Saturday, May 02, 2009

Fallacies of Freidrich List and his Adherents

Christopher_Quigley in The Market Oracle, (1 May) HERE writes on:

The Fallacy of Free Trade’

“The causes of wealth are something totally different from wealth itself. A person may possess wealth i.e. exchangeable value; if, however, he does not possess the power of producing objects of more value than he consumes, he will become poorer. A person may be poor, if he, however possesses the power of producing a larger amount of valuable articles than he consumes, he becomes rich.

The power of producing wealth is therefore infinitely more important than wealth itself; it insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost. This is still more the case with entire nations (who cannot live out of mere rentals) than with private individuals." (Freidrich List – author the National System of Political Economy)

Any serious national economist who objectively reviews the reality of free trade must eventually come to the conclusion that it is ruinous to a nation. Granted it may seem to work short term in providing "cheap goods" but in the longer perspective it destroys the productive wealth-creating base of a community.

The British Empire knew this fact, and while it ostensibly lauded the teachings of Adam Smith and his "Wealth of Nations", under no circumstances did it carry out Smith's doctrine in its actual trading policy. The mandarins from the East India Company, that owned and ran the Empire, had no time for economic nonsense. Whatever they produced in England could not be imported, yet it shoved lower cost goods from India and the Indies onto the new American Colonies, thus destroying fledging industry in the new territories.

List: “"England was unwilling to found settlements in Asia in order to become subservient to Asia in manufacturing industry. She strove for commercial supremacy, and found that of two countries maintaining free trade between one another, that one would be supreme which sold manufacturing goods, while that one would be subservient which could only sell agricultural produce. In her North American colonies, England had already acted on these principles in disallowing the manufacture in the colonies of even a horseshoe nail, and still more, that no horseshoe, made there, could be imported into England
."

Comment
Freidrich List never understood Adam Smith, a characteristic often shared by his modern acolytes.

Wealth Of Nations was a critique of the mercantile political economy that dominated England (and Scotland) from the Elizabethan era. Economic activity had begun to recover from the 1,000 years interregnum following the Fall of Rome in Western Empire in the 5th century.

Fallacious ideas about ‘wealth’ and how it was increased were prevalent (a country was rich by the amount which it gold and silver bullion increased, tariff protection and outright prohibitions of trade facilitated a gold surplus if exports were larger than imports, and the sovereign could increase national wealth by offering Royal Charters to its nationals who would invest and trade locally in specific products (and places).

State-supported commerce was the supposed 'solution' both to the imbalance of trade with foreign countries and domestic tardiness in setting up trading ventures. By the 18th century the effects of such policies were evident. They were inhibiting the natural growth trajectory of a slowly reviving commercial society.

In fact, they were also endangering is future successes, because along with the mercantile fallacy of the sources of true wealth creation there was the inevitable major error of all mercantile political economy; their proclivity for political errors, summed by David Hume and endorsed by Adam Smith, of ‘jealousy of trade’, an error, sadly, manifested clearly in the work of Freidrich List and those who fall for his ultra-nationalistic prose.

The seven-years war alone cost £125 million, to which treasure must be added the blood of the victims. Similarly, ‘The mandarins from the East India Company, that owned and ran the Empire, had no time for economic nonsense’ and not a lot of time for the blood and treasure of the people of India, either. Both tragedies undertaken in the spirit of ‘jealousy of trade’.

And the fallacy can easily be appreciated in considering a thought experiment: if it is beneficial for a nation-state to shut out the trade of foreign countries, it should follow, but manifestly doesn’t, that a region, town, or locality would benefit if it shut-out trade with neighbouring regions, towns, or localities. In the extreme, households should cease trading with neighbours; indeed, in ludicrous pomposity, List should have also demanded that individuals become self-suffient.

Consider: ‘The power of producing wealth is therefore infinitely more important than wealth itself’. Well, Adam Smith defined wealth as the annual production of the ‘necessaries, conveniences, and amusements of life’. Everything else is sterile. It’s the output of the ‘necessaries, conveniences, and amusements of life’ that is produced which represents wealth, some part of it which is exchanged for other sources of ‘necessaries, conveniences, and amusements of life’, produced elsewhere by others (Smith called this the 'Great Wheel of Circulation').

Note how List slips in the [wealth] “insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost.” What does this mean exactly? Adam Smith explained that productive activity, using the factors of Land, Labour and Capital Stock, earns revenue, which repays the costs of producing output, plus a profit, which in turn, if not wasted in prodigality, produces more output of the necessaries, conveniences, and amusements of life, and so on into successive rounds. But, and this is List’s error, exchange accelerates these processes by small percentage amounts continuously, by exchanging things that a person, a household, a locality, town or region, or nation, produces which others want for the produce of those many others which would cost them more land, labour, and capital to produce for themselves.

Nobody exchanges higher-priced necessaries, conveniences, and amusements of life for ‘necessaries, conveniences, and amusements of life’ which they could produce cheaper themselves. Neither should ‘persons, households, a localities, towns, regions, or nations’ produce for themselves at higher costs than these same items can be exchanged from other ‘persons, households, a localities, towns, regions, or nations’!

The final error of Freidrich List was to see Wealth Of Nations as a manifesto of policies that were actually adopted by successive British Governments. Politics doesn’t work like that. Much of Adam Smith’s description of the then current mismanagement of Britain’s commercial society fell on deaf ears. Having lost the British colonies in North America, instead of aligning British policies to the ‘real mediocrity of her circumstances’ (WN: last paragraph), British governments chased a second empire, in India, Canada, the Caribbean, Australasia, and Africa, incurring all the costs in blood and treasure of the first empire (only more of them), starting with the long war with revolutionary/Napoleonic France, and drained off revenues from productive to unproductive activities, precisely the same policies that Adam Smith observed and wrote about so critically in Wealth Of Nations.

Only the surprising events associated with what is called the industrial revolution made this affordable (like an inheritance fuels the delusion of a profligate prodigal) for Britain. Similarly, the vast lands of North America which developed at a furious rate in the 19th century that staved off a reckoning with its mercantile policies, as mimicked by Hamilton.

In the 21st century there is no likely ‘unexpected’ bonanza about to come that will suspend the reckoning if the world resorts to protectionism, hostility to neighbours, and jealousy of trade. To ruin nations by abandoning the prospect of freer trade – for manifestly we do not have free trade at present, and, so far, never have – would be an act of folly of no small proportion, which, unfortunately is no assurity that it will not be imposed.

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1 Comments:

Blogger Don said...

"And the fallacy can easily be appreciated in considering a thought experiment: if it is beneficial for a nation-state to shut out the trade of foreign countries, it should follow, but manifestly doesn’t, that a region, town, or locality would benefit if it shut-out trade with neighbouring regions, towns, or localities. In the extreme, households should cease trading with neighbours; indeed, in ludicrous pomposity, List should have also demanded that individuals become self-suffient."

This is the argument that I have always used. The problem, based on my observation, is that we want the citizens of our country to prosper, but not necessarily the citizens of other countries, or, let's say, their governments. What we want in trade with other countries, is an exchange that leaves us better off, while either harming the other country or, at least, making sure that we get the better of the deal. We're in competition with other countries, and want to increase our wealth relative to them.

This also occurs within a country. The automaker's bailout showed this clearly, as states that had subsidized certain auto makers in order to lure them to their state, objected to helping the citizens of other states. This goes on all time, as certain states or regions attempt to lure investment to their areas, by outbidding other areas. This is done through subsidies, regulations, property, etc.

To the extent that the best argument for free trade is that it is beneficial for everyone, it will have a tough time convincing anyone of its use or desirability. As Gore Vidal said:

It is not enough to succeed. Others must fail.

Don the libertarian Democrat

8:15 pm  

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