Sunday, November 27, 2011

A Myopic View of Trade

Peter Epp writes (25 November) in The Farmer HERE

"Smith’s ‘invisible hand’ gets slapped"

“It wasn't supposed to be like this. Adam Smith's economic philosophy suggests that society benefits when economies and capital investment are directed by an 'invisible hand'; that is, when self-interest is allowed to dominate economic decisions.
And so when a clothing manufacturer in South Carolina is shut down so that its products can be made more cheaply in China, the Smith philosophy would find this agreeable, because the products are now more affordable for South Carolinians.
Ditto the tool and die worker in Wallaceburg or Windsor. If that work is moved to China or Korea, the Smith philosophy would find this to be a sensible move. The products are made more cheaply, and are thus made more affordable for the customers of those products.

But if workers in South Carolina or in Wallaceburg or Windsor are left without an income, or with an income made lower because of the work of the 'invisible hand', is it surprising that those same workers perhaps can't afford to purchase those goods, now made cheaper but not manufactured with their labour?”

No, no, no. Adam Smith expressed the general notion that society benefitted from economic growth, which, contrary to most modern economists, had nothing to do with ‘direction by an invisible hand’. This was a metaphor in Wealth Of Nations, used once, in reference to a specific object and not enunciated as a general principle to markets, supply and demand, and so on.

In Smith’s example the metaphor ‘described in a more striking and interesting manner’, how some, but definitely not all, merchants, who were fearful of the risks of sending their capital abroad preferred instead to invest their capital in the ‘domestick market’ (note Smith’s 18th-century spelling, written three times in the same paragraph) describing the object the metaphor of ‘an invisible hand’ (see Wealth Of Nations, Book IV. Paragraph 9. P 456).

He was not making nor suggesting a general statement about the economy. That is a 20th-century invention.

By adding their proportionally small investment to the domestic economy they added to ‘domestick’ revenue and employment (today’s GDP), which was a public benefit, especially for those labourers employed domestically in producing the ‘annual output of the necessaries, conveniences, and amusements of life’, which Adam Smith considered to be the public benefit of investment.
The merchants concerned with the risks of foreign trade and invested domestically also added by their net investment from their profits and added to economic growth.

Of course, the labourers who got paid work, and the merchants led by their risk aversions to invest domestically, were unaware, and did not need to be aware, of the public benefits of their decisions to invest locally.

It was not an ‘invisible hand’ that caused the misery of unemployment or low wages. Metaphors do not exist separate from their objects. Consult an English language textbook on the meaning and role of metaphors in the English language. However, Smith noted that trade made people in the participating countries better off in terms of the ‘necessaries, conveniences, and amusements of life’, just as, on a more local scale, trade between towns and country makes the people in a country better off, for without trade among localities, people would all be worse off – local self-sufficiency would reduce domestic living standards in South Carolina and Wallaceburg dramatically.

If this were not true, Peter Epp is welcome to demonstrate his ‘no trade’ proposition for all states in the USA. Who would he suggest would sell them, or buy from them ‘clothing, tools and die products’? Are there enough purchasers of these products in his local area of South Carolina or Wallaceburg making it worthwhile to manufacture it only locally? The same is true locally, town-wide and state-wide.

Adam Smith wrote about the situation in 18th-century Britain. Trade with China and Korea was not significant, and anyway was dominated by mercantile tariffs protections and prohibitions, and trade exclusion policies with countries with which Britain had trade quarrels (such as wine from France), and in the British colonies of North America they were compelled to buy British goods, and all foreign goods, that had to be shipped in British ships and via Britain, under the Navigation Acts at high monopoly prices, and were only allowed to export from a select and restricted list of goods, for which the monopolising British merchants paid very low prices, a classic double-whammy. We know where that led to in 1776.

The 21st-century problems of US trade relations with China and Korea (both major centres of US foreign investment) have nothing to do with Smith’s use of the invisible hand metaphor.

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