, but applies also to the production of scientific ideas and innovation. Government interference with international specialization in innovation and trade can only reduce capital accumulation, productivity and living standards in the long run. That is why the US-China “tech war” can have no winners, but many losers.
Europe is today in the midst of a debate on the future of the European Union. It is not the first one: back before the Maastricht Treaty was passed in 1992, political leaders were discussing as well about where the EU, or as it was called back then, the European Community, was heading. Should it go the way of the “ever closer union,” or revert back to the fundamental principles? There was a split going through Europe on questions like this.
This was the situation in which the British prime minister Margaret Thatcher found herself on September 20, 1988, when she stepped in front of a crowd at the College of Europe in Bruges. “I decided that the time had come to strike out against what I saw as the erosion of democracy by centralization and bureaucracy, and to set out an alternative view of Europe’s future,” she would later write in her memoirs The Downing Street Years.
The result was today’s infamous yet magnificent ‘Bruges speech,’ which was far from being anti-EU, but a stark warning against Brussels, and an attempt to save the EU in the wake of federalists demanding more and more integration. This week, we are celebrating the thirtieth anniversary of this speech. And, as it turns out, it has stood the test of time shockingly well. Indeed, many of the warnings that Thatcher put forth are even truer today (which you can read in our new study).
The European Heritage In Thatcher’s vision, the European heritage is of crucial importance. She tries to teach us that Europe can be proud of its history. While wars did play too big of a role in the past, Europe is still the continent in which the ideal of individual liberty prevailed before anywhere else. It is the continent which brought forth many of the greatest innovations, artistic pieces, literary works, and intellectuals the world has ever seen.
Great Britain has played an instrumental part in the European story, Thatcher makes clear: “Our links to the rest of Europe, the continent of Europe, have been the dominant factor in our history.” Britain has contributed mightily to European history and its values with the Magna Carta, the Glorious Revolution, and many other major steps on the path to freedom. But so has Britain benefitted from its link to mainland Europe, for instance having “borrowed that concept of the rule of law which marks out a civilized society from barbarism.”
This special relationship, says Thatcher, must be retained. Today this is even truer: on the eve of Brexit, it is of the utmost importance to keep this mutual understanding between the two sides intact, regardless of whether Britain is in- or outside of the EU.
Despite the millennia-long European history of (much) success, we need to remember that it is the long history of Europe that is important, not the EU (the latter being only sixty years old): “Europe is not the creation of the Treaty of Rome. Nor is the European idea the property of any group or institution.” Not everyone who criticizes the EU is automatically anti-European — an important point in today’s world in which Europe and the EU are most of the time used synonymously.
Rather, the European Union is a tool which can be used to promote the values Europeans defended so often in the twentieth century: the EU “is not an end in itself,” but rather “a practical means by which Europe can ensure the future prosperity and security of its people.”
A Europe of Free Enterprise and Free Trade What is the way to future prosperity? For Thatcher, it is “to deregulate and remove the constraints on trade.” It means “action to free markets, action to widen choice, action to reduce government intervention.” Instead of increasing centralization and regulatory efforts, Europe should remain a champion of free enterprise. History — and the Soviet Union, should be enough proof that centralized decision-making doesn’t work.
The EU should not only be pro-trade to the inside, however. Instead, it should be globally oriented: “Europe never would have prospered and never will prosper as a narrow-minded, inward-looking club,” she warned. Free trade with the outside world — something that the EU is lacking to this day (while forcing all member states to comply with its trade policy), is one of the most important competences of Brussels: “we must ensure that our approach to world trade is consistent with the liberalisation we preach at home.”
For this, a strong relationship with America is needed. For Margaret Thatcher, the US was indeed to a certain extent part of Europe, “in the sense that she shares a common heritage of civilised values and a love of liberty.” It is a natural fit between the two sides of the Atlantic, since the core values are shared with one another. In the face of today’s trade wars and aggressions on both sides, it would be all the worse if this relationship would be squandered in just a few months’ time.
Against Eurotopia If there is any argument with which the prime minister hit home continuously, it was her stark opposition to a centralized federal state, ruled by the Brussels bureaucracy. The idea of a United States of Europe is a utopia that “never comes, because we know we should not like it if it did.” Instead of politicians trying to create a single European identity, the mantra should be unity in diversity: “Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity. It would be folly to try to fit them into some sort of identikit European personality.”
In Margaret Thatcher’s opinion, the EU should stay a supranational organization which is based on voluntary cooperation between sovereign states, rather than one federal state. She perhaps felt alone with this opinion when she presented it thirty years ago. But today, with another debate on the future of the European Union — and even farther down the road of the “ever closer union,” we should keep in mind what Lady Thatcher said, and “to raise the flag of national sovereignty, free trade and free enterprise — and fight.” Indeed, as the prime minister wrote in her memoirs, “if there was ever an idea whose time had come and gone it was surely that of the artificial mega-state.”
Originally published by the Austrian Economics Center.
President Trump’s sanctions against Iran have intersected with his trade war against China. The intersection comes in the form of the arrest of Meng Wanzhou, an executive with Huawei Technologies, one of the most prominent companies in China. Meng was arrested by Canadian officials on the request of U.S. officials as she was changing planes in Vancouver.
U.S. officials are now seeking Meng’s extradition to face criminal charges in the United States. The charges? Get this: They are alleging that she violated Trump’s sanctions against Iran.
What? Meng isn’t a U.S. citizen. What does she have to do with Trump’s sanctions against Iran?
Well, you see, when the U.S. government imposes sanctions on a foreign country, it expects not just U.S. citizens to comply with its dictates. It expects everyone in the world to comply with its dictates. That’s how the U.S. worldwide empire operates. The empire has worldwide jurisdiction. Its criminal laws apply to everyone in the world. Our country’s ruler issues the orders, and everyone in the world must obey or face the prospect of being arrested, brought to the United States, and placed in a federal penitentiary.
Meng’s arrest, of course, cannot be divorced from Trump’s trade war against China. By arresting Meng, Trump, the self-labeled “Tariff Man,” is obviously upping the ante in his trade war to bring further pressure to bear on China to succumb to his trade demands.
That might happen. But it is also possible that something else might happen. Executives of major U.S. companies who travel to China now might well find themselves in the same straits that Meng finds herself. In fact, I wouldn’t be surprised if lots of U.S. businessmen suddenly find reasons not to travel to China.
How can any of this Trumpian nonsense be considered good for the American people? How can it possibly be reconciled with the principles of a free society?
It is not the job of the president of the United States to be a negotiator or agent for U.S. businesses. It is not his job to rectify any trade injustices in foreign countries. If American businessmen don’t like the trade conditions in some foreign country, there is a simple remedy: Negotiate better terms or just stay out of that country. No American businessman needs for Trump to be his daddy and to wage trade wars on his behalf.
By the same token, it is not the job of the president of the United States to target the citizenry of a foreign country with economic privation and death as a way to secure regime change in that country. That’s what Trump is doing with his sanctions on Iran. He’s trying to kill or impoverish as many Iranians as he can until the Iranian regime cries, “We’ve had enough. We’ll do whatever you say. Please, just stop killing and impoverishing our citizens.”
Trump’s trade wars and his sanctions are moral, economic, and political abominations. They infringe on the fundamental, God-given right of people to travel and trade with whomever they want. They bring untold misery, suffering, and death to countless innocent people. And they engender ever-increasing and unnecessary anger and hatred toward the American people, making it unsafe for Americans to travel around the world.
Unfortunately, Trump’s sanctions and embargoes reflect the statist mindset of the entire conservative movement. A perfect example was a December 6 article in the Washington Post by columnist Marc A. Theissen, who is a standard conservative.
Thiessen extols Trump for waging his trade war against China and praises his toughness in confronting Chinese officials. He ridicules China for retaliating against Midwest farmers, who, he said, continue to support Trump and his war despite massive economic losses. As he put it, “China went for a kill shot — and ended up shooting itself in the foot.” He says that the arrest of Meng show that Trump is feeling “emboldened.”
That’s the standard conservative position on trade and economic liberty. Unfortunately, it also happens to be the standard progressive-leftist-socialist position as well, as reflected by the minimal amount of criticism coming from the left against Trump’s trade wars and sanctions.
It is only we libertarians who are standing foursquare against Tariff Man, both on his sanctions and his trade wars. Sanctions and trade wars destroy freedom. They destroy prosperity. They destroy harmony. They are the essence of tyranny and oppression.
Unilaterally lift all U.S. sanctions and embargoes. Unilaterally end all U.S. trade wars. Unilaterally lift all tariffs and trade restrictions. No trade negotiations and no trade treaties are necessary. Just free the American people, including American businesses, to travel and buy and sell with whomever they want anywhere in the world without U.S. governmental interference, taxation, regulation, or control. That is the key to liberty, peace, harmony, and prosperity.
Originally published by the Future of Freedom Foundation.
The most sophisticated proponents of protectionism acknowledge the economic arguments in favor of free trade, but portray their position as transcending economics and the free traders’ superficial hunger for “cheap stuff.” These protectionists instead champion loftier goals such as the political and societal benefits of a robust middle class. But, leaving aside the economic superiority of free trade, protectionism still falls short of free trade in achieving the protectionists’ own stated goals; it is free trade which preserves peace and community.
Advocates for tariffs often support them in the name of supporting a strong middle class, the existence of which, they claim, provides political and societal benefits that outweigh the overall efficiency losses tariffs bring about. It is true that, in the short term, taxing foreign steel benefits the specific industries whose output is steel, and may increase the number of jobs and/or salaries in steel production. However, this is at the expense of every industry whose inputs include steel. Steel factory employment comes at the cost of car factory employment. Now, what if foreign steel were not taxed, but rather a lower-order good, closer to immediate consumption, like foreign cars were instead taxed?
It is more difficult to see why taxing cars would hurt American workers other than reducing the workers’ — and everyone else’s — purchasing power qua consumers. But it would still be harmful. It would hurt taxi drivers, Uber, Lyft, truck and limo drivers, and all of the industries tied to the people and cargo transported in these vehicles.Tariffs on finished consumer goods will have one fewer mechanism through which they reduce domestic employment: they do not directly increase the cost of the factors of production of other industries, as tariffs on second and higher-order goods do. Descending the ladder of production, what if tariffs were placed on finished consumer goods? Would this benefit the middle class producers of this consumer good without hurting other middle class workers? Not necessarily, because, as mentioned above, higher prices for consumer goods may reduce domestic spending in other domestic industries, and in that way hurt middle-class workers. Moreover, these tariffs hurt foreign consumers, who in turn will have less money with which to purchase U.S. products.
If one’s goal is to use tariffs to bring net benefit to the domestic middle-class, even if it means sacrificing overall economic efficiency, then such a person faces a metaphysically possible but hopelessly complex puzzle, like running through a rainstorm and dodging all of the raindrops. The odds that political actors will identify the ideal tariff, dispassionately enforce it without being swayed by special interests or the temptation of increasing revenue, prevent illegal circumvention of the tariff, and then constantly adjust the tariff in real time as changing conditions render a new tariff rate necessary, are somewhat below fifty percent.
Social Benefits Free trade, in addition to allowing consumers to amass larger amounts of essentials like baby food, fuel, and medical equipment, offers social and political benefits.Exemptions from tariffs on nobler goods such as medical equipment would still result in higher prices for these goods so long as the (nonspecific) factors of production for these items were not also exempted. Free trade creates special interests for peace. With or without tariffs, there are special interest groups that pine for war. Those who sell the weapons and the inputs for the weapons to belligerent states seek war. Free trade counteracts these entrenched bellicose interests with countervailing self-interest. Companies that do business between countries, companies that produce part of their product here, and part there, that buy from here and sell there, desire peace. When war comes, sanctions, blockades, and bombs will ruin those companies, and so they have a motivation to be lobbyists for peace. A free trade regime does not categorically rule out war, but it is a force that will, other things equal, tend to make war less common, and that’s of monumental importance.
Free Trade Brings Communities Together Protectionism, rather than holding communities together, can sever them across political lines. When empires collapse, or parts of nations are conquered by their neighbors, tariffs along new political boundaries can sever traditional bonds. If Armenians within the Ottoman empire are separated from Armenians within the Russian empire by trade restrictions, then that community is deprived of the full benefits of commerce, by which individuals’ fates are tangibly and symbiotically intertwined. If Austrians suddenly find themselves within the new borders of Italy, and can trade more freely with southern Italians hundreds of miles away than they can with their former compatriots whom they can see across the border, previously existing local bonds are weakened. In other situations, bonds that would have formed in the counterfactual world with free trade, do not.
There is more to life than accumulating material possessions. I have met few or no people who think otherwise. Those who value strong families, tight communities, hard work, and spiritual health should favor free trade so that the inputs upon which workers’ livelihoods depend are not artificially scarce; so that tariffs do not drain the purchasing power of consumers whose demand supports industries; so that nations are more reluctant to war with one another; and so that commerce, one of the great engines of social harmony, is not hindered between neighbors kept apart by political boundaries.
Despite the record unemployment rate, widespread hardship to businesses, strains on the healthcare system, political turmoil, and general disruption to daily life in 2020, US consumers have managed to ramp up their habit of buying things. Demand for physical goods replaced some of the previous demand for in-person service-related experiences and much of that demand was met with a surge of imports from China as domestic production slowed down due to lockdown measures. Up until recently, global supply chains managed to find their footing and could meet demand, but news has emerged that reveals stresses on the world’s shipping infrastructure and uncovers clues about the economic outlook.
Container Shortage and Chinese Exports Global logistical networks recently began to suffer from a shortage of shipping containers as demand has suddenly risen. Freight rates from China to the US have jumped by 300%. The container situation has become so extreme that hundreds of thousands of containers have been sent off empty from US ports, mostly to China as exporters demand empty containers with increasing urgency. An estimated 177,938 containers, were rejected from loading US export items at the ports of Los Angeles and New York/New Jersey alone and then sent across the Pacific.
The recent imbalance of shipping containers illustrates the latest state of affairs surrounding the US and Chinese economies. As exports of consumer goods from Asia eclipse exports of mostly commodity and raw materials from the US—in this case, even blocking US agricultural exports from having shipping containers to reach foreign markets—the trade deficit between the two countries may become more important to these highly competitive economies.
When Trade Deficits Matter The Austrian perspective on the US trade deficit has long been that given the continued relative productivity of the US economy, foreign desires to invest in the US, and demand for the dollar abroad, the trade deficit is a ‘pseudo-problem.’ The US competitive advantage vis-à-vis other countries in recent decades has made running a trade deficit highly probable and even favorable for Americans as they enjoy the consumption of cheaper imports.
Thus far, the parties involved have been satisfied with this arrangement as US consumers bring in goods at favorable prices and producers receive a reliably stable world reserve currency: the US dollar. However, the underlying conditions particular to the US economy in relation to China may be changing. There are two aspects of the US-China trade deficit that merit attention. The first is the effect of net consumption by the US coupled with dovish monetary and fiscal policies whereas the second is what China plans to do with US dollars accumulated through exports.
On the US side of the equation, easy money from the central bank coupled with fiscal stimulus extended to consumers has juiced buying activity as the lockdowns have forced people to stay home and spend. It’s no wonder that shipping containers are rushing to get back to China. With the US taking big hits to production and foreign investment in 2020, along with explosive increases in the money supply, critical questions arise regarding the nature of this trade deficit and how long the status quo can continue as the country pushes the boundaries of its exorbitant privilege. Indeed, the health of the dollar itself as it relates to trade deficits would be an indicator to watch in coming years.
In running a trade surplus with the US, China has traditionally exchanged its US dollars for US Treasuries to add to its balance sheet and to maintain its export advantage. In recent years, however, China has reduced its holdings in Treasuries. This trend has also coincided with massive spending on the part of China in the last decade on the Belt and Road Initiative (BRI) infrastructure and trade corridor project which involves 71 countries across Eurasia and Africa that encompass two-thirds of the global population and one-third of world GDP.
Given the continued global dollar demand, it would be shrewd for China to use accumulated dollars to acquire foreign assets and invest in projects that have the potential to generate future income. The trade war with the US in recent years has driven China to deepen its flow of trade toward surpluses with other emerging markets and forge strategic global relations.
As containers carry goods from China to the US and rush to return empty to bring more, the moment provides a glimpse into a potentially precarious arrangement between the two countries. While the US presently consumes itself into debt and liabilities, China has leveraged its productive surpluses from this relationship into increasingly influential assets that may strengthen its position and further challenge the US, and perhaps even the dollar itself.
Originally published by the Austrian Economics Center.
The 2021 Nobel Prize in Economics has been awarded to Berkeley's David Card, MIT's Josh Angrist, and Stanford's Guido Imbens for their work on "natural experiments," a currently fashionable approach to estimating the causal impact of one economic variable on another. Card, of course, became famous in and outside the profession for his 1994 paper with the late Alan Krueger on the minimum wage. Card and Krueger eschewed the conventional supply-and-demand analysis of the minimum wage (which predicts that, other things equal, increasing the minimum wage leads to increased unemployment) in favor of an atheoretical, empirical exercise. They compared the change in fast-food restaurant employment in New Jersey, which increased its state minimum wage, to that in neighboring Pennsylvania, which didn't, and found no substantial differences, concluding that—contrary to the conventional wisdom among economists—minimum wages do not price low-productivity workers out of the labor market.
While the details of the Card-Krueger study are widely disputed (to put it politely), the empirical approach they championed is not. Their work helped usher in what has been called the "credibility revolution" or "identification revolution" in applied microeconomics (also called the "design-based approach" as opposed to the older, "model-based approach"). Angrist and Imbens developed econometric techniques for estimating the "treatment effects" that are central to this approach. Unlike laboratory experiments, in which subjects can be assigned randomly to treatment and control groups, with the experimenter holding all other conditions constant, observational studies require statistical tricks to satisfy the "ceteris paribus" conditions. Developing and applying these tricks has been the main focus of mainstream applied economics over the last three decades.
Despite its popularity, this approach is not without its critics. To Austrians, causality in social science is a theoretical construct, not something that can be teased out of the data without some a priori understanding of human behavior and how it affects (and is affected by) economic and social phenomena. Experimental and quasi-experimental methods may provide some limited historical-empirical insight but tend to lack "external validity," i.e., one never knows if the results will hold up in other settings. There are plenty of mainstream critics of the overuse of natural experiments, field experiments (randomized controlled trials), and the overemphasis on identification over importance (George Akerlof calls this a bias toward "hardness").
More generally, the newer approaches herald a declining interest in theory in favor of what might be called crude empiricism—"crude" not in the sense that the empirical methods are unsophisticated, but meaning that the underlying questions are simple, "does this x affect this y" questions that rarely involve economic ideas, constructs, or relationships at all. I have previously written about the move away from economic questions and toward issues that are "small" in the sense that they don't involve economic principles at all. The decreasing popularity of theory corresponds to the naïve belief that science, as Lord Kelvin famously put it, is all about measurement and that the data somehow "speak for themselves"—when in reality, empirical data are useful only in the way they are interpreted by thinking, choosing, acting human beings.
The invasion of Ukraine, the spike in inflation and the risks of supply shortages have made some politicians dust off some of the worst economic ideas in history: autarky and protectionism.
Some believe that if our nation produced everything we needed we would all be better off because we would not depend on others. The idea comes from a deep lack of understanding of economics. There is no such thing as autarky. There is no such thing as covering all the needs of a population based on the limit of a politically defined border. It makes no sense. If I told you that I want to make my city self-sufficient you would laugh about it understanding that it is impossible and that the reason why my city thrives is because of the interaction and commerce with other cities. However, when a group of politicians define a nation’s border, we are immediately led to believe that those limits contain every resource that citizens may need and that everything else is irrelevant.
The other fallacy about autarky is that anyone can understand that limiting the economy to the confinement of a random limit of land is a very poor way to develop, grow and prosper. It is almost laughable to read from politicians in the eurozone how they want to achieve full independence and limit imports while at the same bragging about its enormous trade surplus. It is funny to see how the most autarkic politicians want to increase exports at the same time. Close our borders to evil foreign commerce that destroys our factories! Let us build more manufacturing capacity so we can export to them!
We also forget that our progress also comes from the development of the nations we trade with. Our security of supply and our improvement is only a function of everyone else’s growth.
How can autarky and protectionism be sold to citizens? By selling the false idea of a zero-sum game in the economy. If someone is selling oil to us, they win, and we lose. If someone is selling solar panels to us, they win, and we lose. We would win if we sold everything to ourselves. Really? The math does not work like that. Politicians that sell a zero-sum game in the economy know it is false, but they also know that protectionism and autarkic aspirations give power to them and make citizens more dependent on political power.
It is precisely through the development of other nations and making the best out of trade that we can grow faster and have access to more goods and services at better prices.
Productivity, technology, trade, and cooperation are essential factors for prosperity. Autarky and protectionism are essential drivers of stagnation and poverty.
It may be true that some nations have taken advantage of an open economy system in order to sell more while making it more difficult for others, but the solution is not protectionism but more open trade. If a nation decides to harm itself by being protectionist, we are reaping the benefits, not them. Because we benefit from trade growth and prosperity while they end in stagnation. Even large economic giants like the US or China cannot survive with closed economies. Who are you going to sell your excess production if you close your borders?
The current inflation and supply shortage problem does not come because of the evils of globalizations and the mistakes of free trade, but the trend of interventionism and protectionist measures that have plagued the world in the past twenty years. There is only one way in which countries can overcome the impact of a war in a country that sells a lot of cereals, oil and gas to the world: with more trade and better diversification of sources of supply, not with autarky and protectionism.
If the current crisis can tell us anything it is that we need more cooperation and trade with even more countries to avoid hunger, shortages, and lack of access to essential goods. The rise of protectionism in the past ten years has proven to be a mistake. It is time to revert it.
The solution to the challenges presented by China or Russia are not solved closing our economies and thinking everything will be good for us while the rest of the world collapses. Our nation would fall with the rest. The solution to the challenged presented by the polarization of the world is to develop even more trade and cooperation agreements with the world. Thankfully, technology and human action are dissolving what once seemed like impenetrable borders.
The world’s supply problems cannot be solved by adding massive overcapacity in every country. That leads to a collapse in productivity and much worse real wages. There are plenty of great nations that can cooperate with us to deliver prosperity to everyone. Trade is the blood of the economy. Autarky only leads to zombification and, ultimately, decay.
The timing of America’s announcement on new tariffs is circumstantially connected with China. In an announcement of enormous importance, a date has finally been set for trading in oil futures denominated in yuan. China’s suppliers of roughly 8.5 million barrels of oil per day are agreeing to take yuan for their oil, not dollars, and the new futures contract allows them to hedge the yuan into dollars, euros, yen, or even gold.
The threat from China’s move is to the petrodollar’s status, and therefore the near-monopoly the dollar enjoys in international trade. It also allows oil suppliers to hedge into gold through matching yuan-gold futures in Hong Kong and Dubai, which are physically deliverable. These two exchanges, in consultation with Singapore and others in Asia, are setting up a gold corridor with vaulting facilities with a 1500-ton capacity in a free-trade zone in Qianhai on the Chinese mainland. This move is almost certainly connected with anticipated physical demand for gold arising from the new oil futures contract.
For the first time since the Nixon shock in 1971, there is an important rival to the petrodollar in the form of a yuan alternative. The kicker is the yuan will be partially convertible into gold through matching futures, avoiding the dollar entirely. And it was gold that successive US administrations have feared posed the greatest threat to the supremacy of an unbacked dollar.
There have been some misunderstandings as to China’s currency objectives. They are not, as some would suggest, an attempt to set up a rival to the dollar, or for some long-term plan for the yuan to become a reserve currency. The answer is simple: it’s about control over her own affairs. Using dollars, all transactions are cleared in the American banking system through correspondent banks on a net basis. In theory, this gives America privileged information on China’s trade flows, and the ability to interrupt them, as she did with Iran and Russia.
Anyway, if China wanted to establish the yuan as a reserve currency, or a currency commonly used for trade settlement between non-Chinese partners, it would require a substantial and sustained increase of yuan in international circulation. The Chinese government certainly does not intend to run the trade deficits necessary to produce the extra currency required to rival the dollar. The more likely policy is for state-owned banks to ensure there is reasonable yuan liquidity for the new oil futures to gain traction.
The threat to the petrodollar is very real. The importance to America of the petrodollar is at the very least suggested by the unhappy fates of those who wished to create alternatives: Saddam Hussein, who planned to accept euros and Muammar Gaddafi, who proposed a gold-backed African currency, are well-known examples. Iran, as reluctant to accept “Satan’s currency” as America is to permit her to use it, is for US foreign policy still a work in progress with military intervention actively under consideration.
Bullying China to use dollars is obviously not an option for America, nor can she force China’s major suppliers to only take dollars for oil. But she has chosen to protest the move, by aiming tariffs at China, tariffs that seem certain to be extended to others and even increased. But that’s not all that’s involved in this story.
Quietly, the Indian Ocean has Become China'sIt’s not only in trade that China threatens America’s supremacy. President Trump decided to withdraw $2bn in military aid from Pakistan, effectively freeing Pakistan to align herself closely with China. The latest word is that China is now looking to set up a military base at the Pakistani town of Jiwani, about 50 miles west from the new port of Gwadar, which is the terminal chosen to link the Indian Ocean with the overland silk road. Jiwani is very close to the border with Iran, and well-placed to control the approaches to the Straits of Hormuz, the pinch-point at the entrance to the Gulf.
China also has a military base at Djibouti, commanding the entrance to the Red Sea, and therefore Suez. She has built a new railroad from Djibouti to Addis Ababa. Meanwhile, India, which is disputing China over their common border, and contesting Pakistan over Kashmir, has missed out on Asia’s silk road projects. Instead, she is developing Chabahar Port in partnership with Iran, just over the border from Jiwani, giving overland access to Afghanistan and Central Asia.
India already has several trade and investment agreements with Iran, which gives her the diplomatic pass to pursue this north-south link into Afghanistan and Central Asia in partnership. It gives the convenient appearance for India of setting an agenda separate from that of China and Pakistan. But this is little more than politics for Modi’s home crowd, with discussions rumored behind the scenes for Gwadar and Chabahah to work together as a major hub from the Indian Ocean into Central Asia.
China is also replacing the old Lunatic line from Mombasa on the Kenya coast via Nairobi to Kampala in Uganda, and eventually extending it to Kisangani in the Congo and Bujumbura in Burundi. Separately, there will be a line from Lamu on the coast to Juba in South Sudan. Not only will China be able to freely transport valuable raw materials from the heart of Africa, but investment in agriculture will also provide her with food security.
The Indian Ocean has therefore become the most important geopolitical asset for China outside Asia, with few realizing it has happened. It is clear that China will command the important shipping routes in the Indian Ocean, while America has to be content with its base at Diego Garcia, some 4,000 miles to the south of Hormuz.
Now that China is close to controlling her most important shipping routes, she is now ready to step up her demands that purchases of oil and other commodities must be paid for in yuan. This is why she must now prioritize the financial markets her suppliers will require.
China Is Also Reducing Dependency on US TradeThe days when China was the cheapest cost-base for labor in manufacturing are over. Manufacturing for export markets is being increasingly mechanized, lowering unit costs and releasing labor for future expansion in other higher-value industries. The Communist party’s plans include the upgrading of infrastructure and the transition of the economy towards serving the growing middle classes. Together with proposals to extend her own industrial revolution into the wider Asian landmass, the full transition will probably take up to twenty years. This is the reason, according to the better-informed China experts, that the National Party Congress currently being held is doing away with the limit on the duration of Xi’s presidency, so that he can complete the plans of which he is the principal architect. It is not, as reported in Western media, only the glory for Xi of being a dictator for life.
This year’s NPC, in granting Xi the facility to oversee his plans, fully endorses them and their progress. The move away from depending on cheap exports to America and elsewhere is likely to gain momentum, reducing the relative importance of Trump’s tariffs. Instead, China is creating what amounts to a large free trade area throughout Asia with her partners in the Shanghai Cooperation Organisation. This is the opportunity offered to other foreign suppliers to the region, such as the UK, assuming she has the gumption to become involved after Brexit.
America’s trade wars could have unintended consequences. They could end up with the two economic titans, the US and the EU, imposing destructive tariffs against each other. The effect on both economies will be to simply increase prices for consumers, when other price-inflationary factors are also coming into play.
Fortunately for the rest of the world, the days when the dollar was tied to gold and trade protectionism by America threw the world into the 1930’s depression no longer apply. The dollar can be expected to decline instead of commodity prices falling, as they did in the depression. The impact of America’s protectionism on the global economy today is therefore likely to be significantly less than following the Smoot-Hawley Act. But from an American standpoint, the principal victim of the trade war that commenced this week will be America herself.
"Globalism" and "globalization," are terms that suffer from a lack of any precise definition. The terms are used freely by a wide variety of commentators to mean both good and bad things — many of which are opposites of each other. Sometimes globalism means lowering trade barriers. Other times it means aggressive foreign policy through international organizations like NATO. Other times it means supporting a global bureaucracy like the United Nations.
This lack of precision was recently featured in The New York Times with Bret Stephens's column "In Praise of Globalists." Stephens however, also fails to make any serious attempt at defining globalism. He feigns an attempt to define globalism, but in the end, it turns out the column is just a means of making fun of Trump voters and rubes who don't subscribe to Stephens's allegedly cosmopolitan views.
Stephens tells us that globalists want to "make the world a better place," thus implying that non-globalists don't. We're informed that globalists value military alliances and free trade. But given that Stephen's isn't willing to define these terms or tell us how these institutions are used to make the world "a better place," we're still left wondering if globalism is a good thing. When international alliances are used to justify the dropping of bombs on civilians or turning Iraq into a basket-case and safe haven for al Qaeda, is that making the world a better place? When the EU uses "free trade" agreements as a means to crush entrepreneurs under the weight of a thousand taxes and regulations, is that making the world a better place?
Globalism: Conflating both Pro-Market and Anti-Market ForcesUnfortunately, this is nothing new. Globalism has long been a heavily abused term that includes everything from lowering taxes to waging elective wars. For critics on the right, globalism must be suspect because so many center-left politicians are regarded as "globalists." Bill Clinton, Hillary Clinton, and Barack Obama are all regarded as dyed-in-the-wool globalists who also advocate for greater government control of markets.
Simultaneously, "globalists" have also long been attacked by anti-capitalists. They see globalism as working hand-in-hand with "neoliberals" who are impoverishing the world by pushing for the spread of market forces, free trade, and support for less government intervention in daily life.
These critics of so-called neoliberalism therefore attack organizations widely perceived to be "globalist" like the World Bank, the IMF, and the World Trade Organization. Unfortunately, though, the critics attack these organizations for the wrong reasons. These globalist organizations deserve to be criticized, but not because they push some aspects of economic liberalization that are actually good. They should be criticized because they primarily act as political organizations that enhance the ability of some powerful states to intimidate and politically manipulate other, less powerful states.
This merging of free trade, military interventionism, and bureaucratic politicking under one umbrella of "globalism" ends up confusing the issue of globalism almost beyond repair.
But there is still hope for the term.
Historically, Globalism Is the Ideology of Peace and FreedomHistorically, it is important to remember that globalism is intimately connected to liberalism, the ideology of freedom and free trade.
It is not a coincidence that one of the nineteenth century's most effective proponents of liberalism was Richard Cobden, who fought tirelessly against both trade barriers and against aggressive foreign policy. Cobden can be credited with waging an effective ideological war against the mercantilism of his day which was characterized by nationalist ideas in which both economic success and military security were zero sum games that required highly interventionist government institutions.
Cobden's program, instead, was one of peace and free trade, which was then rightly regarded as a program of internationalism. Thomas Woords notes:
Although Cobden's program would doubtless be stigmatized in our day as "isolationism," free economic intercourse and cultural exchange with the world can hardly be described as isolation. In his day, in fact, Cobden was appropriately dubbed the "International Man." And that, indeed, is what he was. Peace, free trade, and nonintervention — these ideas, Cobden believed, were not simply the ideological commitments of one particular party, but rather the necessary ingredients for the progress and flourishing of civilization.
We might say Richard Cobden was one of the first true European globalists. Cobden was further supported by the great French free-trader and anti-socialist Frédéric Bastiat who relentlessly called for the free flow of of goods while denouncing efforts by government institutions to "mold mankind" or impose regimentation on the population.
Thus, the liberals of the nineteenth century who supported greater freedom of movement in both workers and goods, and non-interventionist foreign policy, might be perplexed were they to see what passes for "globalism" today.
We are often told, even by pro-market globalists, that we need international organizations like the WTO to "ensure" that free trade prevails. This has always been a less-than-convincing claim. As Carmen Dorobăț has shown, there is not any actual evidence that the WTO really lowers trade barriers. Freedom in trade has grown more outside the WTO framework than within it. All that is necessary to reap the benefits of free trade is to unilaterally remove barriers to trade.
The European Commission meanwhile might facilitate trade within its trade bloc, but it acts as an enormous impediment to truly free and global trade.
Even worse is the foreign policy of the new globalists who support an endless number of wars and military interventions on "humanitarian" grounds. Enormous military bureaucracies like NATO, amazingly, are considered to be "globalist" organizations as well.
Political Globalism vs. Economic Globalism If we wish to end this confusion, though, we need to separate political globalism from economic globalism.
When we do this, we find that economic globalism is a force for enormous good in the world, but political globalism is primarily a tool for increasing the power of states.
As to economic globalism, we can see that again and again that the free flow of goods and services, unimpeded by states, improves international relations and increases standards of living. Where governments have increasingly joined the "globalized" economy, extreme poverty declines while health and well being increases. Latin American states that have embraced trade and freer economies, for example, have experienced growth. Those states that stick to the regimented economies of old continue to stagnate. These benefits, however, can be — and have been — achieved by decentralized, unilateral moves toward free trade and deregulated economies. No international bureaucracy is necessary.
This is economic globalization: opening up the benefits of global trade, entrepreneurship, and investment to a larger and larger share of humanity.
Meanwhile, political globalization is an impediment to these benefits: Political globalists at the World Health Organization, for example, spend their days releasing reports on how people shouldn't eat meat and how we might regulate such behavior in the future. Political globalists hatch new schemes to drive up the cost of living for poor people in the name of preventing climate change. Meanwhile, the World Bank issues edicts on how to "modernize" economies by increasing tax revenues — and thus state power — while imposing new regulations.
It's essential to make these distinctions. Economic globalism brings wealth. Political globalism brings poverty.
Economic globalism is about getting government out the way. It's about laissez-faire, being hands, off, and promoting the freedom to innovate, trade, and associate freely with others.
Political globalism, on the other hand, is about control, rules, central planning, and coercion.
Some careless observers may lump all this together and declare "globalism" to be a wonderful thing. But when we pay a little more attention to the details, things aren't quite so clear.
In 1828, Congress passed a tariff that raised duties on various imports to such extremes that it become pejoratively known as the Tariff of Abominations. In protest of these high duties, Vice-President John C. Calhoun secretly wrote The South Carolina Exposition and Protest, denouncing the “unconstitutional, oppressive, and unjust” bill. The protest was made in opposition to “the whole system of legislation imposing duties on imports — not for revenue, but the protection of one branch of industry at the expense of others.”
The controversy resulted in the infamous “nullification crisis” in which South Carolina stood against Andrew Jackson and the national government until a compromise was reached that lowered the existing duties. South Carolina agreed to submit, though there was no real indication that any substantive change in the law had taken place; the duties were simply lowered.
As I have argued elsewhere, the tariff controversy took a backseat to other political issues after 1833, but the disagreement between the North and the South, generally speaking, still survived regarding the issue of tariffs. Once the southern states seceded, the Republican-controlled Union government had no real resistance to the passage of the Morrill Tariff in 1861. The Confederate States of America demonstrated their contrasting opposition to protectionism by allowing their Congress “To lay and collect taxes, duties, imposts, and excises for revenue” but in the same clause, their constitution specifically prohibited “any duties or taxes on importations from foreign nations [from being] laid to promote or foster any branch of industry” (emphasis added).
Protectionism was certainly the justification for the high tariffs, and this argument continued well after the Civil War. Andrew Carnegie himself credited the steel tariff as his reason for pursuing the steel industry as opposed to another venture. When the Smoot-Hawley Tariff was passed in 1930, imposing duties on more than 20,000 imported goods, protectionism was again the justification. Even among the anti-protectionism South, certain exceptions were quietly tolerated, such as the sugar tariff that protected Louisiana and Texas planters, though this was opposed by southerners in other regions.
The problem with all of these disputes — tariffs as a tax versus tariffs as a boost to domestic industry — is that there is no fundamental difference between one or the other. It is true that a bill may be worded to reveal an intended purpose for either revenue-raising or industry protection, and politicians will advocate for a bill on such arguments as well. It’s likely that these intentions are sincere. But nonetheless, there remains no real economic difference between a revenue tariff and a protectionist one.
It almost seems too obvious to merit saying, but recent debates illustrate the necessity of sometimes stating the obvious: the economic effects of a tariff are independent of the intentions of the bill. Tariffs can vary according to how high or low the imposed duties are, and they can vary according to the industries targeted. But all tariffs, regardless of their respective purposes, have the same effects. They raise money for the government and they raise prices for consumer goods (either directly for imports of consumption goods, or indirectly for imports of production goods). Politically, it is not uncommon for other countries to institute their own retaliatory tariffs in response, which only compounds the harmful effects of tariffs for both countries. And perhaps the most significant effect, yet the one most likely to fly under the radar, is the reallocation of resources into less efficient lines of production.
Conservative commentator (read: cheerleader) Dinesh D’Souza revealed his own inability to grasp this last point when he recently touted the announcement from the CEO of US Steel that they will be opening a new steel plant as a result of Trump’s tariffs. He sarcastically claimed that “poor Milton Friedman would be puzzled” by this phenomenon. But for anybody who is familiar with Frédéric Bastiat’s writings, there is nothing puzzling about US Steel’s behavior.
Bastiat writes:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.
Henry Hazlitt, one of Bastiat’s greatest modern expositors, puts it even more clearly in the context of the tariff controversy:
The effect of a tariff, therefore, is to change the structure of American production. It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.
These effects hold true regardless of whether a tariff is intended to “protect” domestic industry or not. The announcement by the CEO of US Steel merely demonstrates that protectionist policies do have some beneficiaries — in this case, giant companies — at the expense of consumers and other business, such as the myriad industries that require steel for their own production. The 500 jobs D’Souza believes would have left Milton Friedman baffled will undoubtedly come at the cost of any number of unseen jobs that are not created in steel-consuming businesses, in addition to the higher prices of goods all consumers will suffer as the result of these anti-trade policies.
Protectionism is an economic fallacy that simply won’t die. Trump’s tariffs are nothing more than the old mercantilist ideology that the profession of economics was effectively invented to refute. What most economists today call the Law of Comparative Advantage, Ludwig von Mises always referred to as “The Ricardian Law of Association,” in which he flatters David Ricardo (deservingly) for always having been “fully aware of the fact that his law of comparative cost, which he expounded mainly in order to deal with a special problem of international trade, is a particular instance of the more universal law of association” (Human Action, p. 159).
The myths of protectionism and mercantilism are based on the political allure of exoteric successes, such as US Steel’s 500 new jobs. But the Law of Association reminds us of the esoteric failures of these policies. Free trade means letting those who can produce best and most efficiently do so, in whatever industry they may, and through trade, everybody benefits from the higher productivity. This is true whether it is between two individuals, and it is true if it is between two nations.
With new discussion of regulating and even possibly breaking up social media and tech giants like Facebook and Amazon, or blocking the proposed acquisition of Time Warner by AT&T, antitrust policy is back in current events. Coincidentally, revenge and spite motivations for politicians are also back in political news, given the aftermath of the contentious 2016 presidential election. It has become all too obvious that many Republicans and Democrats are refusing to work with, and even intentionally obstructing, President Donald Trump’s agenda simply because he personally attacked them (and continues to do so). In addition, his runner up and arch-nemesis Hillary Clinton continues to blame everyone except herself for losing the presidential race. It is all too fitting, then, that revenge and spite actually played a role in the origins of the first federal antitrust law, the 1890 Sherman Act.
Historians as well as economists have long analyzed the broader special interest motivations for the Sherman Act. The traditional narrative is that big business Republicans supported antitrust legislation because it would deflect attention away from the true source of many monopolies: the protective tariff. Dead letter and poorly enforced legislation would be of little threat to large businesses while also allowing the tariff to go untouched, and possibly even raised. In his new book titled The Progressive Era, edited by the present writer, Murray Rothbard supported this narrative.
Wrote Rothbard:
“[W]e know that the Sherman Act was rarely used by any of the administrations, and that it sunk into innocuous desuetude by the time of the McKinley administration. That it was designed as a sop to public opinion and to take the heat off the tariff therefore seems likely.”Murray Rothbard, The Progressive Era, ed. Patrick Newman, (Auburn, AL: Ludwig von Mises Institute, 2017), p.228.
But he also mentioned another, more personal motivation: the venerable Senator John Sherman of Ohio, who was an early supporter of antitrust legislation and who the act was named after, pushed for an antitrust law partially as a way of enacting revenge on his political rival, former Michigan Governor Russell Alger. The present writer built off of Rothbard’s insights and recently wrote a paper on this topic titled “Revenge: John Sherman, Russell Alger and the origins of the Sherman Act.”
The story is simple. All his life John Sherman wanted to be president and repeatedly tried to secure the Republican nomination. His last real chance due to his old age was in 1888 when he was the front runner for the nomination. However, once the balloting began at the June convention Sherman was unable to obtain a majority of delegates and eventually lost to dark horse candidate Benjamin Harrison of Indiana. Sherman was furious and much like Hillary Clinton, looked for people to blame besides himself. The main target of his vitriol was Russell Alger who he charged with bribing away southern delegates. After the convention was over Sherman made his accusations public and the controversy festered in the news for months.
Sherman maintained his conviction for years and wrote in his 1895 memoir that “I believe and had, as I thought, conclusive proof that the friends of General Alger substantially purchased the votes of many of the delegates from the southern states who had been instructed by their conventions to vote for me.” Much like Hillary Clinton’s bitter resentment at people who were supposed to vote for her but did not do so, Sherman’s blame game was apparent to his contemporaries. After Sherman’s memoir came out writer Joseph Bishop noted: “John Sherman’s conduct in defeat betrays less fortitude and self-restraint than that of any other candidate we have ever had. He is the first to charge his rivals . . .” and “These extraordinary charges, it should be borne in mind, are not made in the first heat of anger and disappointment, but are set down deliberately in a book and published fully seven years later.”
A major goal of Sherman for the rest of his career, now that he lost his last chance at the presidency, was to deprive the man who he felt denied him his deserved chance. Conveniently for Sherman, an opportunity shortly appeared. Alger had become embroiled in a legal case titled Richardson v. Buhl et al. that was decided by the Michigan Supreme Court on November 15th, 1889. Alger and a business partner loaned money to the Richardson Match Company which was later purchased by the Diamond Match Company, an organization whose purpose was to try and monopolize the friction match market. There was a dispute over payment, and so the interested parties went to court. The Michigan Supreme Court was stacked with rabid antimonopolists and considered it unable to help resolve contracts for any company whose goal was monopoly. After the justices charged Alger with a major role in the formation of the Diamond Match Company (who no doubt realized the political implications for the former Republican governor) they threw the case out of court. Only the minority opinion correctly realized that Alger had little to no involvement in the Diamond Match Company.
Sherman, who was previously interested in antitrust legislation, had seen his prior bills never get out of committee. After the verdict was handed down, at the beginning of the 51st Congress Sherman reintroduced his bill in early December and muscled it through the Senate Finance Committee so he could give a speech on the Senate floor. There, Sherman discussed the bill on March 21st, 1890, and described state court cases that dealt with the threat of various monopolies. He spent an enormous amount of time on a case he called David M. Richardson v. Russell A. Alger et al., quoting multiple paragraphs from the court case right up until the minority opinion. Sherman’s goal was clearly seen by his contemporaries: the antitrust bill was a way of getting payback on Alger because he gave Sherman a visible platform to publicly skewer his rival and sabotage his future presidential chances.
On March 25th, the August New York Times noted:
Of course it was with reluctance that Mr. Sherman directed the attention of the Senate and the country to Gen. Alger’s connection with this “unlawful” combination, and to the fact that the Supreme Court of Gen. Alger’s own State had denounced the organization so emphatically . . . [T]he case, as he said, was “quite a leading one” . . . [I]n 1892 Gen. Alger will scarcely look for support and comfort in those pages of the Congressional Record where this speech may be found.
Most newspapers did not recognize that Sherman lied by rearranging the name of the court case, not quoting the minority opinion, and repeatedly mentioning Alger’s name in his speech. Sherman subtly accused Alger of heavy involvement in the Diamond Match Company when Alger had very little influence. The scandal would hang heavy over Alger, and as a result of this and other issues he never got the Republican nomination. Sherman’s tactic worked.
As the importance of the Sherman Act increased during the Progressive Era the discussion of this motivation disappeared from the record. When it was investigated by modern historians they simply dismissed out of hand the revenge motiveAn important exception was Robert Bradley Jr., “On the origins of the Sherman Antitrust Act,” Cato Journal (1990) 9: 737-742. . Hans Thorelli, author of the acclaimed The Federal Antitrust Policy (1955), snidely wrote “The present writer is unable to believe that such a personal matter would play a part of significance as a factor motivating Sherman with regard to the antitrust bill or, in fact, any other major legislative measure.” The reason? Just because. Instead, Thorelli spent his efforts searching for a loftier more public interested reason.
Today analysts continue to ascribe to politicians noble and public interest motivations for supporting particular pieces of legislation. But the origins of the Sherman Act provide an important reminder that politicians can be partly motivated by revenge, greed, hatred, jealously, and spite. In today’s day and age, when public confidence in their representatives is at an all-time low and people have little trust in government, this should come as no surprise.
In April 2019, the Center for Economic and Policy Research (CEPR) published a report called Economic Sanctions as Collective Punishment (Weisbrot and Sachs 2019). The report tries to evaluate the consequences of the economic sanctions the United States imposed on Venezuela in August 2017. In it, the authors conclude that said sanctions decreased the population’s daily calorie intake, increased the mortality rate, and displaced millions of Venezuelans as a consequence of the worsening economic depression and hyperinflation.
However, in May 2019, a report was published by Brookings that refutes these claims. This new report, Impact of the 2017 Sanctions on Venezuela: Revisiting the Evidence (Bahar, Bustos, Morales, and Santos 2019), finds that the methodology Weisbrot and Sachs utilized did not allow them to estimate the causal effect of the sanctions and that accordingly their conclusions are incorrect for two reasons. First, in the absence of an adequate counterfactual, the effects of the sanctions cannot be separated from the negative economic trends in Venezuela that preceded them. Second, the deterioration observed by Weisbrot and Sachs could also be explained by other, more important factors beyond the 2017 sanctions that have not been taken into account.
If we stick to the data, regardless of which socioeconomic indicator we choose, it seems clear that the sharp economic downturn began long before 2017.
Access to International Financial Markets Prior to August 2017, international markets had already stopped the flow of credit to Venezuela. The spread of Venezuela’s sovereign debt — the premium that holders of sovereign bonds demand that the country pay above the “risk-free” rate — was on average 2,884 basis points in the 30 days before the sanctions were announced. This is 7.8 times more than the margin paid by the rest of Latin America and 9.5 times more than what was paid by emerging markets during the same period. As can be observed in the following graph, the imposition of sanctions did not have an impact on the Venezuelan spread.
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On the contrary, the spread only increased — by 1,013 basis points — when Nicolás Maduro announced the creation of a commission for refinancing and restructuring Venezuela’s foreign debt. The data indicate that by August 25, 2017, the Venezuelan government’s capacity to issue debt was either severely limited or nonexistent and investors had already discounted possible sanctions and their potential impact.
Oil Production Weisbrot and Sachs argue in their report that Venezuela’s problems worsened as a consequence of the sanctions. They use Colombian oil production as the counterfactual to determine the sanctions’ impact on Venezuela. For Colombia’s oil production to be considered a suitable comparison, both trends should be similar prior to the sanctions imposed on Venezuela.
However, although the trends seem similar for the period selected by Weisbrot and Sasch, they differ significantly if we go back further back in time.
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Therefore, it would not be reasonable to expect parallel trends after the sanctions. In fact, the evolution of Colombia’s oil production is due to very different underlying factors, which would explain the different trends. Some analysts agree that the fall in Venezuela’s oil production is nothing more than a continuation of a decline that began with the dismissal of more than eighteen thousand workers from PDVSA (the state-owned oil and natural gas company) after the national strike during Hugo Chávez’s presidency. This dismissal resulted in an important loss in administrative and technical capacity (Forero 2003). Even during the golden age of oil, 2004–14, Venezuela’s oil production fell by 24 percent between 2005 and 2016.
Another comparison can be made with oil production in countries that belong to OPEC (excluding Venezuela). As the following graph shows, the trends in oil production were similar before the fall in oil prices (even since 2013). However, oil production in OPEC countries did not decrease after the fall in crude oil prices at the beginning of 2016. In Venezuela, on the other hand, oil production began to collapse.
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Can we conclude that the difference in oil production between OPEC countries and Venezuela is a result of the sanctions? Based on the data, the answer is no. In fact, there is no counterfactual that is appropriate for analyzing Venezuela’s oil-production trends.
Socioeconomic Consequences Weisbrot and Sachs’s work attributes the negative performance of Venezuela’s socioeconomic indicators entirely to the August 2017 sanctions. They argue that Venezuela lacks enough foreign currency to import food and medicines to satisfy the population’s basic needs because of the fall in oil production and the consequent decrease in revenue. In contrast, Brookings’s new report concludes that it is impossible to measure the effect of the observed decrease in production before the sanctions. Furthermore, the significant deterioration in Venezuela’s socioeconomic conditions began in 2013 and cannot be observed in any other part of the region.
The following image shows the value of food imports from Latin America over time. In 2016, the year before the sanctions were imposed, Venezuela was already importing 71 percent less than its maximum in 2013.
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Something similar occurred with imports of medicine and medical equipment. Venezuelan imports fell by 68 percent between 2013 and 2016, whereas they stayed constant in the rest of the region. In other words, most of the fall happened before the sanctions in August 2017. By the end of 2017, Venezuelan imports of these basic sanitary products constituted only 8 percent of the amount observed in 2013.
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Next, the daily measure of the purchasing power of the Venezuelan minimum wage is analyzed in terms of the cheapest calories available, calculated by Douglas Barrios of the Center for International Development at Harvard University (CENDAS, for its acronym in Spanish). Using the prices reported by CENDAS for fifty-eight products at more than fifty points of sale in the metropolitan area of Caracas, they obtained the maximum quantity of daily calories that can be purchased with a minimum wage, on average, for every month between 2010 and 2018. As can be seen in the following graph, there has been a sharp reduction in Venezuelans’ calorie intake, but this decrease began long before the sanctions of 2017.
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The data show that at the moment when the sanctions were imposed, an entire minimum wage could only buy 6,132 of the cheapest calories available per day, 92 percent less than in January 2010. This represents only 56 percent of the minimum dietary needs of a family of five people, which is estimated to be 10,800 daily calories. While the purchasing power of the minimum wage continued to decrease after August 2017 (at levels that only enable the purchase of hundreds of calories), it is impossible to determine how much of this decrease was simply a continuation of the strong trend observed before the sanctions were imposed.
Weisbrot and Sachs also associate a 31 percent increase in the overall mortality rate recorded in Venezuela between 2017 and 2018 (according to their own sources) with the sanctions, concluding that they have been directly responsible for forty thousand deaths. These data have supposedly been extracted from an internal report by the United Nations about Venezuela, Overview of Priority Human Needs (March 2019), which, it seems, is not publicly available. Therefore, to make a comparison that is objective and publicly available, we use data on infant mortality are used because it is often recognized as a good indirect measure of the overall quality of public health services.
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The graph shows infant mortality rates in the first year of life expressed per thousand live births in Latin America over time. In line with the previous findings, the decline in infant mortality (and the correlated increase in overall mortality rates) preceded the imposition of sanctions in August 2017.
Conclusion Although it is probable that the sanctions have had some impact on oil production in Venezuela, the analysis in Brookings’s report does not find sufficient evidence to conclude that the sanctions were responsible for the worsening of the socioeconomic crisis. At this moment, there are not sufficient publicly available data to rigorously estimate a causal effect. The Brookings report therefore concludes that most of the deterioration of socioeconomic indicators occurred prior to the sanctions of August 2017. In fact, a large part of the suffering and devastation in Venezuela has been inflicted by those in power since 1999 and not as much by the sanctions imposed in 2017.
Originally published at UFM Market Trends
The founders of classical economics, namely David Hume (1711-1776), Adam Smith (1723-1790), and David Ricardo (1772-1823) and their British followers were fervent advocates of the principle of free trade between nations. Even more so were J.-B. Say (1767-1832), Frederic Bastiat (1801-1850) and their Continental disciples of the liberal school (who for simplicity I will broadly classify as classical economists because of their link to Adam Smith). Despite their devotion to free trade, the classical economists were nationalists. They viewed free trade as one of the most important means for advancing the security, prosperity, and cultural achievements of their own nations. In this sense, they tended to be what Ludwig von Mises described as “peaceful” or “liberal” nationalists,For Mises’s description and defense of liberal nationalism, see Joseph T. Salerno, “ Mises on Nationalism, the Right of Self-Determination, and the Problem of Immigration ,” Mises Wire (March 17, 2017), and the references contained therein. who recognized the existence of profound differences among nations and nationalities and loved their own nations above all others, yet discerned that the economic and cultural flourishing of each nation was inextricably linked with the flourishing of all other nations. In recognizing this international harmony of interests, the classical economists were naturally thoroughly cosmopolitan and anti-war.
The cosmopolitanism and pacifism of the classical economists has in the past been misconstrued — often deliberately — by their protectionist opponents as a lack of affection and concern for their nation and its interests. This erroneous interpretation of the classical case for free trade has once again gained currency in the writings of some contemporary libertarians and free-market economists who have embraced the anti-nationalist, globalist agenda. Fortunately, eminent historians of economic thought have previously demolished this gross caricature of the classical position and clarified the rationale of the classical economists in promoting free trade. Let us take a few examples.
Lionel Robbins was a British economist who was heavily influenced by Mises, Hayek, and the founders of the Austrian school early in his career. He was also one of the foremost historians of the classical school of economics, having written several articles and books on the subject. Robbins was emphatic in defending the view that the British classical economists promoted free trade because it improved economic conditions for Great Britain:
To the extent to which [classical economists] repudiated former maxims of economic warfare and assumed mutual advantage in international exchange, it is true that the outlook of Classical Economists seems, and indeed is, more spacious and pacific than that of their antagonists. But there is little evidence that they often went beyond the test of national advantage as a criterion of policy, still less that they were prepared to contemplate the dissolution of national bonds. If you examine the ground on which they recommend free trade, you will find that it is always in terms of a more productive use of national resources. . . . I find no trace anywhere in their writings of the vague cosmopolitanism with which they are often credited by continental writers [such as the protectionist, Friedrich List]. . . . All that I contend is that we get our picture wrong if we suppose that the English Classical Economists would have recommended, because it was good for the world at large, a measure which they thought would be harmful to their own community. It was the consumption of the national economy which they regarded as the end of economic activity.Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan & Co. Ltd., 1953), pp. 10-11.
In a classic work, published just after World War II, Edmund Silberner surveyed the thought of the leading economists of the nineteenth century, including the British classical and French liberal economists, on the problem of war, its causes and solution.Edmund Silberner, The Problem of War in Nineteenth Century Economic Thought, trans. Alexander H. Krappe (Princeton, NJ: Princeton University Press, 1946). Silberner pointed out that the classical economists, whom he called “liberals,” viewed war as “economically and socially harmful” and “not only immoral but stupid” because “it is in effect the natural state of men ignorant of the laws of political economy.”Ibid., p. 280. Silberner summarized the classical-liberal position on the connection between free trade, prosperity, war, and the science of political economy as follows:
By favoring international accord . . . [free trade] contributes not only to the material prosperity of nations but also to the intellectual and moral progress of mankind as a whole. Of all known economic systems it is therefore . . . the most favorable to each nation as well as to the human race in its entirety. . . . [T]he establishment of commercial freedom will bring about one of the most profound revolutions in history. Free trade will assure to all men the maximum possible of material well-being, which in fact will know no other limits than the natural resources of the globe and the creative work of men. What is more, the influence of free trade will not be restricted to the economic field: freedom of international commerce will also considerably increase the external security of nations. . . . The role assigned by the liberals, in this matter, to political economy is most significant. This science must deal with war because peace is an essential element of public prosperity. Political economy . . . is regarded by the liberals as the science par excellence of peace. The diffusion of economic knowledge thus tends, in their eyes, to prevent wars.Ibid., pp. 281-82
Having demonstrated the profoundly cosmopolitan and pacific attitudes of the classical economists, Silberner, like Robbins, emphasized that they were first and foremost nationalists. Thus he wrote: “Though hostile to militarism, they make it clear that their attitude is opposed neither to an enlightened patriotism nor to the principle of nationalities.”Ibid., p. 282 In addition, the classical economists not only saw free trade as the most effective policy for avoiding war but also as the best means of preparing for a war that was impending. According to Silberner, “whatever their differences of view [on the relative effectiveness of free trade as a deterrent to war] they all take it for granted that, if war is truly inevitable, free trade, by enriching the nations, prepares them better for it than does the protective system, which impoverishes them all.”Ibid. Finally, despite their abhorrence of war, the classical economists, “with a few exceptions,” were “opposed or hostile” to surrendering national sovereignty to a “supernational peace organization.”Ibid., p. 283.
In an important recent work, Razeen Sally has investigated the views on international economic order held by classical liberals from Hume and Smith to Wilhelm Röpke and other economists of the twentieth-century German Ordoliberal school.Razeen Sally, Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (New York: Routledge, 1998. In his treatment of Hume and Smith, Razeen argues that both view a person’s discriminative love for his or her nation as psychologically and morally warranted:
[B]oth Hume and Smith strongly believe that human fellow-feeling (or approbation of others)—the famous ‘sympathy’ principle in eighteenth-century moral philosophy—might apply within a nation but hardly at all between nations. Sympathy subsumes a sentiment of patriotism or ‘love of country,’ but does not extend to ‘love of mankind’. . . . Both Hume and Smith opine that this is right and proper, for the public interest is secured when one fixes one’s attention on something limited and proximate, stretching to patriotism or love of country, rather than something vague and uncertain like love of humanity.Ibid., pp. 56-57.
Accordingly Razeen insists that Hume’s and Smith’s advocacy of free trade is based on their belief that it is the policy that best conduces to enhancing the wealth and welfare of their own nation. Sally is emphatic on this point:
. . . Hume and Smith stick to considerations of the nation and the national interest as practical objects of analysis. This is a point of absolutely vital importance. Note that Smith does not expatiate on the wealth of ‘the world’; rather he focuses on the wealth of nations. First and foremost, the interrelation of economic phenomena is examined according to the criterion of national, not global, wealth maximization. . . . In contradistinction to the mercantilists, however, he holds that, under free trade, the national interest corresponds to the global interest. However, as a by-product, such a regime benefits the rest of the world through a better allocation of world resources, not to mention the dynamic gains of technology transfer, competitive emulation, and a widening market that spread across the globe. . . . This then is the context for Smith’s advocacy of unilateral free trade which the nineteenth-century classical economists believe in as well: one or a number of nations adopt free trade independently in their own interest; others, also acting in their self-interest, are likely to follow the example of pioneering free trading nations once the benefits of such a policy become readily apparent. [Emphases in the original.]Ibid., p. 58
We need not, however, depend only on the interpretation of modern historians of thought on this matter for we have the words of the classical economists themselves. There is no better place to start than a famous statement by one of the first classical economists, David Hume. Hume’s dictum poignantly illustrates how, in the eyes of classical economists, free trade perfectly harmonized nationalism and cosmopolitanism.
I shall therefore venture to acknowledge, that, not only as a man, but as a British subject, I pray for the flourishing of commerce of German, Spain, Italy, and even France itself. I am at least certain, that Great Britain and all those nations, would flourish more did their sovereigns and their ministers adopt such enlarged and benevolent sentiments towards each other.David Hume, “ Of the Jealousy of Trade ,” in David Hume, Writings on Economics, ed. Eugene Rotwein (Madison, WI: The University of Wisconsin Press, 1970), p. 82.
As Robbins pointed out,Robbins, The Theory of Economic Policy, p. 10, fn. 5. Adam Smith “expressly repudiates” the globalist position that places the welfare of one’s own nation on all fours with that of other nations:
France may contain, perhaps, near three times the number of inhabitants which Great Britain contains. In the great society of mankind, therefore, the prosperity of France should appear to be an object of much greater importance than that of Great Britain. The British subject, however, who upon that account should prefer upon all occasions the prosperity of the former to that of the latter country, would not be thought a good citizen of Great Britain. We do not love our country merely as part of the great society of mankind—we love it for its own sake, and independently of any such consideration.Adam Smith, The Theory of Moral Sentiments (New Rochelle, NY: Arlington House, 1969), p. 337
Ricardo’s closest disciple, J. R. McCulloch (1789-1864), argued that free trade unites all nations and peoples in common interest. “Commerce embracing different nations,” declared McCulloch,
by. . . making every people to a great extent dependent on others . . . forms a powerful principle of union and binds together the universal society of nations by the powerful ties of mutual interest and reciprocal obligation.John R. McCulloch, The Principles of Political Economy, 5 th ed. (New York: Augustus M. Kelley, 1965), p. 92.
Now McCulloch is not saying that free trade will dissolve peoples and nations into a homogeneous globalist mass or eradicate the desire most individuals have for the flourishing and pre-eminence of the nationality or “people” they identify with. In fact he is saying quite the opposite: that free trade and the mutual benefits it confers on all nations are the only rational means available to sustain one’s own nation and secure its desired advancement and distinction among other nations. In McCulloch’s words:
It has been shown over and over again, that nothing can be more irrational and absurd, than that dread of the progress of others in wealth and civilization that was once so prevalent; that what is for the advantage of one state is for the advantage of all; and that the true glory and real interest of every people will be more certainly advanced by endeavoring to outstrip their neighbors in this career of science and civilization, than by engaging in schemes of conquest and aggression.Ibid., pp. 92-93.
Henri Baudrillart (1821-1892) was an eminent French liberal economist and economic historian and a follower of Bastiat’s. He was an avid free trader and anti-militarist, who objected to standing armies. Baudrillart however maintained that international free trade and division of labor are not only consistent with separate nations and nationality differences but require such separateness and differences. Wrote Baudrillart:
Those who do not consider at all the differences produced among men by climate, race, and institutions, are the very theoreticians of prohibitions who want every nation to be self-sufficient and devote itself to all industries at the same time. . . . By endeavoring to maintain that division of labor which Providence itself has established among men, political economy is obviously not hostile to the spirit of nationality; it bases the alliance of peoples on the difference of characters and faculties; it wants each to excel under the conditions peculiar to it, and each to produce so as to have means of exchange. To generalize and extend trade, it localizes industry.Henri Baudrillart quoted in Silberner, The Problem of War in Nineteenth Century Economic Thought, p. 111.
It is imperative to emphasize the nationalist basis of the classical case for free trade for two reasons. First, modern libertarians and “classical” liberals who favor open borders and are indifferent to the dissolution of historical nations often invoke the names of Hume, Smith, and Bastiat in support of their position. But as we saw, the liberality, pacifism, and cosmopolitanism of these great thinkers and their nineteenth-century followers is far different from the homogenizing globalism embraced by their modern epigones. Second, without taking a position on the vexed question of immigration, it is important to bear in mind that the classical rationale for the free movement of goods cannot be simply extended to justify the “free movement of labor,” that is, open borders, especially if the result is mass immigration. As nationalists, the classical economists would hardly look on with equanimity as their nation disintegrated.
A tariff is a tax on imports that is used to satisfy a policy goal. Before the federal income tax became law in 1913, the US federal government was funded almost entirely by tariffs and excise taxes. An excise tax is a tax on a good that is produced in the US. The best example of a current excise tax is the federal tax on gasoline. The most infamous excise tax was the tax on whiskey in the early days of the Republic that resulted in the Whiskey Rebellion, centered in western Pennsylvania. The tax on whiskey was so unpopular that even George Washington couldn't enforce it. The tax was rescinded very quickly and the federal government collected zero revenue.
As a source of federal income, tariffs are a cipher compared to the federal income tax. Today, however, tariffs are used as policy tools, and not as sources of revenue. There are two competing schools of economic thought, and tariffs are justified under one of these schools of thought and not the other.
Macroeconomics John Maynard Keynes is considered the father of macroeconomics, the school of thought under which tariffs are just another government policy tool. His most influential book was The General Theory of Employment, Interest and Money, published in 1936 at the height of the Great Depression. Keynes called for massive government intervention into the economy, guided by his main conclusion that the world suffered from a "lack of aggregate demand" that would be cured only by government spending. The explosion of war production in the Second World War seemed to validate Keynes's ideas. During the war the entire world went off the gold standard. All governments printed money, unbacked by gold, and governments took far more direct control of their respective economies. The general consensus by the public was that if government can direct a vast expansion of war goods, it should be able to direct a vast expansion of consumer goods in peacetime. Unemployment could be eliminated as all manner of capital and consumer goods would flow from the nations' factories just as had tanks, warplanes, and all other war goods. Furthermore, there was no need to fear deficit spending. In fact it was incumbent upon government to deficit spend whenever the economy seemed to be slowing down.
It is not hard to see why Keynes's main thesis was seized upon by politicians and their like-minded economists. Over the years government direction of economic affairs has become so engrained in all major economies that we don't even realize that there might be a legitimate and superior alternative. We'll never know whether Keynes himself would have endorsed all that now is called macroeconomics, because he died shortly after the end of the war.
Macroeconomics has certain characteristics. It relies upon statistics to measure whether and to what extent interventions are needed and whether, once initiated, they are achieving government policy. This assumes that economists fully understand which lever to pull on the great economic machine, for macroeconomists view the economy as a machine. Macroeconomists use econometrics to measure the results of the schemes wrought by their machine-like model. When an economy appears to fall short of econometric expectations, it is merely a matter of adding a little monetary oil here or requiring that businesses comply with some new regulation there and, bingo!, the economy is humming along again! How do we know? Because the statistics that government attempts to move are going in the proper direction!
Some typical tariff policy goals are helping producers (think ... steel and/or automobile companies), helping labor (think ... lumberjacks), or achieving a favorable balance of payments (think ...China buys as much or more from the US as the US buys from China).
Methodological Individualism But there is another school of economic thought in which tariffs have no role. This school of thought is at least several hundred years old rather than a mere three quarters of a century old as is macroeconomics. This school of thought is the antithesis of macroeconomics. Its technical name is methodological individualism, but for our purposes we'll just call it microeconomics. This school of thought emphasizes that the goal of all economic life is to improve the quality of life of the individual. It functions not to serve some certain groups, and it especially doesn't function just to serve producers. Furthermore, unlike macroeconomics, government statistics are of limited value, since it is impossible to quantify an individual's satisfaction gained from economic activity. How much a person's welfare increases from work, consumption, or leisure cannot be measured with mathematical tools.
There is no single founder of methodological individualism, but Immanuel Kant provided two wonderful maxims upon which microeconomics stands: the categorical imperative and the humanity formula. The former maxim states that for something to be ethically valid it must be binding always and everywhere regardless of one's inclination. An example of a violation of the categorical imperative is the government's claim that its central bank's money printing powers are justified as good for "the economy." If that were so, then you and I should be allowed to print money! But, alas, counterfeiting is a crime, unless committed by the government's central bank. The humanity formula states that man is an end and can never be used as a means to an end. The most egregious violation of this maxim is slavery, where it is obvious that some men are used as means to satisfy other men's ends. But there are many such violations all around us. For example, tariffs on foreign steel benefit only some people — US steel companies and their employees —at the expense of everyone else.
The Law of Comparative Advantage Methodological individualism exposes other macroeconomic fallacies. I'll discuss just a few. David Ricardo explained that trade is founded on the Law of Comparative Advantage; i.e., that trade expands the specialization of labor to minimize one's opportunity costs. For example, it makes no sense for basketball star Michael Jordan to skip a few games in order to paint his living room. His opportunity cost would be very high; i.e., he would forgo the opportunity to earn vastly more money by playing basketball than by saving the cost of paying someone to paint his living room. The law of comparative advantage extends infinitely, from the individual to the family to the neighborhood, etc. to cover the entire world. Political boundaries are irrelevant.
Say's Law Macroeconomics' invention of "lack of aggregate demand" attempts to deny the validity of Say's Law or the Law of Markets. Jean Baptiste Say most clearly explained that supply must precede consumption. In other words, inherent in supply is the wherewithal for consumption. Think of an Iowa farmer who gazes over his vast corn crop. The farmer sees the wherewithal for satisfying all his many needs. He will exchange his corn crop for a widely accepted medium of indirect exchange, money, in order to purchase all the necessities of life. If his crop failed, he would face dire straits. Printing money and giving it to him, as advocated by macroeconomists, merely debases the medium of exchange and causes higher prices for the rest of society, a violation of Kant's humanity formula.
The Unseen Frédéric Bastiat pointed out what should be obvious to all; i.e., that state directing of resources may indeed cause certain "seen" statistic to go in the desired direction, but these same resources could have been directed to any number of more highly desired ends. These ends may be less than they would have been absent the state direction of resources. Furthermore, there may be ends that never were realized at all. In other words, if we are forced to pay more for something simply because it is "made in America," we will have less money for satisfying other desires. Bastiat's famous essay "That Which Is Seen, and That Which Is Not Seen" was a devastating attack upon mercantilist direction of the French economy.
Tariffs can certainly be justified using the tools of the macroeconomists, who view individuals are mere cogs in a machine known as "the economy." But once we start to consider individuals as acting human beings with their own values, desires, and rights, we cannot justify taxing, manipulating, and coercing those people for the sake of a politicians goals for the artificial construct known as "the economy."
The Tariff Act of 1828 quickly became known as the “Tariff of Abominations.” That tariff now has a contender for the name.
The Trump tariff program seems to be metastasizing by the day. What are Mr. Trump’s objectives? Consider a different question first. Would Trump be on this course if he thought that it would cost campaign contributions or votes in November? Silly question. As I see it, Trump tariff policy is the most brazen reach for votes and political cash since the Smoot-Hawley Tariff of 1930, and may go down in history as just as big a mistake.
Smoot-Hawley accelerated the sickening descent into the Great Depression. Depression is improbable now but the Trump tariffs combined with the predicable retaliation by other countries is yielding a train wreck. The United States has ratified trade treaties; the only enforcement mechanism built into those treaties is foreign retaliation. The treaties are far from perfect but they have helped the world move toward a more liberal, orderly international trading system under rule of law.
Only Congress can stop this madness. Very simple legislation with two clauses will do what is necessary. 1) The tariff schedule of the United States shall be the one in effect on January 1, 2018. 2) This Act shall take effect immediately upon the President’s signing or upon the congressional override of a Presidential veto.
Republicans should remember Smoot-Hawley and that Herbert Hoover is not one of the more renowned Presidents of U.S. history. Democrats should refrain from all comment; their votes for the bill will be comment enough.
Why do I conclude that the Trump tariffs are a reach for political cash of breathtaking scope? Open several windows on your computer screen and wander back and forth between the new tariff lists released in March and June and the opensecrets.org web site. What you will see is that the import restrictions are highly correlated with firms and industries making political contributions to Republicans.
Here are several examples arising from tariffs on steel and aluminum: The United States Trade Representative simply had to put bulldozers on the higher tariff list, because there is a lot of steel in a bulldozer and heavy equipment manufacturers are major donors to Republicans. At the top of page 10 of the June 15 list, you will find “Floating docks.” Is floating dock manufacture essential to U.S. world leadership? Actually, there must be a tariff on floating docks because the aluminum tariff will make dock manufacture in the U.S. uneconomic. Given that fiberglass docks are close substitutes for aluminum docks, they will need a tariff, too.
The first two words in the June 15 list are “Lubricating oils.” Now go to the opensecrets.org web site and find the chemical industry. There are big campaign bucks there, mostly for Republicans.
Has USTR anticipated all the secondary effects up and down the supply chain? No. Just as Nixon price controls were hammered by the unanticipated OPEC oil embargo following the October 1973 Middle-East war, so also will Trump tariffs be hammered by unanticipated economic interactions and events. Thus, the initial tariffs will tend to spread, like the kudzu vine.
Ironically, in the 19th Century tariffs were the driving force behind populism. Congress designed high tariffs to favor Eastern manufacturing firms. The tariffs hurt agrarian interests in the Midwest and West. That is where populism U.S. style came from. Woodrow Wilson ran against the tariff in 1912 and one of his first acts was the Revenue Act of 1913. The tariff part of the legislation is known as the Underwood Tariff, which reduced the basic tariff from 40% to 25%.
Prior to passage of the 16th Amendment to the Constitution, which authorized an income tax, the tariff was the principal source of revenue to the federal government. Passage of the Amendment, effective February 1913, changed the revenue picture permanently. After that, the tariff became an almost purely political issue of conferring benefits and burdens on various parts of society. Until the Great Depression, the tariff was the business of Congress; the President could not make the decisions by himself.
Starting with the Reciprocal Trade Act of 1934, Congress granted the President authority to negotiate trade agreements. After World War II, Presidents negotiated trade agreements subject to congressional approval of a comprehensive package, such as NAFTA. Trade law grew increasingly complex; the basic principle became one of wide Presidential discretion subject to political constraints that have varied from time to time. Ironically, Trump’s first set of tariff increases this past March occurred under authority of Section 232 of the Trade Expansion Act of 1962. Trade Expansion? As this President might say, “very sad.” There is zero probability that a future war will cut off U.S. access to steel and aluminum produced in other countries. The national defense rationale for these tariffs is transparent nonsense.
Political use of the tariff is, sadly, consistent with all U.S. history going back to the earliest days under the Constitution. In fact, the second act passed by the new Congress under the new Constitution was the Tariff Act of 1789. At that time, the tariff was the only practical way the government could raise revenue. That said, take a look at the very uneven provisions of that act. The United States got off to a bad start in raising revenue in a way that was not at all consistent with the rule of law. Ignoring the rule of law, we pitted citizen against citizen and continue to do so.
Trump is probably chuckling every time he hears of economists and foreign policy experts predicting disaster from his new tariffs. His intention, I will guess, is to negotiate the tariffs down or eliminate them as soon as they become politically inconvenient. Meanwhile, he will have accumulated a massive amount of campaign cash. It is a dangerous game. These tariffs will damage the credibility of the United States at home and abroad for many years.
The late William Niskanen liked to say that Congress should give powers to the President under the assumption that the person most feared to hold that office would occupy it. There may not be many congressmen who voted for the Trade Expansion Act of 1962 still alive; if there are, perhaps they will reflect on the Niskanen principle.
Forget about the always plentiful cover stories: “national security,” “technology transfer,” “currency manipulation,” “unfair competition due to cheap labor,” … . The list is endless. Do not be taken in. Face the truth of what is really going on.
The power of the President to change tariffs in Trump fashion ought not to exist. This kind of arbitrary action is not remotely consistent with the rule of law. We must not confuse a statute with the rule of law. If congressional Republicans do not stop Trump, in time the tables will be turned and they will regret it. They will also deserve it.
As the decline of the Rust Belt became increasingly obvious during the 1980s, protectionists attempted to blame the malaise on too little government protection from foreign competition. Campaigning for the presidency in 1984, Walter Mondale attacked Ronald Reagan for lifting quotas on steel imports, declaring " Reagan’s policies are turning our industrial Midwest into a rust bowl.”
The Rust Belt never recovered its old-time manufacturing base, and it has long been fashionable among protectionists to claim that the modern Rust Belt has become a land of "communities broken technological advances, globalization, and unfettered free trade."
That part about technology is about right. The rest, not so much. For a more complete picture of what has really led to the exodus of jobs from the Rust Belt, we need look no further than the current United Auto Workers strike. As of Thursday this week, "a council of union-hall leaders meeting in Detroit Thursday voted to extend the now 32-day walkout" which is estimated to have already cost GM $2 billion.
It doesn't take a PhD in entrepreneurship to figure out why some manufacturers might be motivated to move far, far away from jurisdictions that encourage this sort of thing. Not surprisingly many manufacturing have indeed moved elsewhere — including within the United States.
Nor did the trend just start in the 1980s. As shown by economist Lee Ohanian
the Rust Belt’s share of economywide jobs declined by about 28 percent between 1950 and 1980 and that its share of manufacturing jobs fell by roughly 34 percent. ... Moreover, the fact that its share of U.S. manufacturing jobs fell so much demonstrates that the Rust Belt’s fate was not simply part of the general decline in U.S. manufacturing. The Belt’s downturn was uniquely deep and long-lived.
In other words, the decline began well before the age of "free trade" agreements and the supposed worldwide takeover by free-market liberals.A report for the Carnegie Endowment notes how Southern states by the 1960s were already building new production facilities that employed less labor and new technology in ways that were not done in the Rust Belt. This is in part due to labor unions who fight labor-saving innovations:Beginning in the 1960s, “mini-mills” sprang up in the South and West of the country. These small, nonintegrated plants leveraged modern technology that required less labor than traditional steelmaking technologies, lower operating costs due to recycling scrap into various rolled steel products, and less restrictive work rules to reap high profits and market share. The plants increased their share of U.S. steel production manifold times in the 1970s and early 1980s, while the industry as a whole suffered a slump in demand. Mini-mill products successfully competed with steel from Ohio’s integrated mills in the construction market. And alternative materials to steel emerged in auto parts, appliances, construction, and consumer products.See: https://carnegieendowment.org/2018/12/10/how-trade-did-and-did-not-account-for-manufacturing-job-losses-pub-77794 And thanks to free trade and free movement of labor within the United states, the trend accelerated into the 1990s. During the ten years from 1996 to 2006, "Michigan lost 83,000 auto manufacturing jobs ... but more than 91,000 new auto manufacturing jobs sprung up in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas."
And why did rust belt experience such a decline? It was the result of government policy designed to protect both laborers and producers in the region from competition. In "The Decline of the U.S. Rust Belt: A Macroeconomic Analysis" the authors conclude:
The lack of competition in labor markets was closely linked to the behavior of powerful labor unions that dominated the majority of the Rust Belt’s manufacturing industries. In output markets,many of these same industries were run by a small set of oligopolists who, according to numerous sources, actively stifled competition for decades after the end of WWII. ... [S]tate policies favoring labor unions greatly depressed manufacturing productivity over the postwar period."
Productivity lagged precisely because manufacturers — and their workers — didn't have to become more productive. Workers didn't have to change because unions shielded workers from non-union labor. And the producers didn't have to become more productive because they were shielded by import quotas, tariffs, and a general lack of competition from the rest of the world — much of which was devastated by the Second World War.
As a result, these industries became costly and un-competitive both domestically and internationally. Those who suffered were ordinary producers, entrepreneurs, and consumers outside the rust-belt's cozy oligopolies. The the region's influence in Washington, DC meant much of the country was forced to pay for the Rust Belt's lethargy in the form of both higher prices and lower quality.
Naturally, both entrepreneurs and consumers benefited when they were able to slip the Rust Belt straight jacket.
Manufacturers more and more opened up shop in states where unions were politically weaker.
This was apparent by the late 1990s when empirical research by Thomas Holmes, showed
[O]n average, there is a large abrupt increase in manufacturing activity when one crosses a state border from an anti-business state into a pro-business state.
By "pro-business" he means states that have fewer laws and regulations that shield workers and firms from competition.
Thanks to greater international trade post-1980, American manufacturers were able to purchase inputs for their own manufacturing at lower prices. The consumers benefited in turn.
Those on the losing end were were the old, ossified unions and industries left in the Rust Belt where state policies never caught up with reality. Indeed, many of these firms became so inept at serving their customers, some had to turn to government bailouts to stay in business.
In even a moderately free-market, of course, General Motors — and the jobs at GM's plants — shouldn't exist at all. When it went bankrupt in 2009, the US taxpayer paid for a partial government takeover of GM, to the tune of a 50-billion dollar stake in the company. Since then, the Treasury has only managed to recover $38 billion, which means $12 billion will never be recovered at all. But the real cost of the bailout is not just in the cash handed over to GM. The true cost is borne by entrepreneurs and consumers who would have benefited had GM been liquidated and its capital taken over by more competent and productive managers, owners, and employees.
Instead, what the GM bailout gave us was a continuation of the old protectionist policies that make the Rust Belt so costly and unproductive in the first place.
In the minds of protectionists, of course, this is all fine. For them, the old manufacturing economy should be protected, no matter how much that protection means consumers and entrepreneurs are fleeced on a regular basis. This is to be done, we are told, in part to "preserve communities" or shield ordinary people from the alleged tyranny of global competition. But what if GM can't build what people want at a price that makes sense for consumers and entrepreneurs? No problem! Just bail them out using the hard-earned cash of productive people from other industries.
But what is the end game here? Just imagine if steel and auto manufacturers had never had to face competition from other US regions or from foreign manufacturers. Should state and local governments just kept ramping up pro-union and anti-trade policies as Rust Belt manufacturers became less and less productive? The result would have been American manufacturers decades behind global trends, with factories still churning low-quality goods at ever-higher prices.
Globally, of course, this has already been tried. For decades, Latin America was in the thrall of Dependency Theory which suggested governments out to protect their industries so they could "develop" while shielded from foreign competition. In reality, the opposite happened. Protected industries became less and less able to compete or to deliver goods and prices that allowed the rest of the economy to develop. The result was stagnation. India tried a similar "self-sufficiency" experiment. It failed.
The same would have happened in the US had the US stuck with its mid-century protectionism. Fortunately, however, the Sunbelt embraced pro-business, pro-competitive policies that provided an easy escape for many firms from the Rust Belt. Meanwhile, growth in international trade allowed entrepreneurs and small business owners access to less-expensive foreign goods that could be converted into new types of goods, services, and firms.
The death grip of the protected, subsidized, costly, and unproductive Rust Belt had fortunately been broken.
This isn't to say the Rust Belt couldn't modernize if it wanted to. States like Michigan and Ohio could embrace a political economy more geared to serving consumers while allowing more free choice for entrepreneurs, small business owners, and other producers. Instead, these states choose to stick with old pro-union policies that enable walkouts and shutdowns of the sort we now see at work in the UAW strike.
Rust Belt manufacturers can continue to make a good show of things so long as the economy is in growth mode. But as 2009 showed, things are likely to look very different once recession sets in. When that happened, we're likely to see even more union-staffed shops pack up and disappear. Protectionists will probably then say its all the fault of free trade, and that all the country needs is a nice new set of tariffs. But just as trade protection failed to save the Rust Belt decades ago, the same will be true in the future.
Lenin’s main book[V.I. Lenin, Materialism and Empirio-criticism: Critical Comments on a Reactionary Philosophy (Moscow: Zveno Publishers, 1909).—Ed.], or at least his most voluminous book (now available in the Collected Works of Lenin), led some people to call him a philosopher. Most of Lenin’s critique of the ideas of his adversaries consists of calling them “bourgeois.” Lenin’s philosophy is merely a restatement of the philosophical ideas of Marx; to some extent it is not even up to the level of other Russian writers on Marxism.
Marxist theory or philosophy had no development in countries where there were Communist parties. Persons whom we call Marxians consider themselves merely interpreters of Marx; they never tried to change anything in Marx. However, there are contradictions in Marx. So it is possible to quote passages from his writings from all points of view. The influence of Marx on all authors and writers who have lived since Marx died has been considerable, even though it is not usually admitted that these authors were influenced by Marx.
Although Marxians considered themselves solely interpreters of Marx, one Marxian, one writer, added something and had a strong influence, not only on the small group of his followers, but also on other authors. Georges Sorel [1847–1922]—not to be confused with Albert Sorel [1842–1906]—an important historian, developed a philosophy in many respects different from the Marxian philosophy. And it influenced political action and philosophic thinking. Sorel was a timid bourgeois intellectual, an engineer. He retired to discuss these things with his friends at a bookshop owned by Charles Péguy [1873–1914], a revolutionary socialist. In the course of the years, Péguy changed his opinions and at the end of his life he was a very ardent Catholic author. Péguy had serious conflicts with his family. Péguy was remarkable for his intercourse with Sorel. Péguy was a man of action; he died in action in 1914 in the first weeks of the war.
Sorel belonged psychologically to the group of people who dream of action but never act; he didn’t fight. As a writer, however, Sorel was very aggressive. He praised cruelty and deplored the fact that cruelty is more and more disappearing from our life. In one of his books, Reflections on Violence, he considered it a manifestation of decay that Marxian parties, calling themselves revolutionary, had degenerated into parliamentary parties. Where is the revolution if you are in Parliament? He also didn’t like labor unions. He thought the labor unions should abandon the hopeless venture of seeking higher wage rates and should adopt, instead of this conservative pattern, the revolutionary process.
Sorel saw clearly the contradiction in the system of Marx who spoke of revolution on the one hand and then said, “The coming of socialism is inevitable, and you cannot accelerate its coming because socialism cannot come before the material productive forces have achieved all that is possible within the frame of the old society.” Sorel saw that this idea of inevitability was contradictory to the idea of revolution. This is the contradiction all socialists ask themselves about—Kautsky, for one. Sorel completely adopted the idea of revolution.
Sorel asked of the labor unions a new tactic, action directe — attack, destroy, sabotage. He considered these aggressive policies only preliminary to the great day when the unions would declare a “general strike.” That is the day when the unions will declare “Now we don’t work at all. We want to destroy the life of the nation completely.” General strike is only a synonym for the live revolution. The idea of action directe is called “syndicalism.”
Syndicalism can mean ownership of the industry by the workers. Socialists mean by this term ownership by the state and operation for the account of the people. Sorel wanted to attain this by revolution. He didn’t question the idea that history leads toward socialism. There is a kind of instinct that pushes men toward socialism, but Sorel accepted this as superstition, an inner urge that cannot be analyzed. For this reason his philosophy has been compared with that of Henri Bergson’s élan vital (myths, fairy stories, fables, legends). However, in the doctrine of Sorel, “myth” means something else — a statement which cannot be criticized by reason.
Socialism is an end.The general strike is the great means. Most of Sorel’s writings date from 1890 to 1910. They had an enormous influence on the world, not only on the revolutionary socialists, but also on the royalists, supporters of the restoration of the House of Orange, the “Action française,” and in other countries the “Action nationale.” But all these parties gradually became a little bit more “civilized” than Sorel thought they should be.
It was the idea of French Syndicalism that influenced the most important movement of the twentieth century. Lenin, Mussolini, and Hitler were all influenced by Sorel, by the idea of action, by the idea not to talk but to kill. Sorel’s influence on Mussolini and Lenin has not been questioned. For his influence on Nazism, see the book by Alfred Rosenberg[Rosenberg [1893–1946] was a Nazi ideologist condemned to death for war crimes at Nuremberg on October 1, 1946. He was executed on October 16, 1946.—Ed.] titled The Myth of the 20th Century. The fundamental idea of racism was borrowed from Frenchmen. The only man who really contributed something to the Marxian idea was Sorel, along with a group of syndicalists — a comparatively small group composed exclusively of intellectuals and even of idle rich and intellectuals, like the “penthouse Bolshevists” of New York. They repeated again and again that only the workers have enough vigor and enough class consciousness in order to search out and to destroy the bourgeois system.
The center of Marxian activity shifted from Germany to France. The greatest portion of Marxian writings are in French. Sorel’s work was done in France. Outside of Russia, there are more Marxians in France than in any other country; there is, however, more discussion of communism in France than in Russia. The École Normale Supérieure in Paris was an important center of Marxian teachings. Lucien Herr [1864–1926], the librarian, had a great deal of influence. He was the father of French Marxism. As former students of École Normale Supérieure became more and more important, the school spread Marxism all over France.
By and large, the same condition prevailed in most European countries. When the universities seemed slow to accept Marxism, special schools were endowed to educate the rising generations in orthodox socialism. This was the goal of the London School of Economics, a Fabian institution founded by the Webbs. But it couldn’t avoid being invaded by persons of other ideas. For instance, [Friedrich A.] Hayek [1899–1992] taught for some years at the London School of Economics. This was the case in all countries — European countries had state universities. People generally ignored the fact that Marxians, not free traders, were appointed by the Tsar at the imperial universities in Russia. These professors were called legal, or better “loyal,” Marxians. When the Bolshevists came to power in Russia, it was not necessary to fire the professors.
Marx didn’t see any differences between the various parts of the world. One of his doctrines was that capitalism is one stage in the development of socialism. In this regard, there are some nations that are more backward than others. But capitalism was destroying the trade barriers and migration barriers that once prevented the unification of the world. Therefore, the differences in the evolution of the various countries with regard to their maturity toward socialism will disappear.
In the Communist Manifesto in 1848, Marx declared that capitalism was destroying all national peculiarities and unifying into one economic system all the countries of the world. The cheap prices of products were the means capitalism used to destroy nationalism. But in 1848, the average person didn’t know anything about Asia or Africa. Marx was even less informed than the average English businessman who knew something about business relations with China and India. The only attention Marx gave to this problem was his remark, later published by Vera Zasulich, to the effect that it might be possible for a country to skip the capitalist stage and proceed directly to socialism. Marx saw no distinction between various nations. Capitalism, feudalism, brings about progressive impoverishment everywhere. Everywhere there will be mature economies. And when the age of mature capitalism comes, the whole world will have reached socialism.
Marx lacked the ability to learn by observing political events and the political literature being published around him. For him practically nothing existed but the books of the classical economists, which he found in the library of the British Museum, and the hearings of the British Parliamentary Commissions. He didn’t even see what was going on in his own neighborhood. He didn’t see that many people were fighting, not for the interests of the proletariat, but for the principles of nationality.
Marx completely ignored this principle of nationality. The principle of nationality asked that every linguistic group form an independent state and that all the members of such a group should be recognized and unified. This was the principle which brought about the European conflicts, led to the complete destruction of the European system, and created the present-day chaos in Europe. The principle of nationality doesn’t take into account that there are large territories in which linguistic populations are mixed. Consequently there were struggles between the various linguistic groups which finally resulted in the situation we have today in Europe. I mention this because it is a principle of government which was unknown up to now.
According to this principle there is no such nation as India. It is possible that this principle of nationality will break India up into many independent states fighting one another. The Indian Parliament uses the English language. The members of the various states cannot communicate with one another, other than by employing the language of the government, a language which they have practically expelled from their country. But this situation will not last forever.
In 1848, when the Slavs of Europe met for a Panslavist Congress in Moscow, they had to speak with one another in German. But this didn’t prevent later developments in a different way.
Karl Marx and Engels didn’t like the nationalistic movement and never took notice of it. It didn’t fit into their plans or schemes. If, on account of the unfriendly remarks Marx and Engels made about various linguistic groups of Austria-Hungary and the Balkans, some authors, especially French authors, think Marx was a forerunner of National Socialism—Nazism—they are wrong. Marx said that what he wanted was to create a one-world state. And that was Lenin’s idea too.
By 1848 Marx had already assumed that socialism was just around the corner. Given such a theory, there was no reason to form a separate linguistic state. Such a state could only be very temporary. Marx simply assumed that the age of nationalities would come to an end, and that we were on the eve of an age in which there would no longer be differences between various types, classes, nations, linguistic groups, etc. Marx absolutely denied any differences among men. Men would all be of the same type. There was never any answer in Marx as to what language the people in his one-world state would use, or what the nationality of the dictator would be.
Marx was furious when someone said there were differences between men in the same nation, the same city, the same branch of business, just as all Marxists became furious when someone told them there were differences between Englishmen and Eskimos. According to Marx, the only difference was due to education. If an idiot and Dante had been educated in the same way, there would have been no difference between them. This idea influenced Marx’s followers, and it is still one of the guiding principles of American education. Why is not everybody equally intelligent? Many Marxians assume that in the future socialist commonwealth the average person will be equal in talents, gifts, intelligence, artistic attainments, to the greatest men of the past, such as Trotsky, Aristotle, Marx, and Goethe, although there will still be some more gifted people.
It never occurred to Marx that, in the best case, education can only transfer to the pupil what the teacher already knows. In the case of Marx, it wouldn’t have been enough for him to have been educated in a school by perfect Hegelian teachers because then everything he would have produced would have only been Hegelianism again. By educating people in the knowledge of the generation preceding motor cars, it wouldn’t have been possible to produce motor cars. Education can never bring about progress as such. That some people, thanks to their positions, inheritance, education, and so on, have the gift to go one step farther than preceding generations cannot be explained simply by education.
Similarly, it is impossible to explain great things and the great acts of some men simply by referring to their national affiliation. The problem is, why were these people different from their brothers and sisters? Marx simply assumed, without any reason, that we are now living in the age of internationalism and that all national traits will disappear. In the same way that he assumed that specialization would disappear, because machines can be operated by unskilled workers, he assumed there would no longer be any differences between various parts of the world and various nations. Every kind of conflict between nations was interpreted as the consequence of the machinations of the bourgeoisie. Why do Frenchmen and Germans fight? Why did they fight in 1870? Because the ruling classes of Prussia and the ruling classes of France wanted to fight. But this had nothing to do with the interests of nations.
In regard to his attitude toward war, Marx was, of course, influenced by the idea of the Manchester laissez-faire liberals. In using the term “Manchester liberalism” always as an insult, we tend to forget the essential statement in that famous declaration of the Manchester Congress where the term originated. It was said there that in the world of free trade there is no longer any reason for nations to fight one another. If there is free trade and every nation can enjoy the products of every other nation, the most important cause of war disappears. The princes are interested in increasing the territorial size of their princely province to get greater income and power, but nations as such are not interested, because it doesn’t make any difference under free trade. And in the absence of immigration barriers it doesn’t matter to the individual citizen whether his country is large or small. Therefore, according to the Manchester Liberals, war will disappear under popular democratic rule. The people will not then be in favor of war because they have nothing to win — they have only to pay and to die in the war.
It was this idea that was in the mind of President [Woodrow] Wilson [1856–1924] when he went to war against Germany. What President Wilson didn’t see was that all this about the uselessness of war is true only in a world when there is free trade between the nations. It is not true in a world of interventionism.
Sir Norman Angell [1872–1967] still argues in the same way. What did the individual Germans gain in 1870? This was almost true then, because there was comparatively free trade. But today the situation is different. Italy’s own policies made it impossible for Italians, in the world of interventionism, to get the raw materials they needed. It is not true in today’s interventionist world that the individual person does not gain something from war.
The League of Nations is one of the great failures in world history — and there have been many failures in world history. During the League’s 20 years the trade barriers had been more and more intensified. Tariffs became unimportant as trade barriers because embargoes were established.
Because the liberals said war was no longer economically advantageous because the people will not gain anything from it, therefore, a democratic nation will no longer be eager to fight wars. Marx assumed that this was true even in the interventionist world which was developing under his very eyes. This was one of the fundamental errors of Marxism. Marx was not a pacifist. He didn’t say war was bad. He only said — because the liberals said so — that war between nations had no importance or meaning at all. He said war — i.e., revolution, by which he meant civil war — was necessary. Nor was Friedrich Engels a pacifist; he studied military science day in and day out in order to prepare himself for the position he had assigned himself as commander-in-chief of all nations, as commander-in-chief for the proletarians of all countries united. Remember that he participated in fox hunting in a red coat, which he told Marx this was the best exercise for a future general.
Because of this idea of revolution — civil war, not international war — the Marxian International began to discuss peace. In 1864 Marx founded in London the First International. A group of persons who had very little to do with the people and the masses met together. There was a secretary for every country. The secretary for Italy was Friedrich Engels and many of the other countries were represented by persons who only knew the countries they represented as tourists. Arguments between the members disrupted the whole International. Finally it was moved to the United States and then fell apart in 1876.
The Second International was formed in Paris in 1869. But this Second International didn’t know what to deal with. The unions had arisen and the unions were opposed to free trade and free migration. Under such conditions, how could you find subjects to be discussed at an international congress? Then they decided to discuss peace and war, but only on a national level. They said they were all proletarians and they agreed they would never fight the wars of the bourgeoisie. The Germans included Engels and Karl Kautsky. There were some “bad” Frenchmen in the group who asked, “What do you mean when you say we can’t defend our own country? We don’t like the Hohenzollerns.” The French at this time made an agreement with the Russians and the Germans didn’t like that. Every few years there was such an international congress and each time the newspapers said it heralded the end of war. But these “nice fellows” didn’t discuss the real causes of friction, migration barriers, etc. The outbreak of World War I disrupted the International Congresses.
What Marx planned was a revolution. But what really happened was that he created a bureaucratic organization in the European countries which was, by and large, innocent because it lacked the power to execute its theories. Then there developed in the East a Communist organization that unfortunately has the power to execute people and to threaten the whole world. And all this was started in the Reading Room of the British Museum in London by a man, who was not in this regard a man of action, but who was able to bring about violent action. It was the timid bourgeois characters, Karl Marx and Georges Sorel, who created all this mischief. Most of the violent ideas of our times have come from men who themselves wouldn’t have been able to resist any aggression.
Wilson accepted the doctrine of the Manchester Liberals, namely that so far as war was concerned, democracies don’t like to fight wars; democracies fight only wars of defense because the individual citizen cannot expect any improvement of his conditions from war, not even if his country is victorious. But Wilson didn’t see that this was true only in a world of free trade. He didn’t see that this was quite different already in the age in which he lived, which was an age of interventionism. He didn’t realize that an enormous change in economic policies had deprived this theory of the Manchester Liberals of its practicability. Trade barriers were comparatively innocent in 1914. But they were very much worsened during the years of the League of Nations. While free traders were meeting with the League in Geneva and talking about reducing trade barriers, people at home were increasing them. In 1933, there was a meeting in London to bring about cooperation among the nations. And precisely at this time the richest country, the United States, nullified the whole thing with monetary and financial regulations. After this the whole apparatus was absolutely useless.
Ricardo’s theory of comparative advantage is that it is to the advantage to a nation to have free trade even if all other nations cling to their trade barriers. If the United States alone today adopted free trade there would be certain changes. But if all other countries clung to protectionism with import barriers, it would not be possible for the United States to buy more goods from other countries.
There are isolationists not only in this country; there are also isolationists in other countries. Imports must be paid for by exports and exports have no other purpose than to pay for imports. Thus the establishment of free trade by the richest and most powerful nation only would not change the situation for the Italians, for instance, if they retained their trade barriers. It would not make any difference for other countries either. It is advantageous for any country to have free trade even if all other countries do not, but the problem is to remove the barriers of the other countries.
The term “socialism,” when it was new in the second part of the 1830s, meant exactly the same as “communism” — i.e., the nationalization of the means of production. “Communism” was the more popular term in the beginning. Slowly the term “communism” fell into oblivion and the term “socialism” came into use almost exclusively.
Socialist parties, social democratic parties, were formed and their fundamental dogma was the Communist Manifesto. In 1918, Lenin needed a new term to distinguish his group of socialists from those groups which he called “social traitors.” So he gave to the term “communism” a new meaning; he used it to refer, not to the final goal of socialism and communism, but only to the tactical means for attaining them. Until Stalin, communist meant simply a better method — the revolutionary method — as against the peaceful, socialist, method of the “socialist traitors.” At the end of the 1920s, without great success, Stalin in the Third International tried to give a different meaning to the term “communism.” However, Russia is still called the Union of the Soviet Socialist Republics (USSR).
In a letter, Karl Marx distinguished between two stages of socialism — the lower preliminary stage and the higher stage. But Marx didn’t give different names to these two stages. At the higher stage, he said, there will be such an abundance of everything that it will be possible to establish the principle “to everybody according to his needs.” Because foreign critics noticed differences in the standards of living of various members of the Russian Soviets, Stalin made a distinction. At the end of the 1920s he declared that the lower stage was “socialism” and the higher stage was “communism.” The difference was that at the lower socialist stage there was inequality in the rations of the various members of the Russian Soviets; equality will be attained only in the later, communist, stage.
Originally delivered as a lecture in 1952. Published as Nationalism, Socialism, and Violent Revolution in Marxism Unmasked.
In the Bible it says, “He that is without sin among you, let him first cast a stone . . .” It also has been said that the one who strikes the second blow starts any fight. If the world is to avoid trade wars due to tariffs being imposed by the Trump Administration, both the United States and its trading partners in Europe and North America should look within themselves and ask if they are blameless in their own trade practices, and if it would not be far better if everyone were to simply follow a policy of free trade.
Donald Trump recently reasserted his intention to impose new tariffs of as much as 25 percent on steel and aluminum imports from Europe and America’s Canadian and Mexican neighbors under the rationale of “national security.” In general, the response by European, Canadian and Mexican government officials and by many in the news media has been that the affected countries must respond in kind, with retaliatory tariffs and related trade restrictions on American goods. Trump added gasoline to the political fire by replying that European automobile imports might be the next threat to U. S. national security.
Then just before leaving for the G-7 meeting of leading industrial nations in Canada over the weekend of June 9-10, 2018, Trump proposed that America and the European Union reduce their existing tariff and other trade barriers to zero. But he later warned that if America’s European trading partners did not do this, then under his executive authority, Europe might be excluded from business in general within the United States. The gist of the European response after Trump had left Canada for his meeting in Singapore with the totalitarian tyrant of North Korea was outraged indignation; how dare Trump speak to them in that way. Trade retaliation would follow. After all, the national dignity of Europe’s governments is at stake!
Neither the U.S. nor Europe Practice Free Trade The fact is, while the U.S. and the major European countries have emphasized the idea and benefits from free trade, all of these governments impose various types of tariff and other barriers to shelter selected sectors of their respective economies. Most import taxes between America and the European Union are relatively low, in the range of 2.5 to 5.5 percent on a wide range of goods. On both sides of the Atlantic, however, there are types and categories of domestically manufactured goods or farm products that receive significant tariff protection, sometimes high in the double digits.
What the sensitive sensibilities of the Europeans find so shocking is Donald Trump’s explicit worldview, which is a throwback to many of the Mercantilist ideas of the 1700s, when kings and their governments saw international relations as a combative zero-sum game. If one country became economically stronger it could only be because one or more of its nation-state rivals had become poorer and weaker. Increased economic strength meant more political and military power in the global combat for survival and dominance.
The sign of economic success for those eighteenth century Mercantilists was a “positive” balance of trade, that is, that your own country exported more goods than it imported from other nations so the rest of the world owed more to your country than you owed to them. The net payment was to be in gold, so as your county’s financial war chest of money increased that of other countries decreased. Gold could buy anything, anywhere, so that if a real war were to break out, your country would have the monetary means to purchase the greater amount of needed military and related materials to triumph over the enemy nation-state.
Trump’s Mercantilist View of the Balance of Trade For Donald Trump, a balance of trade deficit means that other counties are selling more goods to America than America is selling to them. Dollars flow out of the United States to pay for that net in-flow of foreign goods, which means more profits and jobs in other countries, and less business, profits and jobs for American employers and workers.
The loss of that business and those jobs means America is economically weaker and other nations are stronger. That’s a primary reason why Trump keeps saying that the U.S. “negative” trade balance is hollowing out America vies-a-vie it’s trading partners, particularly since he thinks of a nation’s economic strength in terms of traditional manufacturing and energy sectors. Having a big steel industry means you can build a lot of warships and combat planes at a time of war, while a large oil and coal sector means the war machine can be kept going until “victory.”
A good number of critics have pointed out that it’s absurd to impose tariffs on Canada, Mexico and leading European countries due to “national security” concerns since these are among America’s leading political and military allies on the world stage, and have been during the entire post-World War II era.
For those earlier Mercantilists of the 1700s, there were no permanent allies, only expedient alliances on the changing global scene for power and domination; today’s “friend” could be tomorrow’s “enemy.” For Donald Trump, America’s political and military allies not only pick Uncle Sam’s pocket by “free riding” under U.S. military protection around the world, but also steal American jobs and business while doing so. In Trump’s mind, “With friends like these . . .” who play Americans for suckers.
Trump’s Mind Doesn’t Understand a Changing World Trump seems unable to understand that dollars earned by foreign sellers end up being spent in the U.S. one way or another. If not on finished American goods and services, than as dollars directly or indirectly invested in the U.S. economy. And if the earner of those dollars does not want to spend it himself in one of these ways in the Unites States, he will sell those dollars on the foreign exchange market to someone who does. (See my article, “Trade Deficits Don’t Matter – Unless Caused by Government”.)
With a mind frozen in conceptual time, Trump fails to fully understand and appreciate that the world is changing, and always is. A good part of the immediate post-1945 world was unnatural, with so many industrial counties heavily destroyed and America industrially and economically unscathed in comparison.
But over the decades the world has been rebalancing. First, Western Europe and Japan recovered from the destruction of the Second World War. And especially during the last nearly thirty years of the post-Cold War era, more and more parts of Eastern Europe, Asia, Africa, and Latin America are modernizing and economically developing by introducing freer market policies after the epoch of Soviet-style socialist central planning.
The global division of labor has been, is, and will continue to change, in a world of changing supply and demand conditions. Some of these changes are primarily market-driven, while others are influenced to varying degrees by the hand of government interventionism. These are sometimes so intertwined that it’s difficult to sort out how much is market-based and how much is due to different types of political “cronyism.” But nonetheless, the patterns and potential profitable specializations are constantly shifting around the world.
There is no better way of finding out where the most profitable niches of individual and national comparative advantages may be than leaving a country’s domestic and international trade free from the intervening hand of the state. Not only do each of us know our own circumstances and potential opportunities better than politicians and bureaucrats sitting in their government offices, but government interventions inescapably carry with them political privileges and favors for some at the expense of many others that diminish individual freedom of choice and market association that potentially lowers everyone’s possible standard of living.
Whether Trump’s tariffs are motivated by Mercantilist fallacies or merely fulfilling campaign promises to assist his re-election in 2020 (or both), they will harm American consumers and producers whose choices for finished goods and inputs for future production will be narrowed, while raising the costs of whatever they end up buying. Trump may wail against foreign businesses stealing American jobs, but to assist some crony collaborators with his trade walls hurts the economic liberty and prosperity of far more Americans in the process. (See my articles, “Trump’s Economic Warfare Targets Innocent Bystanders” and “Trump’s Protectionist Follies Threaten a Trade War”.)
Tariff Retaliation Misguided and Harmful So what should America’s trading partners do? The consensus in the countries threatened with Trump’s tariffs is retaliation. The foreign politicians and pundits indignantly say that the insult and the injury must be responded to in kind. That hurting “us” in Europe will be matched with counter-tariffs equally harming “you” in America. In fact, if America’s European and North American trading partners follow this path, they not only threaten to further undermine the international system of division of labor, but will greatly harm their own respective citizens.
This was all clearly explained by the British economist, Henry Dunning MacLeod, in his 1896 book, The History of Economics, at a time when protectionist sentiments were beginning to re-emerge after the triumph of free trade in Great Britain in the 1840s. MacLeod warned that, “If foreign nations smite us on one cheek by their hostile tariffs, if we followed the advice of the reciprocitarians, and retaliated, we should simply smite ourselves very hard on the other cheek.”
He asks us to imagine that for some reason France decides to impose new and high tariffs on the importation of British goods. Certainly, MacLeod admits, this does harm to the British manufacturers now burdened with an import duty on the goods they have been selling in France. Their export sales decrease, revenues and profits decline, and some workers in these export sectors of the British economy may lose their jobs.
Immediately the cry is heard that Britain must retaliate, MacLeod continues. An import tax is imposed on a variety of French goods to teach “them” a lesson. This will, no doubt, result in loss of business for the French exporters now unable to as easily sell their wares in Great Britain. But what is not always appreciated in the protectionist argument is that it is not the French exporters who pay the British import tax that increases the revenues of the British government. Said MacLeod:
“It is clear that it is not the Frenchmen who pays [the import tax], but the British consumer. The import duties are charged in the price to the consumer, and, therefore, by placing import duties on goods, it is ourselves we tax, and not the foreigner. Thus, England, irritated at French ill-temper, gets in a passion and immediately fines herself [the monetary value of the import tax].”
Furthermore, since at the higher import price, the French exporters will likely earn fewer British pounds from smaller sales in Great Britain, their ability to purchase as many British goods as they, perhaps, had done before will be reduced. This will negatively affect British exporters, with jobs losses and reduced business throughout the British export supply-chain. Concluded MacLeod:
“By the method of retaliatory duties, when the Frenchmen smites us on one cheek, we immediately hit ourselves an extremely hard slap on the other. The Frenchman, by his duties, does us an injury, and we, by retaliating, immediately do ourselves a great deal more; and, indeed, it would not be difficult to show that the country which imposes the [retaliatory] duty does itself a great deal more injury than its antagonist.”
The Best European Response to Trump’s Tariffs? Do Nothing The Europeans, Canadians, and Mexicans who face higher American tariffs on any of their goods, therefore, should do – nothing. That is, however, damaging they view these increased import taxes on some of their export products, to retaliate will do nothing to get back at the specific American domestic industries protected by these increased import taxes, but it will do greater harm to their own citizens.
Those American goods hit by any retaliatory import duties will now cost more for European consumers to buy, thus, reducing their standard of living to that extent. It will diminish the revenues earned by American businesses from sales in the European Union, thus reducing their ability to purchase as many EU manufactured goods as before, thus decreasing some parts of the European export trade and threatening some of the jobs in these sectors of the EU economy. To teach the Americans a retaliatory “lesson,” the Europeans will end up slapping themselves fairly hard on their own face in response to Trump’s tariffs.
But what about Trump’s charge that the Europeans are not playing “fair,” that their existing tariffs and other import restricting policies against American goods are significantly higher in a number of instances than American import taxes on European goods entering into the United States? Trump threatened before he recently left Canada to close the American market to European sellers if they don’t lower their trade barriers.
The Best Response to Foreign Tariffs? Lower Your Own Henry Dunning MacLeod addressed this issue as well. He insisted that waiting for or insisting upon “reciprocity,” that is, not lowering your own trade restricting policies until your trading partners do so at the same time and to the same degree, only harms the citizens of your own country. The best policy is to simply lower your own existing import tariffs regardless of what any of your nation’s trading partners may or may not do. Explained MacLeod:
“By [Britain unilaterally lowering or abolishing tariffs] the price of French goods are lowered for British consumers, a greater demand for it takes place, and the French producers have more money to spend. Then they in turn take more goods from England, and this sets British industry in motion, gives employment to British workmen and to British shipping. Is it not clear, therefore, that it is to the advantage to lower her duties, whether France does so or not? By lowering the duties we are taking the burden off our own backs, and not that of the foreigner, though of course it benefits him too, as it gives him more employment . . .
“It may be laid down certainly, as a rule, that the country that raises or lowers its import duties injures or benefits itself much more than it injures or benefits its neighbor . . . The true way to fight hostile tariffs is by free imports.”
There is an additional danger of following the protectionist path of retaliatory tariffs and other trade restricting policies, MacLeod pointed out. Its proponents then have a foot in the door to not only insist upon the new import taxes never to be reduced, but to use that as a precedence to make the case for additional protection against other foreign imports under new rationales of “unfair” trading practices by other nations. Thus, a downward spiral may be set in motion of reduced and narrowed trade among countries around the world.
In his passing remark that he wanted all American and European tariffs and related import barriers repealed so that the market arena crossing the Atlantic could be a free trade zone, Trump declared an economic ideal and a policy goal that would increase freedom of choice and improve economic betterment for all concerned.
But Trump’s threat that if the Europeans did not take him up on this proposal, the American response would be to shut America’s door to European businesses would, certainly, bring down great harm to European producers and workers, if implemented. But, as Henry Dunning MacLeod clearly and logically demonstrated, the far greater damage from such a policy would be to the consumers and producers of the United States. Their standard of living and variety of choices among competing goods would be reduced and narrowed; their ability to buy less expensive and preferred European goods would be taken away.
Plus, a new spiders’ web of interest groups now protected behind Trump’s tariff walls from their European rivals would end up fighting tooth and nail for their privileged position in the American domestic market to never be taken away. Political “cronyism,” the use of government power for some to gain financial plunder through government privileges at the expense of the general population, would be reinforced.
Neither the United States nor the European Union are so free of protectionist “sin” to cast retaliatory tariff stones at the other. In addition, the harm to all that would result from trade wars means that neither America nor the Europeans should throw the next punch at the other. Each should lower their interventionist fists, and open their hands in market peace and economic friendship by simply doing away with their, respective, existing trade barriers currently in place and allow, instead, for their citizens to freely trade with whomever they desire on the competitive terms they mutually find beneficial.
To paraphrase, Ronald Reagan, Mr. Trump tear down those trade walls! If Donald Trump really wants a legacy most likely to help make America “great again,” few would be as important as to end all the American barriers to freedom of trade at home and abroad.
Originally published at the Future of Freedom Foundation
Trump’s trade war is not about about being patriotic or protecting American businesses. It is about politics and bad economics. No one wins a trade war; everyone loses.
On July 5, 2018, the United States declared war on China. China mobilized and quickly counterattacked the U.S.
This war is a trade war which means governments enact tariffs taxes on goods we would like to buy which makes them more expensive for us. People aren’t killed in these wars, rather, they are made poorer.
The U.S. imposed a 25% tariff tax on $34 billion of goods imported from China. They include some 818 Chinese products including aerospace products, ball bearings (an important industrial product), information technology, auto parts, and medical instruments. Also included are restrictions on Chinese investment in America and limits on visas for Chinese nationals. Another $16 billion of goods are being targeted. President Trump has threatened to impose tariffs taxes on virtually all imported Chinese goods, some $450 billion worth, in an all-out trade war.
China has retaliated by imposing tariffs taxes on $34 billion of American goods such as soybeans, automobiles, seafood, bourbon, pork, and crude oil.
The tariffs taxes on Chinese goods are part of a larger, expanding trade war against our other trading partners (Canada, Mexico, and the EU) which has targeted imported lumber, washing machines, solar panels, steel and aluminum. The Trump Administration is talking about tariffs taxes on imported automobiles.
The Trump government is justifying these taxes to counter China’s “unfair competition” and “theft of intellectual property.” The idea is that Donald Trump, that consummate negotiator, will force China to loosen up its markets to American goods and companies.
Wars, like this one, as the song goes, are good for absolutely nothing.
The first thing we need to realize is that this is not about being patriotic or Making America Great Again. And it’s not really about protecting American businesses. It is about politics. And it is about Trump’s ignorance about foreign trade.
Donald Trump has built his political reputation on being the smart, savvy billionaire who talks straight and can fix things. His “Make America great again” was a smart play for him which gained him traction with voters who believed America was somehow “losing” the battle for “greatness”.
But it was all an illusion. Trump played up popular myths about foreign trade (we are “losers”). But the facts show that free trade has been good for America. Foreign trade has opened up markets for American goods and has created American jobs. Employment opportunities in America are booming despite being trade “losers”. Exports are a significant 12% of our GDP and account for almost 11 million U.S. jobs. Cheaper imported goods make Americans richer, not poorer.
Whatever. These inconvenient truths don’t seem to faze President Trump which is why this is about politics, not economics.
A recent article in the Wall Street Journal spelled out the politics of Trump’s trade policies.
“’[The fact that the economy is doing well]… gives President Donald Trump’s administration what it sees as leeway to hit China without worrying as much about blowback from U.S. households or businesses caught in the crosshairs.
‘This is the perfect time’ to use tariffs to press China to change its trade practices, said Derek Scissors, a China expert at the American Enterprise Institute, who consults with administration officials. ‘You start a process, which will cause pain to the U.S., and to China, when you have everything rolling in the economy.’”
The Chinese, being no dummies themselves, have targeted Trump’s political base. Their tariffs taxes on U.S. soybeans and autos will hit his heartland supporters the hardest according to a Moody’s Analytics report cited in the Wall Street Journal. We’ll see how long their support for Trump will last. “All’s fair …”
Who wins a war like this? No one, but I can tell you who the losers will be:
Consumers of imported goods in both countries. Eventually the tariffs taxes on imported Chinese goods will make consumer products more expensive for American consumers. The reason we buy Chinese goods is that they are cheaper than products made by American manufacturers. This issue is more complex than outlined here, and it will take time for these tariffs taxes to work their way through the economy, but ultimately consumers will pay more for imports which means they will have less money to spend on other products. We will be poorer as a result.
American workers and companies whose jobs and businesses count on the China trade. American companies relying on parts manufactured in China will have a difficult time finding replacements, so they will have to absorb the 25% cost increase or pass it along to their customers. For example, ball bearings: “Ball bearings are used in a broad range of goods including cars, tractors, trains and conveyor belts. … This tariff is going to hurt the U.S. manufacturers who import from China more than the companies who export from China to the U.S.”
Auto makers like Ford and Tesla export cars to China. China had already reduced their tariff on imported autos to 15%. Now they have slapped an additional 25% tariff tax on imported U.S. autos making them subject to a 40% hit. Tesla’s Chinese showroom prices have already been increased by 20% in anticipation of a trade war. BMW and Daimler (Mercedes-Benz) make autos in the U.S. and export them to China and their Chinese showroom prices are going up. What this does is give an advantage to Toyota, Nissan, and Honda who can export their Japan-made vehicles to China without paying the new higher tariff tax.
A further consequence of Trump’s war is that U.S. auto manufacturers will now be incentivized to open more plants in China to service Chinese domestic consumption, thus depriving American auto workers of jobs (see Tesla and Harley-Davidson).
Midwestern soybean farmers are already being hurt by Chinese retaliatory tariffs taxes. Chinese importers have stopped buying U.S. soybeans and have moved their business to Brazil.
Trump is disrupting America’s global supply chain which many businesses rely on. The reality is that the world now works on a global supply chain. In order to satisfy consumer demands for less costly goods, the entire world competes to supply us. For example, approximately 25% to 50% of the parts in U.S. manufactured automobiles come from all over the world. This has been a boon to American consumers since new automobile costs have barely budged over the past 25 years.
Trump’s advisers believe that China has more to lose than we do in a trade war. That is not a likely outcome. It is more likely that we will suffer more than China. Being that 50% of their economy is based on exports, only 19% is with the U.S., and, the $34 billion of targeted goods will only account for 2% of total Chinese exports.
One thing that the Trump administration may not have considered is the fact that China is still largely a command economy and the ruling Communist Party of China has shown little reluctance to impose hardship on its citizens. As Chinese president Xi consolidates his power, one of his main themes is to assert China’s role in the world and it is unlikely he will want to display weakness in the face of U.S. trade bullying.
I hear Conservative Trump supporters say that he has some secret agenda on trade and that he and we will end up on top of this fight. This is unlikely. No one can predict where this war will end up. It echoes the 1930s and the disastrous trade wars that helped cause the Great Depression. This war could last a lot longer than the Administration thinks and it could end badly for American consumers and businesses.
This war is not against China, it’s a war against us.
Just over a century ago, in August 1914, the major European nations plunged their peoples into one of the most disastrous conflicts in history. The First World War claimed at least seventeen million lives, destroyed the social and economic fabric of Western Europe, and played a vital role in the expansion of state power around the world. It is therefore difficult to exaggerate its importance.
The causes of the war are too many and too complex to discuss in a short article (however, for those interested, the late Ralph Raico provides a fascinating overview here). I will discuss only one general problem that helped fuel the catastrophe: the ideological shift that occurred in Europe in the late 19th and early 20th centuries away from the liberal philosophy of laissez-faire and laissez-passer and toward autarky, protectionism, nationalism, and imperialism. Mises, himself a veteran of the First World War, identified these latter ideologies as joint causes of numerous conflicts. Furthermore, he repeatedly warned that war is a necessary outcome of abandoning economic freedom, which is inextricably tied to the spirit of liberalism and its philosophy of peace:
Aggressive nationalism is the necessary derivative of the policies of interventionism and national planning. While laissez faire eliminates the causes of international conflict, government interference with business and socialism create conflicts for which no peaceful solution can be found. While under free trade and freedom of migration no individual is concerned about the territorial size of his country, under the protective measures of economic nationalism nearly every citizen has a substantial interest in these territorial issues. (Mises, 1998 [1949], pp. 819-820)
Economic nationalism, the necessary complement of domestic interventionism, hurts the interests of foreign peoples and thus creates international conflict. It suggests the idea of amending this unsatisfactory state of affairs by war. Why should a powerful nation tolerate the challenge of a less powerful nation? Is it not insolence on the part of small Lapputania to injure the citizens of big Ruritania by customs, migration barriers, foreign exchange control, quantitative trade restrictions, and expropriation of Ruritanian investments in Lapputania? Would it not be easy for the army of Ruritania to crush Lapputania’s contemptible forces? (Mises, 1998 [1949], p. 827)
By and large, these are the kinds of international conflicts that developed in the decades prior to 1914. As relative free trade declined and imperialism flourished, a culture of militarism swept Western Europe, triggering a race to accumulate military assets and materiel on a previously unknown scale. By the outbreak of the conflict, every major belligerent except Britain had also adopted conscription so as to ensure an abundant supply of human as well as physical resources. Such policies could only end in disaster.
It is important, however, that even though many soldiers were compelled to fight, extraordinary numbers also volunteered for service, especially in the early days of the war. This fact is not so astonishing once we acknowledge the role of ideology. Throughout the 19th century, the nation-state had come to play an increasingly important role in forming the identities of many young European men. This development added a personal ideological dimension to warfare that was largely new, and which also created divisions along political lines among peoples who could otherwise have been at peace. It also helps explain the patriotism and nationalism that lead so many volunteers so unwittingly to the slaughter. Crucially, these sentiments were nurtured and reinforced by many important institutions of European society, especially its intellectual classes, who bear a large portion of the blame for rationalizing and glorifying war.
To take only one example, in his book A History of Warfare, John Keegan recounts a call to arms issued jointly by the rectors of the Bavarian universities on August 3rd, 1914:
Students! The muses are silent. The issue is battle, the battle forced upon us for German culture, which is threatened by the barbarians from the East, and for German values, which the enemy in the West envies us. And so the furor teutonicus bursts into flame once again. The enthusiasm of the wars of liberation flares, and the holy war begins. (quoted in Keegan, 2004 [1993], p. 358; emphasis in original)
This passage hints at the ideological climate in much of Europe after its retreat from an all-too-brief trend toward liberalism. Yet even including the melodramatic rhetoric, the ideas invoked above are indistinguishable from ones made today by both military and culture warriors. The use of religious language to frame a political conflict, the idea that war has been forced upon the blameless, and the claim that barbarians from foreign nations represent an existential threat to civilization that can only be overcome by abandoning reason and resorting to violence based on appeals to tribalism and a (different) barbarian heritage, are still familiar in an age when the European empires have been replaced by an American one. They also run strongly counter to the principles of liberalism.
Historically, the immediate result of the rectors’ appeal was the mass enlistment of German students; so many volunteered that they formed two new army corps. These men were flung almost untrained into battle against British regulars at Ypres in October, 1914, where 36,000 were massacred in only three weeks (Keegan, 2004 [1993], pp. 358-359).[1] This senseless death did not, however, serve as a rebuke to the military class, much less provide an impetus away from international and domestic conflicts; instead, it was simply mythologized and used for propaganda by the Nazis in the Second World War.
The lesson then is that the human costs of war do not in and of themselves teach anything to those who are not willing to listen. War will not cease until the ideas that support it are removed, and until they are, their costs will simply be used as justifications for further conflict. In Mises’s words, “To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war” (Mises, 1998 [1949], p. 828).
[1] I have been unable to verify this estimate, and other sources suggest the number killed was significantly lower. In any case though, casualties were horrific.
Ludwig von Mises’s contributions stood out against the background we outlined previously in mainstream international economic theory. Mises did not employ an analytical distinction between domestic and international trade, and unlike his contemporary scholars, he did not separate the real and monetary realms of the economy in his analysis. Quite the contrary, his lifelong research program was centered on bridging what he believed to be an artificial theoretical separation. Moreover, Mises also focused on placing entrepreneurship — understood as judgment, or decision-making under uncertainty, a view fully reconcilable with the classical principles of international trade—at the heart of his analysis of international economic phenomena. Albeit scattered throughout his works and weaved into the general economic analysis — thus falling short in terms of systematic and orderly presentation — Mises’s contributions to international economics are nevertheless original, wide-ranging, and eloquent.
Mises began his analysis of the particular aspects of international economics from the fundamental and overarching economic phenomenon of the division of labor. Throughout his works, numerous references were made to the merits of the principle of comparative advantage and the economic benefits of international trade, first explained by Adam Smith and David Ricardo. However, Mises stressed the fact that the adherents of the classical school were mistaken in their belief that the law of comparative costs represented the starting point for a separate theory of value in international trade. In accord with 19th century French liberals, Mises argued that
with regard to the determination of value and of prices there is no difference between domestic and foreign trade. What makes people distinguish between the home market and markets abroad is only a difference in the data, i.e. varying institutional conditions restricting the mobility of factors of production and of products (Mises 1998 [1949], 163).
Consequently, in Human Action, Mises revised the principle of comparative advantage into the law of association, a broader concept that incorporated the more particular law presented by Ricardo. The Misesian law of association indicated that unrestricted production and market exchange take advantage of the more propitious conditions, leading to the specialization of individuals and geographical areas according to their comparatively more suitable characteristics for one branch of production or another. If capital and labor are bound to the national soil, it is goods that move across borders; when capital and labor are free to move between countries,
the tendency inheres to draw labor forces and capital to the locations of the most favorable natural conditions of production without regard to political and national boundaries. [Therefore], unrestricted free trade must lead to a change in the conditions of settlement on the entire surface of the earth: from the countries with less favorable conditions of production capital and labor flow to the countries with more favorable conditions of production” (Mises 1983 [1919], 92).
The analytical coup of Mises’s revised version of the principle of comparative advantage lay primarily in the incorporation of money prices into the analysis of comparative costs, and thus in placing monetary calculation at the heart of understanding cost differences and trade pattern tendencies in international trade. Mises argued that
Monetary calculation… affords us a guide through the oppressive plenitude of economic potentialities. It enables us to extend to all goods of a higher order the judgment of value, which is bound up with and clearly evident in, the case of goods ready for consumption, or at best of production goods of the lowest order. It renders their value capable of computation and thereby gives us the primary basis for all economic operations with goods of a higher order. Without it, all production involving processes stretching well back in time and all the longer roundabout processes of capitalistic production would be groping in the dark” ( Mises 1990 [1920], 14).
This set the foundation for Mises’s overall approach to economic phenomena, both in their domestic and international aspects, which put the concept of money at the heart of the matter. As a result, Mises also explained in detail the causes and consequences of a change in the supply of or the demand for money, and thus gave a complex but operational definition of Cantillon effects, with its manifold aspects concerning prices, production, wealth, and business cycles. Mises wrote:
The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and interest rates neither at the same time nor to the same extent. If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various strata of the population. Then the gross market rate of interest too would not be affected either temporarily or lastingly by changes in the sphere of money and circulation credit. The fact that such changes can modify the rate of originary interest is caused by the changes which this unevenness brings about in the wealth and income of various individuals. The fact that, apart from these changes in the rate of originary interest, the gross market rate is temporarily affected is in itself a manifestation of this unevenness (Mises 1998 [1949], 552-3).
As a result of their gradual progress through the economy, from one individual cash balance to another, changes in the money relation thus affect the structure of prices, the structure of production (size and direction of production, and by extension, the size, direction, and composition of trade), the pattern of consumption, and the distribution of income and wealth in an economy. One particularly important instance of these effects is thus the case of the business cycle, when the change in the money relation first takes place on loan markets. In this case, the initial decrease in the gross market interest rates leads primarily to the unsustainable lengthening of the structure of production, which reallocates labor and resources toward the higher order stages of production, but which also revolutionizes prices and redistributes wealth among different groups of the population.
Money occupies in international transactions the same position as all other commodities being exchanged: once a general medium of exchange is selected on the market, barter exchange ratios between the goods imported and exported disappear in a monetary economy, superseded by money prices.
Internationally, therefore, Mises pointed out that “if no other relations than those of barter exist between the inhabitants of two areas, then balances in favor of one party or the other cannot arise” (Mises 1953, 182). Consequently, “the volume of foreign trade is completely dependent upon [money] prices; neither exportation nor importation can occur if there are no differences in prices to make trade profitable” (Mises 1953, 250). By extension, Mises also reached the conclusion that the balance of payments is consequently determined “by the price level and the purchases and sales induced by the price margins” (Mises 1953, 244 ), making money the active element of the balance of payments, and not an accommodating flow of the movement of ‘real’ goods across borders.
By exposing this indelible connection between the demand for money and the demand for goods (sides of the same coin) which drive the equilibration of the international monetary system through changes in individual cash-balances, Mises was able to argue that the separation between the monetary and real economy in the economic analysis was both artificial and pernicious. Throughout the 20th century, Mises remained one of the singular voices to argue that “money without a driving force of its own [...] would not be money at all” and that “money is neither neutral nor stable in purchasing power” (Mises 1998 [1949], 415-6).
What happens then with the purchasing power of money, and subsequently with the exchange rate, when there is a change in the demand for or supply of money? Mises based his arguments—and his definition of money non-neutrality, or Cantillon effects—on the insight that any changes in the supply and demand for money cannot run their course through the economy without first and foremost modifying the levels of individual cash-balances. He argued that if individual cash-balances cannot be increased or decreased simultaneously, the purchasing power of money also cannot be altered instantaneously following a change in the money relation. For example, an increase in the supply money is necessarily distributed step-by-step, from one individual money holder to another, spent and re-spent within and across borders “in a sequence of monetary changes” (Salerno 2010, 155) which drive down the purchasing power of the monetary unit. This process goes on until cash balances, the purchasing power array, and the exchange rate between currencies are established, uno acto, at the new levels. Consequently, argued Mises, individual prices never change at the same time and to the same extent following a change in the money supply. The economic and social consequences taking place during this adjustment process represent the Cantillon effects of a monetary expansion.
What are the welfare effects of change in the money supply? According to Mises, such monetary changes will necessarily lead to the redistribution of wealth on a general scale. The reason for these social changes, Mises argued, is twofold: on the one hand, “all economic agents are in a sense dealers” in currency (Mises 1953, 206), such that changes in its value affect the economic position of every individual. On the other hand, he continued,
the economic consequences of variations in the value of money are determined by the nature of their slow progress, from person to person, from class to class, and from country to country. [...] The fact that these variations occur one after the other is the sole reason for their remarkable economic effects (Mises 1953, 210; emphasis in the original).
First, only some people will initially have higher cash-balances (the first receivers of the new money); given decreasing marginal utility, they will value each currency unit less, so they will be willing to pay higher prices for the goods they prefer. As “a lower subjective valuation of money [will be] then passed on from person to person” (Mises 1953, 208), individual money prices will rise or fall depending on the path in which the additional money is spent, thus depending on the pattern consumer preferences. This process, which gradually drives the equilibration of the purchasing power array to the new money relation, does not affect commodity prices at the same date and to the same extent, i.e. prices do not change simultaneously or proportionally to the change in the money relation.
As a result, argued Mises, “while the process is under way, some people enjoy the benefit of higher prices for the goods and services they sell, while the prices of the things they buy have not yet risen to the same extent” (Mises 1998 [1949], 409-10). Wealth is thereby necessarily redistributed towards the first receivers of money from those who receive it last, or never, and who have to pay higher prices in the meantime. In other words, Mises defined Cantillon effects as the economic phenomenon in which modifications of the money supply gradually and unevenly percolate through the structure of money prices, and more importantly, modify the distribution of resources and wealth in an economy in the short run and on the long term.
More importantly, this changes are permanent. Each change in the money supply takes a different course through the economy toward establishing the new purchasing power array, such that the process will arbitrarily create winners and losers, i.e. benefitting and affecting different individuals each time, and to different extents. This means that the social changes brought about by monetary changes cannot be undone: the redistribution of wealth caused by an increase in the money supply cannot be offset by a subsequent decrease, or by a concurrent increase in the money demand.
Mises’s contributions represented a serious blow to the theoretical integrity of the classical dichotomy—which he often referred to as the ‘barter fiction’—, and implicitly to that of the money neutrality postulate. First, his analysis showed that once a commodity surfaces as the general medium of exchange in an economy, there no longer exist barter transactions and thus barter prices cannot exist either. All exchange ratios are necessarily money prices. Second, it illuminated the fact that the geographical equalization of the purchasing power of money throughout the world is accomplished as part of the same market process that creates the structure of money prices, and brings about the division of labor, thereby making monetary analysis an integral element of economic analysis. Third, it underscored the insight that money is redistributed among individuals according to their individual preferences for cash holdings in a sequential process of monetary exchanges, dispensing with the classical aggregate approach to monetary matters and proposing a disaggregate, ‘microeconomic’ approach.
For international trade in particular, Mises’s insights showed that money is embedded in the economic phenomenon of cross-border exchange. Money makes economic calculation possible by overcoming the drawbacks of direct and indirect exchange, and allows entrepreneurs to judge and plan transactions and extensive production processes (Mises 1990 [1920]). International movements of goods, services, and factors of production are necessarily guided by monetary calculation, and require above all the use of money and the judgement of the entrepreneurs. As Mises pointed out in Socialism, “in foreign trade, just as in internal trade—there is no difference between them—no rational production could proceed without money reckoning and the formation of prices for the means of production” (Mises 1951, 232). A general medium of exchange begets complex and roundabout division of labor, within and across national borders.
Last but not least, Mises’s contribution showed there is no difference in the effects on the distribution of income and wealth whether the variations in the purchasing power of money occur within a single national economy or within internationally connected market economies, or whether it’s the case of metallic money or fiat money (Mises 1953, 208). Just like in the case of a single national currency, the “interrelated variations in the complex of individual cash balances, incomes and prices” (Salerno 2010, 156 ) drive toward the equilibration of the purchasing power of money internationally as well, in a sequence of monetary changes — and it is these individual, microeconomic changes which constitute the focus point of an analysis of Cantillon effects on a national and global level. In other words, the process which brings the balance of payments to its equilibrium, works in a similar way in the case of a change in the money supply: money will move, internationally, from one money holder to another until the new purchasing power array is established together with the desired level of individual cash-balances. Therefore, the inherent social transformations accompanying all such monetary changes will concurrently take place across borders as well: wealth will be redistributed towards the first receivers of money from the last receivers, as the transfer of wealth is parallel, and of opposite sense, to the inflow of new money in the global economy.
This is Part 2 of a series. See Part 1.
The mercantilists contend that President Donald Trump’s tariffs on imports are to shrink the trade deficit, protect American businesses, and boost exports to the rest of the world. But the latest developments in international commerce show this is not going to plan. Instead, the president’s levies are triggering unintended consequences for several key industries, particularly agriculture and energy. Previously sitting on the throne of global markets, these U.S. sectors are being more harmed by the tariffs than they are being helped, proving that former President Ronald Reagan was right: “The most terrifying words in the English language are: I’m from the government and I’m here to help.”
Needless to Soy Since the U.S.-China conflict started, American soybean farmers have been decimated. Because Beijing was their biggest market for their crops, the Plains have nowhere to sell their supplies. As a result, inventories rotted, storage costs surged, farms went bust, and farmers started to transition into other crops, such as cotton, wheat, and alfalfa. The federal government attempted to rescue the agriculture industry by offering subsidies, giving bailouts, and employing the Depression-era measures of purchasing stockpiles.
With no end in sight to the U.S.-led trade spats, some of the globe’s top consumers of soybean are turning to other foreign markets to satisfy their demand. This, of course, has resulted in dissipating global market share for the U.S., which reigned supreme in this arena for years.
In addition to Brazil surpassing the United States as top dog in soybean output, other countries are attempting to take a bite out of global market share. Soybean prices are beginning to rebound from 12-year lows, so it might be a worthwhile endeavor for these states.
In 2018, China launched a five-year plan to increase domestic production of soybean. Entering into its second year, the world’s second-largest economy anticipates output levels to soar to their best in 14 years. With soy demand sliding amid the African swine fever outbreak, its volumes may be enough to no longer depend on outsiders – at least in the short-term.
India has started to plant more land to grow soybeans. In the 2019 crop year, Indian farmers have begun to shift from a diverse array of commodities, primarily cotton, and into soybeans. In the last year, output has climbed about 7%.
Thanks to favorable weather conditions, Argentina will see a 48% jump year on year, up 2% from the previous projection in April. Argentina is the world’s third-largest grower.
Even Europe, which has promised to purchase more soy from the U.S., is anticipated to expand production by more than 14% this year.
A Real Steel China has produced half of the world’s steel for several years. After more than a year of tariffs on its steel, analysts say that they are having “no effect” on the world’s second-largest economy. Why? There is robust domestic demand and the nation is enjoying worldwide tariff exemptions.
While the Trump administration has imposed levies on Chinese steel, the economic powerhouse is enjoying a lot more tariff exemptions from Canada, South Korea, Spain, and the United Kingdom. The Asian juggernaut even increased its total steel production last year, from 831.7 million metric tonnes to 928.3 million.
Exports have tumbled 8%, but these have been offset by rising national sales.
Paul Bartholomew, senior managing editor at S&P Global, told the South China Morning Post:
“Last year when the tariffs first came in, the steel market reacted negatively in China. It’s very sentiment driven, tends to be reactionary to policy announcements.
But it returned to fundamentals within a few days. For the first three quarters, the market was very strong and robust, demand was very robust.
Steel tariffs, the so-called trade war, wasn’t a huge factor. It was playing out in sentiment, but domestic demand was strong enough to save the steel industry.”
Overall, U.S. imports of Chinese steel have slipped from 5% to 2% in the last year.
Fuming Over Natural Gas America’s rise from energy dependent to energy independent has been a remarkable tale. No longer does the U.S. need to bow to the demands of OPEC. Not only is the U.S. keeping its own lights on, but it is also fueling the rest of the world. The natural gas revolution is expected to go on for another decade – perhaps beyond – but it might lose business should the trade war linger.
While the United States is set to surpass Russia as natural gas king in the next couple of years, Washington and Moscow are vying for two key markets: China and Europe.
When Beijing said it would impose retaliatory tariffs on more than 5,000 products, it included U.S. liquefied natural gas (LNG) imports on that list. As of June 1, LNG products will face a 25% levy. This is not good for American energy firms, especially with the trend suggesting diminishing imports. According to Reuters, just 27 LNG vessels ventured from the U.S. to China in 2018, down from 30 in the prior year. And, more than half of those that left U.S. ports did so before the trade war commenced.
Meanwhile, trade negotiations between the U.S. and the European Union seem to have paid off for American natural gas firms. Since 2016, U.S. LNG exports to the E.U. have skyrocketed 272%, with the biggest imports taking place between October 2018 and March 2019.
But Russia was still the biggest supplier of natural gas to the E.U. last year, followed by Norway. It should be noted that Algeria and Qatar are gradually boosting their energy exports to the eurozone. E.U. Commission data show that 11 member states, including Austria, Finland, and Hungary, imported more than 75% of their natural gas needs from Moscow, mainly because of their proximity to the nation.
Moving forward, there are two main factors that could help Russia.
The first is that E.U.-U.S. trade relations could sour, which may be happening right now. U.S. trade representatives have accused the E.U. of not keeping up their part of the temporary arrangement, insisting that the region buying more agriculture be a part of the deal.
E.U. Trade Commissioner Cecilia Malmström told Foreign Policy :
But it’s true, we have a long list of issues in the trade area where we have disagreements with the U.S. administration. So we are not negotiating with a gun to our head. We have very clear red lines, very clear conditions, but we are also determined to say that the EU and U.S. are natural friends and allies—we should have a common agenda.
The second gamechanger are pipelines. Russia has an advantage over the U.S. with cheaper transportation costs and established infrastructure. In addition to an abundance of major pipelines, Russia is in the middle of constructing several important ones, including the Nord Stream 2 that links Russia to Europe through the Baltic Sea. It could explain why the Congress is targeting the project with sanctions.
No Trump Card for US Industry Proponents of the Trump tariffs contend that the rest of the world has been ripping off the United States for far too long. The import levies are an attempt, they say, at reducing the trade deficit, leveling the playing field, and bringing back American jobs. Is the trade war proving to be successful? The trade deficit has increased since President Trump took office, consumer prices are rising, tariffs are having little effect on the roaring labor market, and American industries are losing their competitiveness on the world stage. If this is winning a trade war, then one can only imagine what losing would look like.
[Originally published by Liberty Nation.]
All too often, discussion over trade deals focuses almost solely on tariffs.
It's true that tariffs—i.e., taxes—are always a significant barrier to free exchange at all levels, but there are also plenty of ways to block or lessen trade that are not primarily tariff-based. Recent conflicts over the pending negotiations between the UK and the EU are a reminder of this.
For instance, The Guardian reported yesterday "The EU will demand the right to punish Britain if the government fails to shadow the Brussels rule book in the future….The bloc will demand that the British government apply EU state aid rules in their entirety as they evolve."
Specifically, EU countries—especially France—want to make sure
that Britain must comply with strict "level playing field" provisions to ensure that the UK does not undercut the EU on issues like the environment, state aid and workers' rights.
Let me translate that for you: European politicians are concerned there might be too much freedom in the UK after Brexit is finished. Brussels fears producers in the UK might use that freedom to produce goods and services that will be more affordable to European consumers.
Thus, the EU's negotiators want to force British producers to labor under all the same entrepreneurship-crushing and innovation-destroying regulations that Europeans now must endure.
Should they refuse, the EU plans to hike tariffs or employ other trade-blocking sanctions.
The Creation of a Global Trade Bureaucracy This isn't to say that the EU is the only state or quasi state guilty of working to limit trade while also claiming to be expanding it.
The United States-Mexico-Canada Agreement (USMCA, the successor to NAFTA) features the use of government regulations to manage trade and limit foreign freedoms that might be used to "undercut" other countries.
As with NAFTA, under the USMCA Mexico can't export goods to the United States unless those producers are subject to new labor laws demanded by US negotiators. Mexican firms must also adhere to US-approved environmental regulations and to intellectual property laws that extend corporate monopolies (mostly patents) into ever longer time periods.
And, of course, Mexico must conform to "country of origin" rules designed to ensure that other countries aren't using Mexico as a pass-through for their goods.
What if Mexico doesn't comply? Well, then tariffs go up, thus illustrating that the agreement was never really about free trade in the first place.
After all, under both the USMCA and the EU agreements, enforcement of all these regulatory provisions requires a whole host of bureaucratic agencies designed to monitor and regulate trade so as to ensure compliance.
When your "free trade" agreement depends heavily on thousands of pages of rules and regulations, then somebody has to check to make sure "40 to 45 percent of automobile parts must be made by workers who earn at least $16 an hour," or that 75 percent of a manufactured good's components come from an approved location. There must be inspections, reports, audits—and when necessary—judicial-type proceedings designed to determine guilt and punishment.
We should also expect these requirements, regulations, and mandates to get worse over time. Ever since NAFTA was inked, there have been complaints that the agreement did not impose enough new requirements on the Mexicans to suit the desires of environmentalists and labor union advocates. And, of course, huge corporations are always demanding ever-more-exploitive intellectual property rules. We should not expect those demands to go away with the USMCA.
Meanwhile, Europe isn't exactly in any danger of liberalizing its regulatory regime. If the past decade is any indication, the next ten years will bring a host of new regulations. Through it all, the EU is now telling us the British will be expected to "keep up" or "harmonize" its own laws with those of the EU. Otherwise, Britain will be accused of abusing the system by providing a means for employers and producers to avoid some regulations but still get access to the EU trading bloc.
Poor Countries Often Get the Worst of It But at least the UK is already a rich country. In the case of Mexico, as with other developing countries, these nontariff trade barriers "may erode the competitive advantage that developing countries have in terms of labour costs and preferential access."United Nations Conference on Trade and Development, Non-Tariff Measures to Trade: Economic and Policy Issues Issues for Developing Countries, United Nations publication no. 1817–1214 (New York and Geneva: United Nations, 2013), https://unctad.org/en/PublicationsLibrary/ditctab20121_en.pdf.
Yes, poor countries can offer cheap labor to bring down costs of producing goods. But when exporting those goods requires jumping a host of regulatory burdens, costs can quickly climb again. Moreover, these regulatory requirements can be stacked on top of each other. Under EU rules, for example, a trading partner in Africa might need to meet "sanitary" requirements around food quality while also meeting labor requirements and quality control mandates on manufactured goods. In many cases, these requirements are difficult to meet because producers in poorer nations lack the expertise and capital to achieve compliance at a level far above what the market itself demands.
For this reason, "tariff liberalization alone has generally proven unsuccessful in providing genuine market access [and] has drawn further attention to non-tariff measures (NTMs) as major determinants in restricting market access."Ibid.
Nor are these "regulatory harmonization" efforts the only sort of nontariff barriers at work. According to this 2017 study,Erdal Yalcin, Gabriel Felbermayr, Luisa Kinzius, Hidden Protectionism: Non-Tariff Barriers and Implications for International Trade (Munich: Liebniz Institute for Economic Research, 2017). these can include domestic subsidies designed to make domestically produced goods more competitive than foreign ones. Other nontariff barriers include straight-up quotas on foreign goods and laws requiring governments procure goods and services only from domestic firms. Given the size of the public sector in many countries—including the US, which heavily employs this type of trade barrier—those kinds of provisions have a sizable impact on international trade.The rise of nontariff barriers also illustrates the a problem with claiming US trade is much more free now than in the past. While it is true that tariffs in the nineteenth century in the US were higher, non-tariff barriers were likely much lower. Thus, simply comparing current US tariffs to past US tariffs is not a valid way of comparing the relative freedom of trade regimes past and present.
Global non-tariff barriers, 2009-2016:
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Source: Erdal Yalcin, Gabriel Felbermayr, Luisa Kinzius, Hidden Protectionism: Non-Tariff Barriers and Implications for International Trade (Munich: Liebniz Institute for Economic Research, 2017), p. 8.
Of all of these, though, it may be the use of regulatory mandates as a trade barrier that is the most insidious. By requiring trade partners to expand their own regulatory states so as to "harmonize" their legal environments with those of trading partners, trade agreements actually expand the power and jurisdictions of bureaucratic regimes.
Trade Bureaucracy Destroys Innovation and Entrepreneurship in Rich and Poor Countries Alike Like all trade barriers, this may be a net win for certain interest groups within the country where the state is pressing for greater regulatory mandates. But these measures also cut out much of the benefit of expanded international trade for entrepreneurs and consumers.
For example, imagine a small chain of US restaurants discovers a new much more affordable source of avocados in El Salvador. The restaurant chain then begins to demand more avocados than it could afford to buy before. Farmers in El Salvador start to hire more workers to harvest the avocados and ship them north. The American restaurants then hire more truckers to deliver the avocados and more waiters to serve their customers.
But then it turns out that the El Salvador farmers aren't paying the workers the wage mandated in the trade agreement between the US and El Salvador. US trade negotiators then demand that the farm owners pay higher wages or submit to a 20 percent tariff. As a result, El Salvador workers are laid off and become once again unemployed. Meanwhile in the US the restaurant chain must scale back its operations and close stores as a result of rising food costs. Had there been real free trade, of course, the workers, the restaurant owners, and the diners would have all been free to produce avocados in a way that everyone could agree on. But then regulators got involved and imposed regulations to make sure Salvadoran workers and farmers weren't "undercutting" US workers and farmers. The enforcement of these provisions might be a win for certain American farmers and labor unions. But it's a loss for everyone else.
So much for "free trade."
Here we see again the dark side of economic integration: what was billed as a lowering of taxes, barriers, and "transaction costs" was in many ways just an expansion of the state's jurisdiction. We are witnessing something very similar in the Brexit negotiations. The UK is angling for an agreement to facilitate trade, but in the end it may just end up increasing Brussels's power over British consumers.
It remains unclear how much the stock market implosion of recent days will affect the larger economy. As David Stockman has noted often, the Wall Street economy is not synonymous with the Main Street economy, contrary to what the advocates of rampant bank bailouts and financialization would have us believe.
Nevertheless, fear of a general crisis has driven Donald Trump to hint that tax cuts should be on the table.
That's good news, and the first place Trump should start—since he has the authority to unilaterally do so in many cases—is reducing trade barriers.
It is certainly true that Trump's trade war against China has reduced real wages for Americans, raised the cost of doing business for entrepreneurs, and generally hobbled the US economy. Trump's protectionism serves mostly to pander to select interest groups (such as organized labor and steel factory owners) while raising net taxes for everyone else. (See: "Smashing Protectionist 'Theory' (Again)" by Murray Rothbard).
It's Not Just a China Thing An Rothbard explains, economics-based arguments made by protectionists against free trade fail again and again (see also the many linked resources at the end of this article), but I am aware that there are many non-economics-based arguments against free trade with China. (These geopolitical and sociological arguments appeal to non-monetary benefits of protectionism, and implicitly concede protectionism does not bring net monetary gain.) But even these arguments tend to focus on China as the real threat. After all, few people outside doctrinaire protectionist circles are willing to buy that South Africa, Brazil, or India — let alone Australia, Italy, or Peru — pose threats to the self-determination or physical defense of Americans.
But let's leave the issue of trade with China alone for the moment. Since I'm such a moderate and accommodating fellow toward my critics who advocate for a war of economic nationalism against China, let's turn our attention instead to every country that isn't named China.
The claim that free trade is bad because it fosters a supercharged China obviously doesn't apply to anyone else. Russia's economy is a tiny fraction of the US's. Mexico is no geopolitical threat to the US whatsoever, and indeed Mexico depends on US prosperity for its own prosperity. The US has been at peace with the entire Anglosphere for more than two hundred years, and all other large countries are either US allies or far too small to present any sort of real geopolitical threat.
So, why are there so many US trade barriers constricting trade with the world outside of China?
The answer is simply bad economics and interest group politics. Many industries want to use protectionism as a weapon to protect their industry at the expense of taxpayers, entrepreneurs, and consumers overall.
This applies, of course, to tariffs on tech, sugar and all other agricultural products, minerals and metals, automobiles, and a host of other products.
It's Not Just Tariffs But trade barriers are also much more than tariffs. It's misleading to look at a tariff schedule since this does not give us a sense of the many barriers to trade that actually exist. Nontariff trade barriers are actually quite common.
Yes, it's true that imposed tariff rates tend to be low, averaging around 2 percent. But it's important to remember that those are "best case scenario" tariffs in the sense that low tariff rates are imposed only on goods that meet a wide array of other nontariff requirements on potential imports.
As noted here at mises.org earlier this month, the United States is actually a world leader in imposing nontariff trade barriers, such as
Subsidizing US industries so as to help them outcompete foreign goods.Requiring government procurement of domestic products only (known as "public procurement" policies).Placing quotas on imports."Rules of origin" preventing "transshipment" of goods from third parties through countries with "free trade" access."Sanitary and phytosanitary measures," which are controls on the importation of foods affected by substances such as beef hormones and "genetically modified organisms."Regulatory requirements on the production of foreign goods, including mandates on foreign wages, labor unions, and environmental regulations.Imposing packaging, labeling, and product standards. Since the 1950s, these barriers have been increasingly used by the US government and other governments to reduce imports, and "[n]ontariff barriers [have] spread to substitute for the tariffs previously bargained away. Pressure began to surface for retaliation to punish trade partners for unfair trade barriers and unreciprocated tariff cuts. All of this was a prelude to the changes that would overtake U.S. trade policy in [the 1960s]."Kerry Chase, Trading Blocs: States, Firms, and Regions in the World Economy (Ann Arbor, MI: University of Michigan Press, 2005), p. 110.
These barriers are applied generally, and not at all just specifically to China.
Thus, when protectionists insist trade barriers must be kept in place in order to combat "a rising China" they are mostly talking about barriers that apply to the world outside of China as well. Basically, these enemies of innovation, entrepreneurship, and productive Americans are using China to justify an enormous government bureaucracy designed to limit trade in order to benefit a small number of special interests such as labor unions and environmentalists.
Step One: Open Up Trade with Every Country Not Called "China" Although it's true that an ideal policy would let Americans chose for themselves whether or not they want goods from China, a perfectly sane first step would be to drastically reduce or eliminate the trade barriers imposed against goods coming in from the rest of the world. Protectionists may claim that imported lumber from Canada is a grave threat to American security and propserity, but these claims are frankly and utterly incoherent. Imported goods are essential to American productivity and prosperity. For exmple, Canadian lumber is a boon to US homebuilders and millions of Americans who wants to buy a home or rent an apartment. Imported vehicles from Mexico may make the difference between a profitable business and a failed business for American entrepreneurs who need delivery vehicles. And of course, on the household level, imported goods may mean the difference between a household that lives paycheck to paycheck, and one that manages to sock away a little bit of savings each month.
Trade barriers, on the other hand, make both business and workers wasteful and incapable of dealing with innovations and productivity gains in the rest of the world. This is why the protected dinosaur industries of the Rust Belt couldn't even keep up with domestic US industries in other regions of the country.
Protectionists Resort to Violence to Enforce Their Whims Protectionists, of course, will continue to attempt to trick people with their sleight of hand which conflates trade in general with the public's fear of Chinese geopolitical growth. It's an easy political ploy that often works. And when people aren't convinced? Then the protectionists lobby for laws that ensure people who engage in non-government-approved trade will be jailed. After all, you can't have protectionism without jailers to enforce it.
However, a sound understanding of the economics of trade—and an understanding of how US trade policy also limits trade with everyone who isn't China—should lead us to conclude that most trade barriers have little to do with what the anti-China activists are going on about.
Thus, Trump could embrace free trade without even backtracking on his anti-China rhetoric. He'd just have to admit that freedom is a good thing and that American business owners and consumers ought to be free to chose to buy goods from Mexico or South Korea or the United Kingdom if they like. Unfortunately, freedom isn't a big priority in Washington.
For more:
"Rules of Origin" Show Why Trade Agreements Aren't Free Trade3 Modern Arguments for Tariffs, DebunkedTrump’s Maoist Steel Obsession"The WTO Is Both Irrelevant and Unnecessary""The EU's Latest Screw-You to the UK Shows a Big Problem with Trade Agreements"The US's "Free Trade" Isn't Very FreeTag: Protectionism and Free Trade
Listen to the Audio Mises Wire version of this article. The 2016 Brexit referendum was the culmination of a debate which had been ongoing for years. While the Leave promoted rhetoric targeting the EU as an illegitimate and despotic entity threatening the freedom of all British citizens, the EU institutions together with politics and media supporting the Remain disregarded most of the concerns raised by the Leave to focus on the pieces which could be easily labeled as either xenophobic or anti-European. It was difficult to find any constructive conversation about the motivations of citizens supporting the leave option. Nevertheless, listening to what the Leave said shows that behind Brexit is a complex of interconnected issues about what the EU has become and what perspectives the EU proposes for the future.
But opposition to the EU has long been about the growing power of the EU bureaucracy over the member states and their populations. During his last speech in front of the EU parliament, UK deputy Nigel Farage summarized his viewpoint by reminding them that the UK had signed an agreement to facilitate business relationships, reciprocity, and exchanges of scientific and technical expertise, all of this to foster collaborations among Europeans. Mr. Farage pointed out that the initial agreements never included the legal framework for the implementation of a bureaucracy made up of unelected technocrats interfering with affairs normally controlled by the states. He also reminded his audience what problems appear and worsen with bureaucracies designed so that a minority of individuals is granted power without accountability.
Brexit in a Nutshell: What Is (Really) at Stake The EU’s power rests in many ways on its revenue, and this is among the reasons why the EU has so long fought a British exit.
To understand the importance of the UK's exit from the EU, one should keep in mind that the UK is the fifth-largest economy in the world. With a population of 65 million, the UK represents around 13 percent of the EU’s population while its economy accounts for 18 percent of Europe’s GDP. This makes the UK the second-largest economy of the EU. To put this into perspective, the UK is as rich and powerful as the nineteen weakest economies in the EU combined. This shows that although Brexit is not an easy transition for the UK, it will not be without consequences for the EU.
The EU should feel the economic consequences of Brexit in three stages. In the short term, there is the loss of the British contribution to the community budget. As the contribution of member states to the EU budget is dependent on their GDP, it is understandable that behind Brexit there will be considerable financial consequences. It was sometimes said that the negotiations, from the day after the initial Brexit vote and through their interminable duration, only served to perpetuate the English contributions to the EU budget which should have otherwise been compensated mainly by Germany and France. In the medium term, both parties need to redefine agreements to ensure the continuity of trade and business relationships. Trade talks should continue until December 31, 2020, when it will be known whether the transition period has allowed the two sides to establish strong points of convergence. Finally, in the longer term, the UK having freed itself from all European regulations, there is a good chance of seeing there develop an economic and social model competing with that advocated and imposed by the EU on its members. The UK will be free to conclude trade agreements with new partners and could reach an advantageous agreement with an EU that cannot do without either the British market or its army, whereas with the withdrawal of the British, the military expenditure of Europe is cut by 21 percent.
EU Destiny: From Fostering Collaboration to Empowering a New Form of Continental Statism In any case, the regulatory power of the EU has grown over time.
Until the Maastricht treaty of 1992, the European Economic Community applied the principle of subsidiarity by confining itself to its areas of exclusive competence. The exclusive powers of the union were the Customs Union; the establishment of the competition rules necessary for the functioning of the internal market; monetary policy for member states whose currency is the euro; the conservation of marine biological resources within the framework of the common fisheries policy; common commercial policy; and the conclusion of international agreements. In terms of barriers to trade, the EU has been beneficial when it has put an end to customs barriers and to repeated devaluations which were a means for companies to avoid the need to make productivity gains. European integration, as it took place up to and including the Single European Act of 1986 (which preceded the 1992 treaty), has made European economies more modern and more competitive.
The EU in its current form is different in the sense that it has "shared competences" with the member states, "competences to support, coordinate or supplement the action of the Member States," and, finally, "competences to take measures to ensure that member states coordinate their policies.” To the Europe of free trade was added the Europe of standards, regulations, and lobbying. There is no longer any principle of subsidiarity, and the EU can interfere in fields such as culture or social policies. With the extension of its prerogatives, the EU has turned into a bureaucratic organization whose institutional bodies continuously centralize powers. The EU pushes to reduce economic and societal disparities among its members, and this induces conflicting relationships between some European countries and European institutions. The UK often dissented within the EU and argued against EU policies while requesting exemptions. During the debates at the EU parliament, one deputy claimed that the Brexit started when the EU granted exceptions and that it was this that impaired integration under a homogeneous regulatory scheme. Far from questioning this quest for homogenization of the EU political and economic spaces, he asserted that the solution for avoiding such catastrophes was to ensure that no similar treatment would ever be granted in the future.
There remain many defenders of EU institutions, which are seen as guardians of “continental stability.” It is also argued that the EU is a powerful tool that constitutes a system of balances to protect individual rights against encroachment by member states. For the proponents of minimum governance, it would be preferable to decrease the government power at the national level rather than adding a layer of institutions acting at the continental level. The EU might look like a protective entity, but centralized structures are never politically neutral and are not exempt from regulatory overreach or abuses of power. Over time they tend to distance themselves from the viewpoint of the citizens. Technocrats working from within become convinced that they know better and that this justifies intrusions and interference in the business of others.
Although Brexit now appears to be a done deal, the EU bureaucracy may find ways to punish the UK for its independence. Moreover, the EU may use the Brexit experience as a reason to further limit the freedom of member states so as to avoid any future exit by other member states. This represents a sort of bait-and-switch for member states that were sold on membership as an opportunity to join a free trade bloc and a chance to participate in a more cooperative Europe. The reality today is something much different.
In Hans Hermann Hoppe’s original and controversial essay “The Case For Free Trade and Restricted Immigration,” he outlined a defense of state action for the restriction of immigration according to certain, specific qualifications. Of particular note is his invitation proviso, in which he argues that so long as a state exists, it is responsible for protecting the person and property of its citizens, and restricting immigration to only those migrants who have an “invitation” — most likely in the form of a contractual agreement for employment or property rental.
Hoppe’s position is, in its simplest form, that a per se right of migration does not exist. Instead, what right can be derived from the principles of private property “is the freedom of independent private property owners to admit or exclude others from their own property in accordance with their own restricted or unrestricted property titles” (emphasis mine). The role of the state, failing the preferable “corrective solution” of the privatization of public lands and the decentralization of the government, is to enforce this prerogative of private property owners. Hoppe calls this the “preventative solution” to immigration.
As the debate over the right to restrict immigration has blown up in the libertarian community, the focus from all sides has almost exclusively been on the matter of preventing potential migrants. But this means overlooking the corollary point of Hoppe’s argument, which is the right of property owners to admit migrants, by hiring them or renting them a home or through some other valid exercise of their own private property rights.
With this in mind, it is interesting to note that many of the United States immigration policies have violated Hoppe’s invitation proviso by preventing the legitimate migration of foreigners who were able to voluntarily enter into labor contracts with American businesses.
The first sweeping immigration law in the US was the Chinese Exclusion Act of 1882. This law was a reaction to the growing anti-Chinese sentiment that was erupting throughout the country, particularly in the West. The anti-Chinese and anti-immigration movement followed the predicable evolution of domestic workers growing increasingly disgruntled at having to compete with foreigners for jobs.
But although many of the early Chinese settlers might have violated the invitation proviso (though the principle of original appropriation, which has been consistently violated by government territorial claims, would have justified many of the early California settlers anyway), thousands of the Chinese workers that Americans were reacting to did meet Hoppe’s requirements.
When the Central Pacific Railroad was having trouble maintaining its labor force, it reluctantly hired fifty Chinese workers from California. After proving themselves to be productive workers — and because Chinese laborers were willing to accept lower wages than whites — the Central Pacific started recruiting laborers directly from China. To do this, it offered contracts to Chinese men prior to their migration into the United States, and the provisions of the contract often assumed responsibility for the cost of transport, usually in the form of loans that made the Chinese liable for a certain period of work to cover the cost.
Despite the anger this aroused among naturalized citizens, these labor contracts unequivocally met the standard Hoppe outlines with his invitation proviso. The result was the migration of well over 10,000 Chinese through voluntary labor agreements.
These contracts were not exclusive offered to the Chinese, either. Other businesses commonly advertised for contract labor, especially in eastern European countries. Often, these contracts were facilitated by middle-man agencies that traveled to Europe or Asia, negotiated contracts between the potential laborer and the American business, and then facilitated passage into the country.
Labor Unions spearheaded the movement against these voluntary arrangements because, along with the typical racist sentiments that were prevalent in the nineteenth century, foreign workers were seen as less likely to agree to pay union dues. Thus, immigration restrictions began to gain steam in the 1880’s and after.
While there was a mixture of immigrants who came prior to having a Hoppean “invitation” and those who met this requirement, it is undeniably evident that the immigration laws passed by the US, according to Hoppe’s immigration arguments, violated the private property rights of many business owners who were thus prohibited from voluntarily entering into labor contracts with foreign workers.
Immigration laws have continued to violate the right of private citizens to admit immigrations according to the invitation proviso into the present day. During the Syrian refugee crises, Tho Bishop noted similar instances of immigration laws interfering with the rights of private citizens to financially sponsor Syrian immigrants by providing them with shelter and living expenses for up to a year. This, of course, is equally consistent with Hoppe’s invitation proviso, but it was made illegal by statutory law.
Hoppe’s immigration theories continue to be a matter of controversy among libertarian theorists. But regardless of whether or not one subscribes to Hoppe’s ideas, it is important to put his theories in proper context. This means that it is necessary to recognize the cases in which the government, according to Hoppe, would be justified in restricting certain immigrants on behalf of property owners, but one must not forget that private property owners retain the ultimate right to admit migrants on a voluntary basis as an extension of their legitimate property rights.
Robert Mundell, winner of the Economics Nobel in 1999, recently passed away at the age of eighty-eight. As many of the obituaries have explained, Mundell is considered the intellectual father of the euro and was associated with the supply-side revolution in economics in the early 1980s. However, in this article I will focus on his earlier, seminal work on monetary and trade theory—which won him the prize—and critique it from an Austrian perspective. Specifically, I will explain what is meant by Mundell’s “impossible trinity,” and then show why a hard-money Misesian would reject its apparent insight.
Mundell’s Impossible Trinity Although I often take shots at him, Paul Krugman actually had a very good explanation in Slate of Mundell’s contributions back in 1999 when he (Mundell) was awarded the Nobel. For our purposes, I’m reproducing here the relevant portion of Krugman’s column. The quotation is somewhat lengthy but it’s very good at first setting the historical context and then explaining (in layman’s terms) what Mundell demonstrated:
Here’s what the world looked like in 1960: Almost all countries had fixed exchange rates with their currencies pegged to the U.S. dollar. International movements of capital were sharply limited, partly by government regulations, partly by the memory of defaults and expropriations in the ’30s. And most economists … took it for granted … that this was the way things would continue to work for the foreseeable future.
But Canada was different. Controlling the movement of capital across that long border with the United States had never been practical; and U.S. investors felt less nervous about putting their money in Canada than anywhere else. Given those uncontrolled movements of capital, Canada could not fix its exchange rate without giving up all control over its own monetary policy. Unwilling to become a monetary ward of the Federal Reserve, from 1949 to 1962 Canada made the almost unique decision to let its currency float against the U.S. dollar. These days, high capital mobility and a fluctuating exchange rate are the norm, but in those days they seemed outrageous—or would have seemed outrageous, if anyone but the Canadians had been involved.
And so perhaps it was the Canadian case that led Mundell to ask, in one of his three most famous contributions, how monetary and fiscal policy would work in an economy in which capital flowed freely in and out in response to any difference between interest rates at home and abroad. His answer was that it depended on what that country did with the exchange rate. If the country insisted on keeping the value of its currency in terms of other nations’ monies constant, monetary policy would become entirely impotent. Only by letting the exchange rate float would monetary policy regain its effectiveness.
Later Mundell would broaden this initial insight by proposing the concept of the “impossible trinity”; free capital movement, a fixed exchange rate, and an effective monetary policy. The point is that you can’t have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain—or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).
Elaborating on the Impossible Trinity Although Krugman’s summary was written in plain English—readers who want a more technical account with citations to the literature should check out the Wikipedia entry on the “Mundell-Fleming model”—let me elaborate a bit, to make sure the reader understands the dynamics involved.
Imagine the US is initially in equilibrium with Japan, and it takes $1 to buy ¥100 in the foreign exchange markets. Now suppose that at current prices, interest rates, exchange rates, etc., American consumers suddenly want to spend $1 billion more on Japanese cars, and that this is not counterbalanced by any desire from Japanese consumers to import more American-made goods. What happens? We will analyze the three possibilities from a Mundellian perspective, letting the authorities pin down each of the elements in the “impossible trinity” in the respective options. (Note that our discussion of the first option will be the longest, while we set up the framework, so that our discussions of options 2 and 3 can be brief.)
Mundell Option #1: Choose free capital movement and effective/independent monetary policy, while giving up a fixed exchange rate (i.e., allowing flexible exchange rates).
In this first scenario—which corresponds to the policy suite adopted by the United States and Japan today, incidentally—the authorities would allow the desired transactions to go through; the US consumers would get to buy their $1 billion in additional cars. This increase in the trade deficit would be matched by a corresponding Japanese investment of financial capital in the (net) accumulation of American assets.
In principle, the Americans could literally send hundred-dollar bills across the ocean that the Japanese would then add to their safe-deposit boxes; this would show the Japanese increasing their portfolios by $1 billion worth of American-issued financial assets (specifically, currency). However, a more typical outcome would be that the American importers would first enter the foreign exchange markets with their $1 billion and use them to buy Japanese yen. They would then use the yen to buy the cars from the Japanese sellers, who (of course) typically conduct their business in their own domestic currency. Meanwhile, those in the forex market who had sold their yen for dollars would then take the new $1 billion in US money to invest in American assets, such as Treasury debt, US stocks, real estate in Miami, etc.
Now here’s where things get tricky. In this scenario, we are supposing that the thing that upset the original equilibrium is American car buyers suddenly deciding to import additional vehicles from Japan. The only way to make that increase in the trade deficit “balance” is for Japanese investors to increase their investment in American assets—which remember, can be debt claims—by a comparable amount, measured in dollars.More accurately, the trade balance is part of the “current account” balance. In terms of simple accounting, it is always the case that a current account deficit is counterbalanced by its mirror image in a “capital account” surplus. For a more comprehensive explanation, see my article from early 2007. Note that although the accounting explanation of the trade balance is correct, at the conclusion of that article I criticized Peter Schiff’s gloomy forecast—for which I wrote a mea culpa in this later piece.
But if we were originally in equilibrium, where Japanese investors were happy with their holdings of American assets, then to induce them to hold an additional $1 billion worth, the American assets have to become more attractive. Specifically, their expected yield has to increase. In the case of Treasury securities, that means the interest rate on US government debt has to increase, so that the Japanese investor is willing to add more of it to his portfolio than before.
Yet hold on. In this Mundell Option #1, the central bank is still allowed to practice “effective monetary policy.” Presumably the Federal Reserve doesn’t want to let US interest rates rise above its original target level just because American car buyers want more Japanese vehicles. So if the American and Japanese authorities are going to allow the desired transactions to go through—thereby maintaining free capital movement—and the central bank is going to maintain control over its monetary policy decisions, then the Fed will act to combat the upward pressure on interest rates.
Typically, the Fed will engage in open market operations (which I explain in this chapter), buying assets from the market while creating additional dollars “out of thin air.” By flooding the credit markets with new reserves and by taking Treasury debt onto its own balance sheet, the Fed’s actions will push down US interest rates back to the original target level.Perceptive readers may wonder why Japanese investors would continue to hold more Treasury debt if the Fed’s actions undo the higher US yields that we originally supposed would be necessary to make them willing to do so. We will refrain from spelling out the answer, because the story we are telling in the text is somewhat ad hoc. In a more formal setting, we would have to carefully spell out all of our assumptions—including the possibility of other investors in different countries, who might rearrange their own portfolios when the Fed brings extra Treasurys onto its balance sheet. One of the loose ends in our own story is that we didn’t explain how the US consumers came up with an extra $1 billion to spend on Japanese cars.
All of the extra money printing will move exchange rates, however. (Remember, in Mundell Option #1, the element of the trinity that couldn’t be maintained was a fixed exchange rate.) In order to restore equilibrium, the US dollar will fall against the yen, so that instead of buying the original hundred, perhaps now a dollar only trades for ninety-nine yen. Other things equal, as the dollar weakens against the yen, it makes Japanese cars appear more expensive to American importers, and so this movement in exchange rates will stanch the new flows of cars and capital.
Now that we’ve carefully walked through the details of one leg of the “impossible trinity,” we can quickly cover the other two.
Mundell Option #2: Choose a fixed exchange rate and effective/independent monetary policy, while giving up free movement of capital.
This second scenario is quite easy to explain: when our hypothetical American consumers want to import more Japanese cars—or if Japanese investors want to buy more American assets—the respective authorities just say no. By strictly limiting international transactions to only approved channels and amounts, the authorities retain a free hand to set whatever targets they want for domestic interest rates and the foreign exchange rates on their currencies. If their citizens complain that they see a better car deal or bond available in a foreign country, their political officials tell them, “Tough! If you’re so unhappy here, move to Somalia.”
Mundell Option #3: Choose free capital movement and a fixed exchange rate, while giving up control over monetary policy.
In this third and final scenario, we suppose that the American and Japanese authorities want to allow their citizens to import cars and export financial capital however they’d like. However, they don’t want the vagaries of consumer and investor demand to affect the USD-JPY exchange rate, which (we suppose) is permanently locked in at 1:100.
Therefore, when American importers want to buy more Japanese cars, thereby putting upward pressure on US interest rates (to induce Japanese investors to hold the corresponding extra amount of American assets), the Federal Reserve has to allow it. This is the case even if the Fed’s own views on unemployment and inflation say that a “rate hike” would be bad for the US economy. Indeed, not only would the Fed not engage in looser policy (as in option 1), but depending on the specifics it might actually have to sell some of its own assets and soak up dollars from the system in order to keep the dollar from falling against the yen. Other things equal, Fed officials might worry that such tightening would slow US economic growth and keep US unemployment higher than they desired, but such is the corner into which Robert Mundell has painted them.
An Austrian Critique of Mundell’s Impossible Trinity Admittedly, my narrative above was somewhat loosey-goosey; perhaps Krugman would have explained the cause and effect differently (see for example this Wikipedia entry), and Mundell in his published papers of course spelled out a formal model with all the i’s dotted and t’s crossed. Even so, I’ve given a fair flavor of what Mundell meant by his claimed “impossible trinity” or what is also called a “policy trilemma.”
Yet from an Austrian perspective, this apparent tradeoff is spurious, particularly in the long run. Under the classical gold standard (which prevailed among the advanced nations up to the eve of the First World War), the participating countries enjoyed free movement of capital, fixed exchange rates, and their central banks were practicing the most “effective” monetary policy in fighting recessions that was available to them. In this respect the situation is analogous to the alleged tradeoff between freedom and security: when citizens give up their liberties so that the authorities can (allegedly) protect them, they end up exposed to more danger.
I explain the operation of the classical gold standard in great detail in this chapter. For our purposes here, I will highlight two key points:
First, under the classical gold standard, each sovereign nation defined its own currency in terms of a specific weight of gold. This implied a fixed exchange rate between these sovereign currencies. For example, in the year 1913, the British government stood ready to redeem its currency at the rate of £4.25 per ounce of gold, while the US government would redeem its currency at the rate of (approximately) $20.67 per ounce of gold. These respective policies implied—using simple arithmetic—that the exchange rate between the currencies was fixed at about $4.86 per British pound.
Yet this exchange rate between the dollar and the pound wasn’t “fixed” by coercion, in the sense of literal price controls; there was still a free market in foreign exchange. What happened in practice was that if the actual market exchange rate of dollars for pounds deviated too far from the anchor point of $4.86, it would become profitable for currency speculators to ship gold from one country to the other in a series of trades that would push the market exchange rate back toward the “fixed” anchor point. (See my chapter for more details on how this worked.)
The benefit of a fixed exchange rate is that it allowed individuals to make economic plans involving foreign commerce much more confidently, because they wouldn’t have to worry about movements in each currency. Imagine the difficulty of being an American entrepreneur if each of the fifty states issued its own fiat currency that “floated” against all the others.
The second point to highlight is that yes, Mundell is right that under the classical gold standard, the central bank had to subordinate its other policy goals to maintaining adequate gold reserves. If changes in consumer and investor attitudes put downward pressure on a nation’s currency, this would lead to gold outflows. If the central bank were to maintain the fixed redemption rate of its own currency in gold, it would need to reverse this outflow of gold, and so the central bank would have no choice but to tighten its monetary policy, by slowing the creation of new currency (or even absorbing some of the outstanding stock), and/or allowing domestic interest rates to rise.
Yet if the Austrian theory of the business cycle (explained here) is correct, then letting markets—rather than central banks—determine interest rates is precisely the way to avoid the boom-bust cycle that so plagues market economies. In other words, what Robert Mundell or Paul Krugman refer to as “independent” or “effective” monetary policy should actually be translated as “the tool with which central banks fuel an unsustainable boom that leads inevitably to a crash.”
Now it’s true that even under the classical gold standard, the market economies suffered from periodic panics and depressions. But even here—if Mises is correct in his diagnosis—the problem is that even the commercial banks have too much “discretion” over interest rates, derived from their ability to create and destroy money (broadly defined). So to be clear, I am not in this essay claiming that the classical gold standard by itself prevented recessions. Rather, I am saying that tying the central bank’s hands—in a way that a Mundellian might describe as “forfeiting effective monetary policy”—is a necessary (but insufficient) condition to eliminate the boom-bust cycle.
Conclusion Fans of the Austrian school would benefit from reading more about the Mundell-Fleming model, at least intuitive explanations. I know that I personally understood more about international trade and capital flows after working for Arthur Laffer, who himself published in this framework. To be clear, the canonical Austrian treatments (such as in Mises and Rothbard) of these topics are correct, but there are subtleties that Human Action and Man, Economy, and State don’t cover.
Even so, what most economists conclude from Mundell’s theoretical analysis is nonetheless wrong. To wit, we don’t do any favors for economic growth or the labor market by giving central bankers a “free hand” to create money and set interest rates however they see fit. Later in his career, when he became associated with the supply-side revolution, Mundell himself may have embraced the virtues of hard money and eschewed macro “fine-tuning,” but his insights still pale in comparison to those of Ludwig von Mises.
One of Ludwig von Mises’ great contributions to modern thought was his proof of the inability of economic calculation under socialism. This core truth should be recalled as many leftists seek to restore communism’s cachet. Perhaps nothing more vividly illustrates the mental paralysis that socialism begets than the foreign trade practices of East Bloc regimes.
In 1986, a Czech border guard stopped a Polish family leaving Czechoslovakia and ordered a Polish kid to take off his new Czech shoes "because taking children's shoes out of the country is prohibited." The Polish border guard watched passively - and then stopped a Czech car coming from Warsaw and ordered its new Polish tires stripped from the car, claiming that they had been illegally purchased in Poland.
Western trade wars were love fests compared to East Bloc trade fights. COMECON - the Council for Mutual Economic Cooperation - was derided by East Europeans as the "council for mutual exchange of inefficiency." COMECON was the foreign trade organization of a group of nations that instinctively hated foreign trade.
In Budapest, the saying was "We deliver grain to the Czechs and they in turn deliver machinery to the Poles. The Poles then ship chemicals to the Soviet Union and as a final payment, we get a Russian folk dance ensemble in return."
Foreign trade was a perpetual war in the East Bloc because no one could agree on prices. The nation's currencies were not convertible - and the Transferable Ruble - the official COMECON currency - was about as transferable as a wooden nickel. Each socialist government sets its national prices according to its own fancies, usually with little or no attention to world prices. As Ed Hewett of the Brookings Instiution noted, prices "are administratively determined, with complete disregard for important economic considerations such as costs or the level of demand."
Trade agreements among East Bloc countries were usually based on primitive barter arrangements - often simply on the gross poundage of objects to be traded - with no consideration or reward for quality.
In the early 1980s, Czechloslovakia and Poland agreed to cooperate in producing tractor parts. But, they were incapable of agreeing on a price so they simply swapped one kilogram of Czech tractor parts for one kilogram of Polish tractor parts. Both sides thought they were being shafted, so even this primitive agreement soon collapsed. As Indiana University eastern Europe expert Paul Marer observed, "The inability to have accurate cost-price calculations makes the specialization in production of parts and components nearly impossible."
Since trade agreements were based on physical quantities, countries had a strong incentive not to improve the quality of the goods and to maximize the weight of their machinery and products. Eastern European manufacturers used up to three times as many raw materials per unit of output as do western manufacturers. But, virtues in COMECON trading were fatal vices in trading with the West. As the Director of the Hungarian National Planning Office complained, "Comecon is difficult to buy from, and the West is difficult to sell to."
East European leaders distrusted foreign trade almost as much as some American congressmen do. Since each socialist government was obsessed with planning its own economy, each country tried on principle to minimize foreign influence. Trade as a percentage of GNP was far lower in eastern countries than in western countries.
This distrust was justified because COMECON members were notorious for "slack delivery discipline," as the latest socialist euphemism went. The Soviets ceased exporting their highest quality cotton to their Warsaw Pact allies and that in turn crippled Eastern Europe's ability to export clothing to the West. The Soviets also provided electricity to its neighbors but the poor quality of Soviet electrical grids led to increasing number of blackouts and brownouts, causing serious harm to Hungarian industry.
The usual socialist disregard of the consumer reached pathological extremes when the consumer was a foreigner - or at least a foreigner who is not paying with hard currency. It was extremely difficult to get spare parts for goods produced in other socialist countries. Hungary has had to import spare parts for its East German cars from Latin America.
While in the West most countries strive for a trade surplus, in the East Bloc each country preferred to have a deficit - to import more than it exports. The interest rate on outstanding trade debts was only 2% - and there was not a whole lot you can do with surplus "Transferable Rubles," except paper the walls and wipe off the floors. But, most countries were very careful not to achieve a surplus, so trade among the small East European countries was far more balanced than it is among western countries.
Not only did countries try to balance trade with each other every year; they also aimed to strictly balance trade in each commodity group with each country each year. When Hungary invented the Rubik's cube, many Russians would have loved to acquire the world's most fashionable toy of the year. But, Hungary could not have increased its Cube exports to the Soviets without decreasing its toy piggy bank sales to the Soviets. So, it made little effort to satisfy Russian demand.
The combination of widely-differing shortages and subsidies among socialist nations created a huge incentive for individual arbitrage. East Germany practically shut its borders to Poles and Romania refused to allow Poles to carry anything into Romania without making a deposit in western currency for each item. East German border guards routinely took away East German shoes from other socialist visitors leaving the country and Hungarian border guards were forever seizing salami from people leaving Hungary. On crackdown days, trains were sometimes stopped and torn apart - including ripping out the seams in suitcases. Romania was notorious for its day-long backups at the border.
As Jan Vanous, Czech emigre and research director of PlanEcon consultants in Washington, DC, ironically observed, "They are heading a situation where they will weigh you when you go out of the country and they will weigh you with your luggage when you come back. You can eat - or you can throw something away and bring something in. But you can't bring anything new in."
Though COMECON's problems were obvious, they could not be solved without destroying COMECON. Free trade and socialism were as irreconcilable as politics and honesty. If currencies were made convertible then nobody's national plan would be safe, because foreign individuals and businesses could come in and buy what they chose. As long as governments are committed to central planning, foreign influences had to be minimized and strictly controlled.
Von Mises warned in 1920: “Socialism is the abolition of rational economy.” Comecon’s antics were one of the most vivid proofs of the folly of foregoing price mechanisms.
An earlier version of this piece was published in Wall Street Journal/Europe on January 25, 1987.
When Ronald Reagan officially announced his candidacy for president of the United States in November 1979, he called for the establishment of a large free trade zone encompassing the USA, Canada, and Mexico. Not surprisingly, the so-called free trade agreement better known as the North American Free Trade Agreement (NAFTA) resembled the usual “managed trade” that falls much more into the category of what Randall Holcombe calls “political capitalism.” Politics has a way of doing that.
For all of the logic of theories of free trade and for all of the prosperity that has come about as international trade has expanded in the past few decades, freedom of exchange over international borders will always have its enemies. On the progressive Left, we have seen the political candidacies of Bernie Sanders and Elizabeth Warren, both of whom are hardcore protectionists.
Conservatives, however, have opposed free trade for decades and seem to be impervious to any arguments to the contrary, no matter how logical free trade policies might be. In a recent edition of the American Conservative, Clyde Prestowitz praises President Joe Biden’s proposal to heavily subsidize the US semiconductor industry. He writes:
President Biden has proposed that the U.S. government invest billions of dollars in the pivotal U.S. semiconductor industry as part of an effort to assure continued global leadership. It is a break with 70 years of U.S. free-trade doctrine, as well as a huge step back to America’s future.
While one can write volumes on the meaning of “invest” in that statement, nonetheless there is much more to understanding just how fallacious this latest conservative argument for “managed trade” really is. President Bill Clinton used that term regularly as a euphemism for more spending, and politicians recklessly have used the terminology ever since.
However, what exactly would be Biden’s “investments”? Will the federal government be financing new capital expenditures for US companies and, if so, what are the terms of financing and how will the capital be directed? Government “investments” by definition are political expenditures and require political outcomes, none of which will meet actual needs in the US economy.
Like so many conservatives that call for some forms of autarky, Prestowitz conjures up an American past that in his thinking was made possible only by protective tariffs. He writes:
This is a return to the trail first blazed by Alexander Hamilton in 1791. Hamilton proposed mimicking Britain’s budding industrial revolution by copying its technology, imposing tariffs on imports of manufactures and providing financial incentives for the development of domestic manufacturing.
Hamilton was initially opposed by Thomas Jefferson, who dreamed of an America of yeoman farmers trading produce and raw materials like timber for imported manufactures. The outcome of the debate was determined by the War of 1812, which the U.S. nearly lost for want of manufacturing capability. In its wake, Jefferson yielded to Hamilton, noting that manufactures were “as necessary to our independence as to our comfort.”
The ensuing Tariff Act of 1816 launched a 132-year U.S. policy of imposing high duties on manufactured imports while subsidizing domestic industrial and technological development. Known as the “American System,” it led to the establishment of the Erie Canal, the telegraph, the transcontinental railway, and the world’s leading industries in steel, farm equipment, chemicals, autos, aviation, and engineering—along with the creation of the world’s largest economy by 1890 and the greatest economic mobilization ever seen in America’s World War II victory.
Prestowitz then goes on to construct a history that never was:
After the war, America ironically abandoned the American System and turned toward the Jeffersonian. There were two reasons. First, by dint of the American System and the nation’s victory in WWII, the United States had become the world leader in virtually every industry and no longer needed protectionist policies.
Second, many economists believed that U.S. tariff increases in the 1930s had both exacerbated the Great Depression and contributed to the outbreak of WWII. Led by the great John Maynard Keynes, they preached free trade as the road to both economic growth and peace. Thus was the postwar trading system founded in 1948 on free-trade principles.
Those associated with the Austrian school of economics know that we can call Keynes many things but “great” is not among them. While there is much to digest in the preceding paragraphs, one can be sure that American prosperity and the rise of large-scale manufacturing did not come about because the governments at all levels restricted trade. For that matter, as economic historians like Robert Higgs and Tom DiLorenzo have noted, many of the so-called American System projects, especially those involved with transportation via canals and railroads, were neither models of economy nor free of massive corruption.
(Because of limitations of space, I defer to excellent works on US economic history by Higgs, DiLorenzo, and Burton Folsom, who have looked at the so-called American System in detail and find a gap between the myths and the facts.)
The growth of industries such as steel and the development of the automobile did not come about because the USA had high protective tariffs but rather because entrepreneurs had the freedom to pursue profitable ideas. Yes, a system of high protective tariffs did exist at that time, but to say that tariffs and other government-sponsored projects such as canals or railroad subsidies created prosperity is to engage in the post hoc ergo propter hoc fallacy. Furthermore, if protectionism creates prosperity, as the author claims, then how can one reconcile the fruits of protectionism with the fact that the USA itself is a very large free trade zone in which people within states and localities freely exchange with each other?
In order to escape his own logical fallacies, Prestowitz then turns to economic historicism, a doctrine that says there are no laws of economics, as epochs of history themselves determine what set of economic arrangements will succeed and fail. Writers such as Karl Marx and Thorstein Veblen, for example, fell into the historical camp. Prestowitz writes about the effect of the reduction of tariff barriers in the USA following World War II:
It worked—for 25 years. During this economic golden era, GDP more than doubled. Dramatically rising productivity made it possible for single-earner families of eight like mine to enjoy middle-class life while sending the kids to college without borrowing.
By the mid-1970s, however, the United States began to experience trade deficits and balance-of-payment problems for the first time in nearly a century, as German Volkswagens and Japanese TVs showed up in American driveways and living rooms.
Note that in these paragraphs, there are no “whys,” just things that happen. Japanese televisions just “happened” to “appear” in American living rooms and German cars just “happened” to suddenly occupy American roads. There is no causality, nothing. There is no explanation as to why GDP in the United States rose in the postwar years and no reason that imports showed up on our doorsteps. He gives a halfhearted response which raises even more questions about his own logical processes:
Harvard economist Dani Rodrik notes that U.S. free-trade doctrine rested on questionable assumptions (e.g., permanent full employment) and ignored key realities like economies of scale (costs falling as production rises) and non-tariff barriers to trade (varying safety standards, monopolies).
Furthermore, he goes on to claim that nations that were poorer than the USA (and still are) turned the tide by creating systems of government subsidies and other protections from imports that enabled manufacturers in their countries to create goods that ultimately supplanted domestic goods in the US markets. He gives the example of Japan subsidizing steel and countries like China subsidizing just about everything else.
One does not dispute that other countries used subsidies, but there is a problem Prestowitz fails to address. Subsidies by definition must be taken from profitable portions of the economy and then applied to the unprofitable sectors. For example, if Japan were to subsidize its electronics industry, then every sale of a Japanese TV in the USA would be drawing from the accounts of Japanese industries that were profitable without subsidies, weakening those industries in the process. Prestowitz, furthermore, does not say that the subsidized industries suddenly became profitable, but rather that they continued to operate because of taxpayer largess, which means that countries like Japan and China weakened their own economies in order to sell products to Americans.
It is obvious that this is not a sustainable situation, which is why even hard-core protectionists always emphasized that the “infant industries” being subsidized sooner or later would have to grow into production adulthood. There is no way around this problem, as even the most creative methods of accounting cannot turn deficits into assets. Subsidies must come from somewhere, and the only place from which they can come is from those economic assets that are profitable. Anything else turns into an economic form of cannibalism.
In the end, we are left with a morass of contradictory thought, all undergirded by a conservative version of historicism. Free trade helped us to prosper until it didn’t. All of the successful industries in US history that created wealth were subsidized, except for those that weren’t. And so on.
One of the allegedly redeeming factors of conservatism was that it allegedly was grounded in a factual reality that recognized the natural limits of humanity and the universe. In its religious form (Christianity) conservatism understood the implications of original sin and the limitations it placed around people.
Today, we get something quite different, a set of beliefs based upon the notion that because something was “American,” it was exceptional by nature. The limits of time and space only applied to other people, not Americans, and that included laws of economics. In fact, there were not real “laws” of economics, according to these conservative historicists, just epochs of history that came and went and set their own rules.
So, according to Prestowitz, if Joe Biden wants to provide vast subsidies for American businesses, we are to assume that cronyism, rent seeking, and other behaviors that always have accompanied government-directed business investment will disappear because, well, because we are Americans. We accept the slogan “Build Back Better” and run with it, no questions asked.
If guilt is the best you have to offer a customer, you probably don't have that much to offer a customer.
When I walk into Walmart I know I will be able to get a wide selection of products, I will be able to get them cheap, and I will be able to get them with very little customer support or hassle. When I want that, it feels great. Fast, simple, cheap.
There is no guilt campaign from Walmart. There is no appeal to me about how bad of a person I am if I don't shop at Walmart. There are no protestors outside my houses or outside other stores convincing me it is bad to shop anywhere but Walmart. When I step foot in a Walmart, I go there because that is exactly what I want. I go there because they are better than anyone else at providing for me as a consumer in the ways that Walmart is so proficient in providing for me.
When I shop at Amazon.com, I get a wide selection of goods, at a cheap price with both the ease and occasional difficulty that comes with shopping online. They do that better than anyone else. When I want that, it feels great to turn to Amazon and get that, and to get it exactly as I expected, and to, often enough, be surprised by an experience that is even better than what I expected.
There is no guilt campaign from Amazon, there are no protestors outside my house convincing me it is bad to shop anywhere but Amazon. There are no online ads pointing out how immoral it is of me to shop anywhere that isn't Amazon. I use Amazon because Amazon is exactly what I want at that moment.
This is in sharp contrast with the average "mom and pop" shops.
When I step foot into a local shop, all too often, I find nothing remotely of value to me. It is an unpleasant experience with an unhelpful, or sometimes even rude and unknowledgeable salesperson.
I don't feel like I'm contributing to my community by shopping in such places. To the contrary, I hope most low value shops like that go out of business. The sooner they go out of business the better. By even being in existence they take up valuable real estate that can be used by others seeking to innovate the local space, to provide a better consumer experience, and to develop a better use for that local space.
Not only do I not feel guilty for not patronizing these mediocre local businesses, it makes me sad that they even exist. They are partially propped up by the guilt movement that encourages consumers to disregard all other benefits in favor of having the opportunity to shop locally, a movement I find misguided at best, more often ill-informed, and often enough willfully ignorant and therefore blatantly deceitful. The moral thing is to help bad local businesses go under by not patronizing them, and therefore helping to clean out that detritus that takes up valuable local brick and mortar space.
Confusing charity with shopping, confusing philanthropic activity with consumer activity benefits no one but the mediocre shop owner.
Shopping locally generally offers me only one added value — immediacy. I like shopping locally because it is nice to have an item that I want in my hand before I buy it so that I can look it over. It feels nice to have it in my hand ten minutes after I decide that I want it. Soon that will barely be an added value. With Amazon's same day delivery, it is already barely more immediate to shop for most things locally. If one can restrain oneself for an hour or two and not have truly immediate gratification, then Amazon, all things considered provides a far more valuable shopping experience to me than a local mom and pop on virtually all products. Also, while a minor added value, it is visually appealing to have an active business district. I am sure I can rather quickly adapt to a business district concept that looks different than what I am used to.
When I happen to sit down at a friend's or relative's home where the television is on, especially at this holiday time of year, I hear public service announcements about how important it is to shop locally. I sometimes hear as many as one or two segments on each news broadcast that interject how important it is to shop locally.
This is practically mindless — this "shop locally" pronouncement. Guilt about not shopping locally and feeling good about the idea of shopping locally is practically the only value proposition offered by local stores. Instead the pronouncement should be "shop at good shops," or "shop at shops that give you what you want and how you want it."
In some places — and the places are thankfully becoming more common — walking into a local store truly is brilliant. The reason some locales have such high quality stores, is precisely because some people were so unwilling to shop locally.
Because competition has upped the level of difficulty required to run a store, and driven so many bad stores out of business, we are left with increasingly better stores that are increasingly customer focused. For a consumer, that is a great shift in local businesses. Businesses that don't provide more local value than the guilt of "shop local" are becoming less common.
This is sadly not happening as quickly as it could. People stuck in an ideology, as thoughtless as any other ideology, profess that "buy local" is some sort of unchallengeable axiom, a fundamental, impossible to further elucidate truth that all people must profess and live by or otherwise are subject to moral condemnation.
Even in places like the bougie neighborhoods here in Brooklyn, that ideological attitude proliferates, along with its accompanying misguided moralism. This is substituted for a far-preferable constant pursuit of higher quality and higher customer satisfaction that pervades the free market and has led to so much development in quality of life over the past several hundred years since the Industrial Revolution.
I'd prefer that society start saying "stop shopping locally." The competition is good for local stores — they have to be the best possible thing, the most desired thing to even survive in such an environment.
The Walmart and the Amazons of the world came into the bush leagues and upped the competition to major league level. Of this, I am entirely grateful, and though I really like these companies and companies like them, I also look forward to the next generation of companies that squeeze the Walmarts and the Amazons of the world and perhaps even put them out of business. Of course, the established entities in a place had the new destabilizing competition. It's great for the consumer.
I will feel no guilt at such a moment. Guilt does not bring me value as a consumer and it is of limited value to me as a person. I will focus on feeling good about the benefits of what life offers.
International trade hasn’t had a very good time lately. Encircled by Trump’s plans, by EU and China’s threats at retaliation, and by the utter failure of the WTO, international commercial relations are stymied under an increasing amount of regulations, tariffs, and restrictions. The outlook is bleak indeed, but it’s not the first time, nor will it be the last. There are three main reasons why we seem to learn nothing from the history of trade.
First, the theoretical underpinnings of modern political and academic discourse on international trade are wrong. Currently, no matter whether one claims to support protectionism or ‘free trade’, the underlying assumption is that countries are or must be permanently in some sort of political and economic conflict with each other. Thus, whichever side of the barricade commentators claim to be on, they all believe that increasing one's own welfare can only be accomplished by decreasing the welfare of others—or, that the benefits of trade only arise through reciprocal governmental agreements on mutual tariff concessions. The WTO’s entire agenda is built on reciprocal trade concessions, which have inevitable led to the current deadlock of negotiations. Trump’s view of trade is similar; to quote his now famous tweet, “trade wars are good, and easy to win… when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
It’s really not easy, nor true. The fallacy underlying this approach is based on the tenets of mercantilism, which originated in the 17th century France. Mercantilists claimed that trade is a zero-sum game; to win it, a country had to accumulate gold and silver at the expense of other countries, by imposing tariffs to restrict imports and encourage exports. Their ideas were demolished by the classical liberals of the 19th century who explained that international trade consists of a voluntary and mutually beneficial exchange—thus, a positive sum game. International trade is in fact only an extension of the domestic division of labor to an international scale. If trade between Georgia and Alabama is mutually beneficial, and no one is concerned about ‘winning’, the same holds true for trade between the U.S., China, E.U., and so forth.
The misguided concern with trade deficits can also be traced back to the same mercantilist fallacy that exports are good and imports are bad by nature. The balance-of-payments issue is a pseudo-problem, created simply by the fact that we collect data about which goods pass through customs. The real issue should be monetary inflation: back in the day of the gold-exchange standard, a trade deficit usually meant that gold was seeping out of a country because of domestic monetary inflation. But in the current monetary system, as domestic inflation is masked through dirty floating exchange rates, trade deficits no longer fully reflect reckless domestic monetary policies. Thus, trying to fix them won’t fix the unsound monetary system.
Despite these shortcomings, mercantilist ideas are pheonixlike—in academic circles, and particularly in policy. If the principle of comparative advantage was fully understood in its implications, we wouldn’t have any trade debates or multilateral negotiations anymore. Yet mercantilism creeps back under various names, such as strategic trade protection or ‘managed trade’, and as long as it does, tariffs are here to stay.
Second, to explain the interminable repetition of past errors, it must be said that trade policies, like all government policies, are addictive, to politicians as well as entrepreneurs. The rationale for trade protection is, in the end, not economic, but political.
The U.S. steel industry has benefited from some type of trade protection for the past 227 years: it was considered an infant industry in 1791 when tariffs were first proposed. But over the next two centuries, protection continued under the guise of it being a 'mature industry' that needed breathing room from international competition to maintain domestic jobs. And it’s not just steel: the U.S. protects and has protected everyone from peanut farmers to candlemakers, from the Colonial Era through the Civil War and the Great Depression.
In this light, a debate about the merits of one trade theory or another is somewhat futile outside academia. Ideas are important, but eventually it’s not trade theory that trade policies are based on. Politics implies the power of granting privileges to special interest groups, the power to gain at the expense of competitors and consumers. This power is indeed addictive, and compared to it, even correct trade theory is powerless. Entrepreneurs get an easy way out of the market through rent-seeking, and politicians gain powerful businessmen behind them supporting them in the election. This vicious circle will remain unbreakable until the very idea of a state trade department disappears.
Third, and finally, the present outrage of commentators at the U.S. government’s trade conduct is usually coupled with a quiet acquiescence about its new, record-high military budget. But we cannot expect free trade when military spending increases and there is a decline in domestic freedoms. These actually reinforce each other, as professor Salerno points out: military conflict “provides the ruling class with an extraordinary opportunity to intensify its economic exploitation of the domestic producers through emergency taxes, monetary inflation, conscription of labor”, and of course, trade restrictions.
Trade policy thus goes hand in hand with military policies and control of domestic activity, and an interventionist government that wages wars on small businesses and foreign countries will wage trade wars as well. Only when we will have peace, and peace at home, will free trade follow.
There is growing concern across the globe that automation will lead us to a dystopian future. With robots becoming ubiquitous in every aspect of our lives, the marketplace will be filled with cheap goods, but the consuming population can’t acquire them because they don’t have a job. It is a legitimate worry for millions of people, especially when you see the countless videos and news articles about a robot flipping burgers, automated arms packaging goods inside a factory, and grocery stores without cashiers.
One of the latest doom-and-gloom alarmists is the Wisconsin chapter of the AFL-CIO, which is griping about self-serve checkouts. Do unions ever do anything productive?
Last week, the labor union went to Facebook to demand its followers to “never self checkout.” The organization whined that it doesn’t want to assist corporations in firing employees just so they can boost their bottom lines.
It’s not convenient for me to help corporations fire workers so they raise their profits. I stand in line and when the lines back up, the store calls more cashiers to the front. If we keep doing it, they’ll need to hire more people. NEVER SELF CHECKOUT.
If life were only that simple.
Why hasn’t the group requested similar action for ATMs? If you avoid the bank machine and stand in line waiting for the bank teller, then the financial institution will simply hire more people. This logic, or lack thereof, can be applied to a myriad of other automated services that we enjoy today: ecommerce, digital cameras, search engines, and so much more.
But nobody is calling for an end to Google or Bing so the yellow book can be made great again. The AFL-CIO isn’t telling members to ditch mobile devices so telegrams can make a comeback.
What the labor group is conveying to the world is that it hates progress.
Automation will Benefit our Lives Earlier this year, many Oregonians made headlines because they were complaining that a new law will allow residents in rural communities to pump their own gas. There were multiple grievances, but one of the main objections was the reduction in the number of attendants.
In 2016, up in Canada, the CBC spoke to a retiree, Bonnie Banks, who bothers people at self-serve checkouts, asking them if they “like working for Walmart for free.” She was upset that she now pumps her own gas and puts her own trash in the garbage at fast-food restaurants.
In the age of automation, there are many occupations and industries that will become obsolete. They will inevitably enter the dust bins of history.
The automobile eliminated the horse and buggy industry. The refrigerator rid the world of icemen and milkmen. Advancements in telecommunications abolished telephone operating jobs. Ride-sharing services have brought the government-protected taxi industry to its knees.
Are we any worse off than we were before? If you ask the average young person 70 years ago, he or she would admit that they cannot get along without the icebox and local telegram office. If you query the average young person today, he or she will concede they cannot live life without an iPhone or Uber.
Times change. New businesses rise. Old industries fall.
$15 Minimum Wage Is Ramping Up Automation If you think that businesses are suddenly investing a lot more into automation, you’d be correct.
With the Fight for $15 crowd holding demonstrations, staging walkouts, and encouraging lawmakers to raise the minimum wage, companies are reacting by automating operations.
As McDonald’s installs self-serve kiosks or mom-and-pop diners have robots in the kitchen, there is less of a demand for human cashiers and cooks. As Wal-Mart adopts self-serve checkouts, they don’t need too many cashiers on the front lines.
And you can blame entities like the AFL-CIO for the rampant rise of automation.
It is mostly immigrants, young, unskilled, and uneducated people who hold minimum wage jobs. Without these entry-level positions, thanks to the $15 fight, they can’t enhance their human capital.
New Opportunities Pop Up In today’s world, where socialism is becoming trendy, there is a misconception that the free enterprise system is a zero-sum game — somebody wins, somebody loses. In other words, according to the left, you only become prosperous if you steal from others. Warren Buffett or Jeff Bezos get the entire pie while everyone is left with crumbs.
Nonsense. This is hardly the case in the free market.
When Microsoft was established, Bill Gates created more pies. When the iPhone was created, Steve Jobs produced more pies. When Karl Benz invented the automobile, he baked pies for the entire world.
With automation seeping into every single part of society, new opportunities will pop up. If scores of positions become antiquated, the individuals holding these jobs will do one of three things:
Enhance their human capital by learning new skills.Fill the demand for labor in other industries.Perform other roles or tasks in the company. This is what tellers have done in the banking sector. Many branches simply transferred tellers into other important roles, such as marketing and investment advising. Ditto for business publications. Thanks to the advent of software that composes articles from news releases or corporate earnings reports, reporters can now spend more of their time on investigative journalism, interviews, and much more.
Once the car was prevalent, carriage makers didn’t raise the white flag. They either adapted to the changing conditions or applied their craft to something else.
You will always come across people like Bonnie Banks moaning about self-serve checkouts. You can stop these busybodies in their tracks by doing a couple of things: point out their hypocrisy since they likely use ATMs or the computer and provide them with a lesson in Econ 101.
The future is now, and we shouldn’t be apprehensive of its arrival. We’re all getting richer and leading happier lives because of technology. Let’s embrace it.
Originally published by LibertyNation.
Phew, the disaster is averted – at least for the time being. After Donald Trump threatened to not extend his tariff exemptions to the EU, the US administration announced last month that another one-month relief will be granted. The EU now has until June 1 to make concessions to the US, or else will face tariffs of 25 percent on steel and ten percent on aluminum.
But, as we already found out , the EU can’t really do anything when it comes to concessions. After all, it’s not Europe’s fault that American products aren’t too popular on the continent. That’s at least what Günther Oettinger, the European Commissioner for Budget and Human Resources (i.e. one of the most powerful people in the EU if the title doesn’t ring a bell), said last month in an interview on German TV.
When asked on the gigantic trade surplus Germany has with the US and why it is not importing more goods from across the pond, Oettinger had the idea to name some products Germans simply love from America: “We import jeans from the US.” The list ended there.
Instead, Oettinger argued that it’s totally natural that more goods are exported than imported from the US, considering German products are much better anyway: “The fact that Porsche, Audi, BMW and Mercedes-Benz, that those premium cars are selling like crazy in the U.S. … has to do with design and motors, with quality. In contrast there is no real reason to bring an American car from the U.S. to Germany.”
It’s relieving that Commissioner Oettinger knows best what the people he supposedly serves want — I for my part would appreciate it if American pick-up trucks would be cheaper, but whatever … What is even more astounding, though, is that the EU seems to think this and still is not ready to make any concessions.
The reason Donald Trump wants to slap European products with tariffs is that the EU has traditionally been having excessively high tariffs on products coming from the US. The German-based Ifo Institute for International Economics actually agrees with Trump’s assessment, showing that the unweighted average EU customs duty is 5.2 percent in comparison to the US’ 3.5 percent.
This is especially true for cars. European cars — that is, those Porsches, Audis and BMWs that “are selling like crazy in the US” – are subject to a 2.5 percent duty when exported to America. A Chevrolet Silverado, a GMC Sierra or a Ram — or a Ford Focus of course (European generally like smaller cars than Americans), meanwhile will be slapped with a ten percent tariff when imported in Europe. “The EU is by no means the paradise for free traders that it likes to think,” says Gabriel Felbermayr, the Director of the Ifo Institute for International Economics.
Thus, what the argument boils down to is that US President Trump rightfully thinks it’s unfair from the EU to have extremely high tariffs on US products, that the EU reacts innocently enraged and argues that Trump wants to start a trade war, and still refuses to lower their own tariffs despite supposedly Europeans not even being interested in American products anyway. Or to put it differently: we Europeans can’t lower tariffs on American cars, they are so bad that Europeans wouldn’t buy them anyway even if they were free. It does make sense, right?
The EU has instead decided to threaten the US as well. If the US doesn’t keep its current tariff regime intact, Europeans will retaliate with substantive tariffs of 25 percent on a long, long list of American products — mostly those produced in Republican states. The list is shockingly long for a place that allegedly has no interest in American goods. (If you haven’t read it, then do so.) The list includes Kentucky bourbon, peanut butter, and tobacco. It includes grills, kitchen sinks, and ladders. And obviously Levi’s jeans (yes, those that Oettinger likes so much) and Harley Davidson motorcycles are also included. It’s not entirely clear what a farmer from Kentucky has to do with Trump’s trade policy — even though he and not Trump would be hurt most by this, but hey, the total value of all the goods being slapped with tariffs would be 2.83 billion euros — enough to make Trump nervous.
Looking at the EU’s side of the argument makes it even more evident how childish this dispute really is. Both sides agree that tariffs are not the solution. Both sides agree that trade should more or less happen freely on both sides of the Atlantic Ocean. But both sides seem to think they are still in kindergarten where you hit back when someone has started a fight. There is no way out — a war is inevitable and will continue until the nurse comes in.
Well, there is no nurse in this. Instead, both sides should finally come to the conclusion that retaliation over retaliation, tough word over tough word, will not help anyone. Instead, both sides should realize that the only “fair trade” is free trade. So let’s make it happen: cut tariffs on both sides instead of raising them. It would be a shame if Americans couldn’t buy BMWs as cheaply in the future – and if I can’t afford to buy myself Kentucky bourbon anymore.
RELATED: "The Case for Unilateral Free Trade" by Louis Rouanet
A new North-American trade deal is in the works between the U.S. and Canada, after a tentative agreement was reached with Mexico last week. The deal would replace the almost 25-year-old NAFTA accord between the three countries. The media and industry alike are suffering from "deal fever," as they eagerly await the results of negotiations.
There is not much known about what this new deal will involve exactly. However, the few things we do know indicate there’s no need for any excitement. The new trade agreement will be simply an amalgamation of the old NAFTA, the previously-rejected TPP, and some new protectionist measures.
Is it likely to be a win for free trade? Not by a mile.
First, the agreement with Mexico specifies that two thirds of a car’s value (up from 62% in NAFTA) must be manufactured in North America, and almost half of it must be manufactured by workers earning a minimum of $16 per hour. Only the car manufacturers that meet these new requirements will be allowed to ship vehicles across the border at zero tariffs—others will pay a customs tax of 2.5%. This comes as great news for industrial unions in the U.S. and will be beneficial also for Canadian unions in the event of a deal. But Mexico also hopes that this will force auto makers to raise wages. However, these rules of origin and wage and content requirements only increase manufacturing costs. This may eventually reflect in higher car prices, and may bring about the relocation of auto industries from North America to lower cost jurisdictions in the long run.
Second, steel and aluminium imports are currently subject to tariffs after Trump’s latest policy attempts to rebuild U.S. metal industries. These restrictions are likely to remain in place in the form of a quota plan. The impacts of quotas and tariffs are similar, and will bring about price increases and losses for consumers and adjacent industries.
Other measures include the extension of copyright to a 75-year term past the creator’s death, and scrapping NAFTA’s Chapter 19, under which companies could sue for wrongful anti-dumping or countervailing duties. These measures increase governments’ influence in business transactions and intervention in prices, and are likely to reduce innovation in the long run. What’s ironic is that the copyright term extension existed in the Trans-Pacific Partnership that Trump refused to sign back in early 2017.
Canada has opposed these two changes, but it may however agree to them if something else is given in return. It may, for instance, negotiate to keep its very low de minimis threshold for duty-free goods of $20—compared to $800 in the U.S. and now $100 in Mexico. Or it may fight to continue protection, in some form or other, for its rich dairy farmers from Ontario and Quebec, whose great influence over Canadian politics makes them a powerful interest group.
If it looks to you like the "much more fair, really good deal" with Mexico (and possibly Canada) is merely shifting trade regulations from one area to another instead of reducing them, your eyes are not deceiving you. The reason for these shifts is to transfer the highly targeted benefits that come from protectionism from one group to another. Even these are fairly short-lived though, because when imports drop, so do exports. If consumers spend more on domestic goods, domestic prices rise, and the more they rise, the more exports are reduced.
The new trade agreement is simply about making new deals for new special interests. Free trade or consumer interests never really enter the equation. Campaign donations do.
Mises’s view of this was very blunt and practical. In Omnipotent Government, he showed that modern trade agreements bore no resemblance to the commercial treaties of Cobden and Chevalier:
“In the age of laissez faire commercial treaties were considered a means of abolishing, step by step, trade barriers and all other measures of discrimination against foreigners… Then the tide turned. The meaning of commercial treaties changed radically. Governments became eager to overreach one another in negotiations. A treaty was valued in proportion as it hindered the other nation’s export trade and seemed to encourage one’s own.
It is vain to expect anything from purely technical changes in the methods applied in international negotiations concerning foreign-trade matters.” (1944, 247-8).
If it also seems to you that the inevitable detrimental impact of the new trade agreement on domestic prices and living standards is contrary to the stated goals of other government policies, you are right again. Mises explained in Bureaucracy how the interests of powerful groups often conflict, and are dealt with in a haphazard manner by state administrations:
“The department of labor aims at higher wage rates and at lower living costs. But the same administration's department of agriculture aims at higher food prices, and the department of commerce tries to raise domestic commodity prices by tariffs. One department fights against monopoly, but other departments are eager to bring about—by tariffs, patents, and other means—the conditions required for the building of monopolistic restraint” (1944, 85)
As various trade agreements change names, clauses, and proponents, with the old bait and switch tactic, protectionism only changes its less-than-convincing disguise. “The new consumer flimflam agreement” would be a more fitting name.
The European Union (EU) and Mercosur signed a historical trade deal last Friday. The adjective historical is sometimes misused. However, in this case, it is the most pertinent. The agreement has been negotiated for a staggering twenty years. Indeed, trade talks started on June 28, 1999, with a major relaunch in 2016 after negotiations had been stuck. According to Jean-Claude Junker, the President of the European Commission, “this trade pact makes it the largest trade agreement the EU has ever concluded.”
Mercosur is a regional alliance comprised of Argentina, Brazil, Paraguay, and Uruguay. The combined population of the four nations is 260 million with a GNI per capita of approximately 9,500 euros. This is the first trade deal of this kind signed by the South American nations.
According to Brussels, the pact will eliminate 4 billion euros in annual duties and tariffs for exports coming from the EU. What is more, according to the Financial Times, the EU “estimates that the savings brought about by the tariff reductions would be some four times those delivered by the EU’s recent deal with Japan, and almost seven times those of its agreement with Canada.”
Protectionist Lunacy The same article by the FT states one of the most bizarre reasons why the deal took so long:
For Mercosur, some of the most difficult concessions included slashing tariffs on imported European cars and car parts and opening up its public procurement market; on the EU side, the most controversial issues centred on agriculture.
So, for South American bureaucrats, politicians, and regulators, it was a major issue that their citizens could have better access to Mercedes Benz or Ferraris. And for their European counterparts, the “problem” were superb Argentine beef and more affordable Brazilian sugar cane. Only through the lenses of the state such a thing could become a deterrent instead of the strongest incentive.
Nonetheless, Emmanuel Macron remained loyal to the agricultural lobby until the very end. The French president made frenetic efforts to get a deal that was not “generous” regarding beef in particular. Incidentally, France is the largest recipient of EU agricultural subsidies, with a grand total of 7.6 billion euros.
In an interesting turn of events, the counteroffensive was mounted by the Spanish Üresident, Pedro Sánchez, who is not known for being in favor of liberalization. He was quickly followed by Angela Merkel (Germany), António Costa (Portugal), Mark Rutte (The Netherlands), and others.
Fresh Air, But… In times when the president of the United States has a dangerous anti-trade rhetoric and there is an escalating tariff war between the United States and China, the Mercosur–EU deal comes as a breath of fresh air. Cecilia Malmstrom, the EU trade commissioner, expressed that this was a “loud, clear message that we believe that trade is a good thing, that it brings peoples and companies together.” It is indeed undeniable that trade agreements have done a lot to increase the volume of global trade and they have been a positive for globalization.
However, trade agreements have a dark side. By their very nature, they are discriminatory. The conditions of relative openness that they bring are only enjoyed by the members. To the outsiders, the situation can be much more complicated. The EU itself is a good example of this. It can be quite open to the inside but it can also be a fortress to the outside. What is more, the enhanced “deep and comprehensive” trade agreements include exotic clauses that have nothing to with reducing import duties.
The ideal free trade agreement should fit on a single page. As the American economist Dan Mitchell says, “My FTA would fit on one page, or a scrap of one page: ‘There shall be no restrictions on commerce between Country A and Country B’.”
In the same way, the ideal trade policy should be unilateral free trade. Countries do not trade. Individuals and companies do, never a country as a whole. The best a nation can do is to leave its citizens and companies alone and let markets work. That would constitute real openness to the world. “Free and extensive trade, unsubsidized, between the peoples of the Earth,” explains Ron Paul, “lowers tensions and makes us all better off. It is, morally and economically, the only proper policy.”
And this policy works. Places like Hong Kong, Switzerland, and Singapore have implemented it. These are, respectively, the eight, seventh, and second richest countries on the planet.
A Long Way to Go The signing of the EU–Mercosur agreement constitutes, at best, a starting point. Now it has to be ratified by the 28 national parliaments in Europe and four in Latin America. What is more, an unholy alliance between protectionist politicians, agricultural lobbyists, and environmentalists may be forming.
How skeptical the French or Polish parliaments will be remains to be seen. Brazilian diplomats are already warning that the actual implementation “may take years.” The most powerful agricultural lobby group, Copa-Cogeca, has issued a statement in which denounces a “de fact double standard” for Mercosur’s agricultural goods and the threat of “unfair competition.” As we all know, unfair competition is a common false accusation against good old competition.
The environmentalist multinational Greenpeace was also quick to react against the deal. Naomi Ages, the green trade expert, said that “trading more cars for cows is never acceptable when it leads to the destruction of the Amazon, attacks on Indigenous Peoples, and escalating hostility towards civil society.”
Hopefully, Europeans and South Americans will be able soon to access better beef, better wine, and better cars. Not necessarily in that order.
Originally published at the Austrian Economics Center
In a recent tweet, the US president said, “When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War! The U.S. has been ripped off by other countries for years on Trade.”
Trump continues to ratchet up tariffs on China claiming it is stealing billions of dollars by running large trade surpluses with the USA. If this view was held by a country bumpkin it would be irrelevant, but it becomes a serious problem when held by a man who can reduce the real incomes of billions of people, both American and Chinese.
[RELATED: "Free Trade Brings Abundance — Protectionism Brings Scarcity" by Frank Hollenbeck]
Trade Is Mutually Beneficial A trade surplus is an aggregate statistic made up of individual transactions. It reflects the yearly difference between the sum of US citizens or companies buying products or services from China, and Chinese individuals or companies buying US products or services. Each of these individual transactions is voluntary and therefore mutually beneficial. Our economy is made up of millions of these transactions every day. You value the money you give up less than the goods or services you receive, and the store’s preferences are exactly the opposite. It values your money more than the goods or services making the exchange. This is also true of the extremely large number of transactions involved in bringing any product to your doorstep: from the farmer, the baker, the trucker to the manufacturer of the goods that made it possible to purchase a cake and take it home.
The Two Sides to Every Trade Do you worry about the rising trade deficit you have when you spend $100 at the supermarket? Do you feel “ripped off”? You buy more from the supermarket than it will ever buy from you. If you answered yes to these questions, you are exclusively looking at the monetary side of the transaction, the $100, and have totally ignored the goods and services you received. This is basically what Trump does when he complains about China’s trade surplus. He is focused on the monetary side of the transaction and has totally ignored all the goods and services obtained from China.
The Nationality of Products We now live in a globalized world. In the past, a BMW could be called a German car. The steel mill had to be close to the manufacturing plant, and the workers making the different parts had to be local. Today, reductions in transportation costs have created a globalized economy where parts can originate from anywhere in the world. It is now a stretch to call a BMW a German product since it could be produced in Brazil with steel made in China. Besides, labor is now only 10% of the cost of a car and could easily be a Frenchman working in Berlin. Furthermore, a shareholder of BMW is more likely to be a mutual fund in Tokyo than a German citizen living in Düsseldorf. This same internationalization is true of most products exported from China or from anywhere else in the world.
Globalization has significantly reduced the cost of making any product, as production has naturally gravitated to areas with the greatest comparative advantages. China’s industrialization has not only significantly benefited every Chinese citizen, but every active individual in the global economy. Any trade restriction is equivalent to throwing a wrench in the workings of the global economy causing a diversion of production from where it would be most beneficial to everyone.
Exchange and War Trade is not a war, and military analogies should not be used to describe a sum of mutually beneficial transactions. Trade, on the contrary, reduces the risks of actual war. Wars have been fought historically to gain access to key resources. Hitler’s main ideological principle justifying his territorial ambitions was to claim that the German people had a natural right, as a manufacturing country with little natural resources, to obtain these resources by force. Germany’s neighbors had imposed severe trade restrictions that greatly limited Germany’s access to these resources. Had free trade been the norm, Hitler’s argument may have fallen on deaf ears. We know that trade raises the standard of living of everyone by creating mutual inter-dependencies and joint interests, making military conflict less likely because the costs of war significantly outweigh the perceived benefits.
The Link Between Imports and Exports When a Chinese company or individual sells a product to an American company or individual, it receives dollars in return. These dollars reflect claims on American goods and services or assets, and nothing else. In general, this Chinese company or individual will convert these dollars into .yuan to cover its domestic costs or to distribute dividends to its stockholders. The persons selling yuans for these dollars could be a US exporter of wheat, a Chinese importer of oil, someone who wants to buy a US government bond or any dollar based asset. This is the essence of an exchange economy: exports are closely linked to imports. The Smoot-Hawley tariffs that worsened the great depression in the 1930s reduced both imports and exports by 50%. If China can’t sell, it can’t buy.
Trade Is a Fundamental Freedom During the seventeenth century when mercantilism was at its zenith, the Dutch with very few restrictions on trade flourished with superior prosperity and economic growth while other European countries remained mired in abject poverty. The optimal strategy is simple and can be implemented unilaterally by eliminating all restrictions on both imports and exports, including regulatory constraints. This can be implemented irrespective of the strategy of your trading partners.
Trump’s interferences should universally be condemned as unnecessary and incompatible with the most important aspect of capitalism: the freedom to engage in voluntary mutually beneficial transactions.
One of the fundamental questions in development economics is how an economy grows. As the reader may know, an economy grows by means of economic freedom, which implies property rights and the emergence of markets and exchange ratios (prices). Further, such chains of events bring about economic calculation. However, are such conditions enough for economic development? That is, does a nation need only property rights to develop?
The answer is no. So long as there is a state — government — there need to be constraints with respect to the actions of politicians. That is, there must be rules to the game, namely rules to the political process. So long as there is discretion — the ability to break rules of the game, rent seeking, which is a form of value (or wealth) destruction, will impoverish a nation.
What is Rent Seeking? Rent seeking, as mentioned above, is a form of value destruction. However, it should be emphasized that according to the Kirznerian definition of the entrepreneur, such action is a form of entrepreneurship — the realization of a profit opportunity. Therefore, rent and profit seeking have one thing in common: both are forms of entrepreneurship. The difference, of course, is that the former is destructive whereas the latter creates value.
There might be confusion with respect to the term "rent" in "rent seeking." Rents, in economics, are payments above opportunity costs, that is, profits. Rent seeking, therefore, is the process by which a firm seeks payments above its opportunity costs. But, unlike profit seeking, rent seeking occurs by means of the political process — that is, firms must lobby, expend resources — in order to capture profits by means of government legislation. Again, per the Kirznerian interpretation of entrepreneurship, such action is a byproduct of profit opportunities, namely the attraction of artificial scarcity rents.
Rent seeking, however, has massive welfare costs.See Gordon Tullock, “The Welfare Costs of Tariffs, Monopolies, and Theft,” Economic Inquiry 5, no. 3 (1967): 224–32. For example, in The Welfare Costs of Tariffs, Monopolies and Theft, Gordon Tullock, one of the creators of the term, noted that the cost of a tariff, which is a means of capturing rents, is not fully captured by the Harberger triangle (deadweight loss).
Prior to Tullock’s groundbreaking work on the welfare costs of rent seeking, mainstream economists underestimated the costs of tariffs. That is to say, according to mainstream microeconomics, a tariff’s cost was quantified and graphed as simply deadweight loss. However, as Tullock stated,
There are a considerable number of costs that are ignored by this procedure. … a collection of a tariff involves expenditure on custom inspectors, etc., who do the actual collection, and coast guards, who prevent smuggling.Ibid. p. 223.
As Tullock demonstrated, tariffs are more than transfers of wealth — that is, producers stealing consumers’ surplus — as such legislation brings about numerous costs, namely a waste of scarce resources which have alternative uses.
To better understand Tullock’s thesis, let us imagine that American car companies expended resources so that the federal government would implement a tariff that would essentially prohibit the importation of cars. As mentioned above, mainstream microeconomics would label such legislation as simply a transfer of wealth — that is, the producer is gaining income at the expense of the consumer.
But, as Tullock emphasized, there is more to the story: that individuals were purchasing imported cars shows that domestic producers must have not been using scarce resources efficiently, since foreign producers were meeting their respective wants instead. Such a tariff would mean that resources are being misallocated in lobbying for its enforcement, in addition to the misallocation of resources toward to the production of American-made cars that it would cause.
Moreover, politicians, who act to increase their respective utilities, do not enforce tariff legislation at random, but rather do so by means of the firms that waste scarce resources to lobby for its existence. Put simply, one must picture the political process as a market (or catallactic) process, with politicians exchanging property rights — monopoly privileges — for resources, namely money or special favors such as employment following the politician’s term.
Once it is clear that the political and market processes are analogous and that the ability for politicians to create rents is a profit opportunity for firms, it should be expected that firms will expend scarce resources on capturing such rents. That is, there will be a tendency not to invest capital, but rather to consume it.For more on capital consumption see, Ludwig von Mises, Human Action (Indianapolis: Liberty Fund, 2007), pp. 523–29.
Rent Seeking and Impoverishment Besides the study of human action, one of the fundamental questions in economics, as stated above, is how to develop an economy. While Ludwig von Mises and other private property economists, such as Armen Alchian and Harold Demsetz, emphasized the importance of private property as a means to rationally calculate, such rights are not enough to ensure development. So long as there is government and self-interested politicians, who act purposefully — that is, seek to increase their utility — they will create rents, and firms will such policies as profit opportunities for themselves. Therefore, as stated above, one will see a tendency for firms to waste scarce resources on capturing the rents offered by the government, particularly politicians. Ultimately, the ongoing cycle of rent seeking, as Tullock stated, does not promote value creation, but rather value destruction. Indeed, as William Baumol noted in his article entitled "Entrepreneurship: Productive, Unproductive, and Destructive," rent seeking is a form of unproductive, at times even destructive, entrepreneurship.William J. Baumol, “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Business Venturing 11, no. 1 (1996): 915–19.
Constraints on Politicians and the Emergence of Productive Entrepreneurship Ultimately, so long as there is government, constraints must be placed on politicians. In particular, they should be prohibited from creating rents, which would, all things being equal, encourage productive, as opposed to destructive, entrepreneurship. One of the great differences between wealthy and impoverished nations lies in the rules of the game — that is, in creating an environment in which entrepreneurs are encouraged to profit, not rent seek.
With constraints placed on politicians, one would see the emergence of entrepreneurs who thoroughly bear the uncertainty of the market with the end of satisfying the wants of their fellow men. This is a form of productive entrepreneurship and thus brings about economic development.
Proponents of intellectual property rights often rely on one of two lines of reasoning. The first is based on the misunderstanding that the frequency or volume of innovations determine economic growth. The second is captured by the question, “So if I spend $1 billion on R&D (research and development) to bring a new drug to market, anyone should be able to copy my drug without compensation?” Both are based on the same fundamental error: assuming that innovation is a matter of production. It is not. Innovation is all about entrepreneurship, and that’s why intellectual property rights do not and cannot help.
The economic growth argument appears to be in line with empirical observation. After all, it is the introduction of and change caused by valuable innovations that make us better off and raise our standard of living. But as is so often the case, observations in economics tend to lead to problematic if not false conclusions. The market is a trial-and-error process under uncertainty, in which entrepreneurs and businesses compete by offering goods and services anticipated to satisfy consumers at a future point in time better than the offerings of others. Then, obviously, innovations are important.
But it is not the number of innovations attempted that matters. There is also scarcity, meaning that a market process that generates a huge number of innovations may in effect produce less value than a process that generates only a few. Quality is more important than quantity, just like aiming the one arrow will produce a better result than shooting a great number of arrows in random directions. Although entrepreneurs hardly have a visible target to aim for, their “division of intellectual labor” places boundaries on what attempts are made. Innovations are uncertain, but not undirected or random.
The compensation argument makes the same mistake but clarifies the error. The issue in the market is not about compensation for investment or effort made, but the creation of value for consumers. We are not, and should not be, compensated for the time and effort we put into something, but for our contribution to value. The reason we get paid at our jobs is not that we get up in the morning and spend our days doing tedious tasks and following management’s orders, but because the entrepreneurs, along with their “junior partners” (management), are betting that this type of production will be valuable to consumers and thus generate revenue that more than covers cost.
In other words, that a firm invests in research and development is not primarily a matter of production, but one of attempting to find solutions that consumers will value. It is a means toward generating sales with revenue that exceeds cost. Such revenue is generated, because this effort turns out to be more valuable to consumers relative to other entrepreneurial undertakings. As Mises puts it, “The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers” (emphasis added).
The entrepreneurial problem, therefore, is one about better figuring out how to serve consumers. Innovation is undoubtedly a means toward that end, but whether an innovation is profitable depends not on the innovation being new or even costing a lot of money to carry out, but on whether it is correctly positioned with respect to (1) consumers’ (future) wants and (2) other entrepreneurs’ (future) offerings. Both aspects are necessary for the market process to progress and thereby improve our standard of living.
Intellectual property rights, imposed on entrepreneurs generally and thus on the market, mean that entrepreneurs are relieved of the second part of the problem—the positioning relative to other entrepreneurs. This is the purpose of this type of regulation, but what it means is that entrepreneurs can and will overinvest in innovations that comply with the regulations’ requirements for protection. And they will do so instead of innovating for the benefit of consumers relative other entrepreneurs’ offerings.
The result is that innovations are pursued for the sake of being innovations, and not for their contribution to consumers’ want satisfaction. In other words, investments in research and development are not directed by the consumer's wants. Consequently, what matters is the investment in R&D rather than the business model—how, when, and in what manner the offering is presented to the consumer.
This is more than an inefficiency in the market system. It is a change of incentives that fundamentally distorts the market process, its direction, and thus the economy’s ability to satisfy actual consumer wants.
The real solution lies in allowing entrepreneurs to be entrepreneurs, and thus, through their imaginative speculative efforts, to figure out how to beat each other in offering goods with value to consumers and be the “driving force” of the economy. Freeing innovation efforts from their entrepreneurial component is not the way to improve the value for consumers or improve the functioning of the market process. It is only a matter of providing some producers with profit at the expense of everyone, as well as the economy and society.
In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018.
Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, a surplus on the trade account is considered a positive development while a deficit is perceived negatively. What is the reason for this?
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Popular thinking holds that the key to economic growth is demand for goods and services. Increases and decreases in demand are behind the rises and declines in the economy’s production of goods. Hence, in order to keep the economy going, economic policies must pay close attention to the overall demand.
Now, part of the demand for domestic products emanates from overseas. The accommodation of this type of demand is labeled exports. Likewise, local residents exercise their demand for goods and services produced overseas in the form of imports.
It is held that while an increase in exports strengthens the demand for domestic output, an increase in imports weakens the demand. Exports, according to this way of thinking, are a factor that contributes to economic growth while imports detract from the growth of the economy. Thus whenever imports exceed exports, a trade deficit emerges, and this is bad news for economic activity as depicted by the gross domestic product—GDP.
The deficit is viewed as a symptom of bad economic health. It is then assumed that what is required is a boost in exports and a curtailing of imports in order to reduce the deficit.
This, it is held, will lead to improved economic health. The popular view maintains that it is the role of the government and the central bank to introduce a suitable mix of policies that will guide the economy on the path toward a “favorable” trade account balance. However, does it all make sense?
Trade Account Balance in a Market Economy In a market economy, each individual sells goods and services for money and uses money to buy desired goods and services. The goods and services sold by an individual could be termed their exports, while the goods and services bought could be termed imports. The record of such monetary exchanges for any period could be labeled the trade account balance.
In a free market economy, individuals’ decisions regarding the selling and buying of goods and services (i.e., their exports and imports) are made voluntarily, otherwise the acts would not be undertaken. The emergence of an exchange between individuals implies that they expect to benefit.
Whenever an individual plans to import more than he exports, the shortfall will be balanced either by running down existing savings or by borrowing. The creditor who supplies the required funds does so because he expects to profit from that.
The current practice of lumping individuals’ trade account balances into a national trade account balance is of little relevance to businesses. What possible interest can a business have in the national trade account balance? Will it assist him, in the conduct of his business? Since there is no such thing as the "USA, Ltd." that can be bought or sold in the market, the national trade account balance will be of no use to businesses.
Although the national trade account balance is of little economic significance and is a sterile concept, individual or company trade account balances are real things that carry economic significance. For instance, the trade account statement of a particular company could be of use to various investors in that company. Again, this is not the case with the national trade account balance.
The Government Is a Greater Danger Than Any Trade Balance Although the national trade account balance is a harmless definition, the government’s reaction to it can produce harmful effects. Government policies that are aimed at attaining a more “favorable” trade account balance by means of monetary and fiscal policies disrupt the harmony of the marketplace. This disruption leads to a shift of scarce resources away from the production of the most desired (by consumers) goods and services, towards the production of less desirable goods and services.
Furthermore, it is not the US that exports wheat, but a particular farmer or a group of farmers. They are engaged in the export of wheat, because they expect to profit from it.
Similarly, it is not the US that imports Japanese electrical appliances, but an individual from the US or a group of Americans. They import these appliances, because they believe that a profit can be made.
If the national trade account balance is an important indicator of economic health, as various commentators imply, one is tempted to suggest that it would be a sensible idea to monitor the trade account balances of cities or regions. After all, if we could detect economic malaise in a particular city or a region, the treatment of the national malaise could be made much easier.
Imagine, then, if the economists in New York were to discover that their city has a massive trade account deficit with Chicago. Does this mean that the New York authorities should step in to enforce the reduction of the deficit by banning imports from Chicago?
No individual or group of individuals can suffer as a result of an “unfavorable” trade account balance. But suffering can emerge from a drop in the incomes of individuals because of government tampering with the economy.
The fallacy of the national trade account balance also extends to the national foreign debt.
If an American lends money to an Australian, the entire transaction is their own private affair and is not of concern to anyone else. Both the American and the Australian are expecting to benefit from this transaction.
Lumping individuals’ foreign debt into the total national foreign debt is thus another questionable practice. What is this total supposed to mean? Who owns this debt? What about all those individuals who do not have foreign debt? Should they also be responsible for the national foreign debt?
The only situation in which individuals should be concerned with foreign debt is when the government incurs it. The government is not wealth generating and as such derives its livelihood from the private sector.
Consequently, any foreign government debt incurred means that the private sector will have to foot the bill sometime in the future.