Follow Up on My Mercantilism Post
Responding to comments on this morning's post.
Okay, so I read some of the comments in my last post, and going to reply here on the main page.
First up is this comment by grumpy realist,
Except that there are a few things that you leave out:
1) National security. We could use the same logic to “outsource” all of our military hardware as well to the nation with the lowest cost-why don’t we do that? Heck, we could outsource all of our MILITARY outside this country, arms and the man together-why don’t we do that?
2) Moving everything in the direction of cheapest cost will prove to be a false economy if your populace-without-jobs decides to have a revolution.
3) Don’t be so enamored of the “oh if we pay any more than the absolute bottom of the economy it’s welfare” idea. Wage supports may be the one thing keeping the lumpenproletariat from invading your house and looting everything. Driving everything down to Chinese wages means the workers can only afford Chinese prices, Chinese level of environmental protection, and Chinese safety. You really want to take a chance on that?
4) Ever heard the term “race to the bottom”?
This has very little to nothing to do with national security or the military. The military is something that the government typically provides and not the market due to the significant free rider problem. The notion that the military will be “outsourced” is just grasping at straws.
The second point is what happens in the domestic economy. Firms look for the low cost method of production. In fact, I would argue that quite a bit of innovation is to lower the cost curve for firms, domestic and foreign, and allow firms to earn economic profits for a period of time. And if we flip it…do we really want an economic process that seeks out higher and higher cost production processes? That is the recipe for economic prosperity? Why aren’t employers simply increasing employee wages, paying more in terms of rent for their floor space, etc.? Nothing is stopping them from arbitrarily raising costs right now. No, this point makes literally no sense.
Point number 3 completely missed the point that I noted about payments to the factors of production. Those payments go up, in a competitive system, as the workers become more productive. And workers become more productive the more specialized their work. It was all there in my post. If we were to reduce specialization people would have to become more self-sufficient. And by that I mean they’d have to produce things they currently purchase in the market. I used the grocery store as an example. But lets go with something far more simple…the humble pencil. I use the pencil when discussing economics with co-workers because it looks so damn simple. But…anyone know exactly how to make a pencil? I mean could you make one right now? I couldn’t and I’d be willing to be all of the commentators could not either. They lack the supplies, the tools and/or the know how. Could anyone make a pencil without…yes WITHOUT going out and buying at least some of the inputs? If you answer yes, please tell us where you obtain the graphite. A picture of your mine and mining equipment would be lovely. Next, a picture of your chainsaw an tree(s) oh and yes, tell us how you’ll produce the rubber eraser. What is the point here? That the market allows us to specialize in only a small part of overall economic production and become very good at it and become significantly more productive and that by exchange in said market process we can all be significantly better off.
And yes, some people are going to be uniquely unsuited for success, even marginal success, in a market based economy. However, moving away from a market based economy is not the answer. Moving away from a market based economy is to move towards a more self-sufficient economy–i.e. where you have to do for yourself vs. using your higher income in a market economy to buy those goods and services you cannot self supply. This is not the answer because I’m pretty sure those people who are not well suited for success in a market based economy are also not going to be well suited for success in a self-sufficient economy. And in the self-sufficient economy everyone is going to have less resources for themselves let alone helping others, especially when there is little to no perceived benefit.
As for point 4, the bottom of what? The bottom in terms of cost? Great! I love paying less for the same product. What quality might decrease, well people are willing to pay more for better quality. Quality and quantity are trade offs that firms and consumers make on a day-to-day basis in the domestic economy. Why is it suddenly bad when it is done between countries. Yes, it is bad if fraud is involved, but that is why we have courts and the law and the government. To punish those who engage in it. Our legal system when it comes to business and the economy is largely like the criminal side: reactive. It does not seek to proactively prevent fraud, but to prevent fraud by punishing those who engage in it. Further, where it is proactive….is precisely where people like Donald Trump complain: regulations. Oh the irony.
Our next post is by Slugger.
I think economic theory is too abstract and too glib. My last US made car was a 1980 Jeep Cherokee, and I and most Americans are better off due to imports, but not everybody. These large shifts in customer allegiance hurt somebody, and often the people who are hurt are the most vulnerable segments of the population. Image a town with one guy making a million a year and ten workers making fifty thou. As a result of opening trade barriers, the millionaire’s income increases to 1.5 million, and each small guys ‘ income drops to forty thou. Looking simply at the numbers that is a good net increase for the town. However, if you look at marginal utility or at human happiness/suffering the town is not better off. Economic theory treats people as fungible widgets, but in reality switching to a different enterprise or moving to a more dynamic part of the country comes with real human costs. In the US, income for middle class people has been stagnant while a tiny elite gets richer. Sadly, there are very few NFL starting quarterback slots available.
Economic theory looks at dollars through a mathematical prism. It needs to account for human happiness and suffering from economic displacement. I sort of understand the Schumpeterian argument about the positive values of dismantling less efficient sectors, but I do think that every job has a human face and every closed plant has some tears with the hopes for a better future. I guess that’s what makes me of the left.
[Note: I added a paragraph break in there for readability]
I agree with some parts of this…kind of. I do think that economists spend too much time looking at aggregate data which can be both misleading (even when correct) and also of dubious value (when incorrect or incomplete). Take for example data on household income. Economists are often prone to taking that day for say the last 20 or 30 years and treating it as if it were comparable. But it may not be. Suppose the in the data there are more single parent households, or more households of illegal immigrants, or more (or fewer) children. Or that there are more (or fewer) college graduates or that the distribution of college degrees have changed. All of these things can make the numbers incomparable. Economists know this, and try to get more data. Data on the composition of the household, educational levels, and so forth. But there is always a limit. As with non-economists there comes a point where you’ll stop collecting data as the cost of doing so will outweigh the benefits (at the margin)….or so you think. Further, as I have pointed out with co-workers aggregated data hides information and distorts it.
As for the town example, that is true, we could look at the aggregate numbers and say, “Oh, no problem. Overall incomes have increased, so nothing to see here move along.” But again, this can happen even without international trade. If it is bad with international trade…why is not bad when it happens without international trade. If you object to this you should object to it irrespective of the cause being international trade or just domestic economic activity.
Further, this is what happens in the market process. Schumpeter called it creative destruction. When somebody innovates they inevitably destroy something that came before. When somebody innovated with the ipod, they set in motion the destruction of cassette players. Similarly with the DVD. They put in motion the destruction of video tape players. Not literal destruction, but…can you even buy a VHS recorder in a store? I haven’t looked in years. And with streaming I’m pretty sure there is now tremendous pressure on DVD production. So, if you want to preserve jobs…stop innovation of all sorts. Innovations that save money, innovation that gives us new products, and so forth. And yes, the “destruction” part of creative-destruction is hard on people. But invariably many recommendations to deal with that destruction are implicitly to stop the creation part of the process. In fact, I do not think you can have the creation portion without the destruction portion also. So the solutions for the destruction side of the process is to find ways to ease the discomfort that causes, and no that won’t be easy either. So while I agree with some aspects of the comment it appears to be missing the forest because of the trees.
Our next comment, and the last one I’ll address in this post is from Ben Wolfe who has been pounding the drum that mercantilism was not anti-trade.
It’s not a big deal for Montana to run a trade deficit with California because the currency monopolist called the U.S. government makes large block grants to replenish the lost financial assets.
Suggesting the deficit of a customer with Wal-Mart is equivalent to a trade deficit with Germany is asinine
P.S.: Mercantilism was a policy of ensuring maximum generation of national wealth by balancing trade to support domestic wellbring. It was never anti-trade.
First of, no financial assets have been lost. That is just completely untrue. Second that one trades financial assets for goods and services is done so on the basis that such a trade makes both parties better off at least ex ante. This comment suggests that because I trade a financial asset, money, for all the groceries I want makes me strictly better off. The grocery is also strictly better off. And as I noted, this is a trade relationship where I run a persistent and on going trade deficit and thank God!
And it is nice you think comparing a trade deficit with Wal-Mart is equivalent with a trade deficit with Germany is asinine, but that isn’t an argument is a baseless assertion. You literally sound like Donald Trump.
As for mercantilism, even with put the best make-up job on this pig it still comes down to being implicitly anti-trade. You simply cannot have every country running a positive trade surplus at the same time. It would be, literally, impossible. Somebody has to run a trade deficit. And trying to have the balance of trade be precisely zero is to argue for substantial State control of the economy. Congratulations on being a fairly extreme statist. Here is Murray Rothbard,
Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged.
If every country is discouraging imports while trying to encourage exports it is exactly like pissing up a rope. This is precisely what happened with the Smoot-Hawley Tariff in 1930. It is quite clear that that legislation had a very deleterious effect on the not just the U.S. economy the world economy as well. I would encourage everyone to listen to this podcast at EconTalk that has Thomas Rustici as the guest. Rustici takes on the notion that Smoot-Hawley was not a significant factor. He points out that while the primary effects were “small” in that trade was not as significant as it is now, that the secondary and tertiary effects resulted in a significant worsening of the economic situation. For example, one of the U.S. primary exports was agricultural goods and that with the passage of Smoot-Hawley and the concomitant retaliatory trade restrictions by other countries the prices for agricultural goods dropped sharply. This lead to farmers being unable to pay back bank loans and due to the unit banking in many states during that era that those banks in turn would fail and wipe out deposits for the entire community. And that such bank failures can take on a contagion like aspect leading to sound banks facing runs and shutting down due to being illiquid (and letting an illiquid bank fail is just bad central banking policy).
As for promoting overall well being; I’m sorry but you don’t do that by telling people they can’t buy the things they want to buy and that they have to buy something they don’t want that also costs more.