Thursday, December 27, 2018

The Maddest Fantasy

     Good morning, Gentle Reader. I’m in an economic-history mood just now, so I hope you’re prepared to go a little further off the beaten track than Liberty’s Torch usually goes – though let it be said that I and my Co-Contributors aren’t exactly “mainstream commentators” even at our staidest moments.

     The word for the day is mercantilism. Have you ever heard it? Do you know what it means? If so, do you know the historical context in which it arose?

     The usual answers to those questions are all negatives. Mercantilism as a subject of economic inquiry died out a couple of centuries ago, though the mercantilist attitude resurfaces every now and then, to the detriment of men and nations. Here’s a pretty decent definition:

     [A] system of political and economic policy, evolving with the modern national state and seeking to secure a nation's political and economic supremacy in its rivalry with other states. According to this system, money was regarded as a store of wealth, and the goal of a state was the accumulation of precious metals, by exporting the largest possible quantity of its products and importing as little as possible, thus establishing a favorable balance of trade. [Emphases added by FWP.]

     I must inject that modern in the above definition should be read as post-Westphalian. Mercantilism as national policy had no advocates before the emergence of the modern nation-state. That required the agreements in the Treaties of Osnabrück and Münster, which are the foundation of the contemporary conception of sovereignty.

     For the great powers of post-Renaissance Europe to agree on the cuius regio, eius religio principle, the absence of which had kept them at war for many decades, certain significant changes had to be made to the most fundamental of all political matters: what institutions shall have the privilege of making war. The Westphalian agreements established that only sovereign powers – i.e., the agreed-upon monarchs of nations – would have that privilege. Private armies would henceforward be outlawed, and the use of military force by lesser nobles would be treated as treasonous.

     With the elevation of sovereignty to an internationally recognized condition came something that could not have been practiced before it: state interference in commerce. Monarchs began to meddle in production and trade, usually at the behest of commercial powers that had ingratiated themselves with the royal house.

     Return for moment to the definition of mercantilism above. Review the first emphasized clause. I did that for a reason.

     Economic thought from Smith and Pareto all the way to contemporary Austrians and Friedmanites has emphasized the value of absolutely free trade. And indeed, in no case imaginable is absolutely free trade inferior to any variety or degree of government intrusion. Yet government intrusion in international trade has been the rule. It’s the rule today. Why?

     The simple answer, which is entirely adequate, is that sovereigns have been induced to look upon international trade as a win-or-lose proposition. That requires a static view of such trade: i.e., the ability to “halt the carousel and declare that the ride is over,” without regard for the relentless continuation of time. It also requires a considerable myopia about the nature of money.

     As I’ve written innumerable times, money is a medium of exchange and a store of value. Simple words, but what do they mean in the context of international trade?

     Money, regardless of whether it’s commodity-based or fiat, is not wealth. That is: the possession of a great quantity of money does not automatically make the possessor well off. There must be goods and services available for purchase with that money – and unless the possessor is willing to make those purchases, his money is valueless. The “favorable balance of trade” sought in mercantilist theory neglects this aspect of money.

     Instructive in this regard is the story of Hetty Howland Green, “the Witch of Wall Street.” This woman amassed an enormous monetary fortune in the late 19th and early 20th Centuries...but lived in a degree of penury almost unimaginable today. She was unwilling to spend a penny she could not somehow contrive to retain:

     Hetty Green's stinginess was legendary. She was said never to turn on the heat or use hot water. She wore one old black dress and undergarments that she changed only after they had been worn out, did not wash her hands and rode in an old carriage. She ate mostly pies that cost fifteen cents. One tale claims that Green spent half a night searching her carriage for a lost stamp worth two cents. Another asserts that she instructed her laundress to wash only the dirtiest parts of her dresses (the hems) to save money on soap.

     Green conducted much of her business at the offices of the Seaboard National Bank in New York, surrounded by trunks and suitcases full of her papers; she did not want to pay rent for her own office. Later unfounded rumors claimed that she ate only oatmeal, heated on the office radiator. Possibly because of the stiff competition of the mostly male business environment and partly because of her usually dour dress (due mainly to frugality, but perhaps in part related to her Quaker upbringing), she was given the nickname, the "Witch of Wall Street".

     She was a successful businesswoman who dealt mainly in real estate, invested in railroads and mines, and lent money while acquiring numerous mortgages. The City of New York came to Green for loans to keep the city afloat on several occasions, most particularly during the Panic of 1907; she wrote a check for $1.1 million and took her payment in short-term revenue bonds. Keenly detail-oriented, she would travel thousands of miles alone—in an era when few women would dare travel unescorted—to collect a debt of a few hundred dollars.

     Green entered the lexicon of turn-of-the-century America with the popular phrase, "I'm not Hetty if I do look green." O. Henry used this phrase in his 1890s story "The Skylight Room" when a young woman, negotiating the rent on a room in a rooming house owned by an imperious old lady, wishes to make it clear she is neither as rich as she appears nor as naive.

     Her frugality extended to family life. When her son Ned broke his leg as a child, Hetty tried to have him admitted to a free clinic for the poor. Mythic accounts have her storming away after being recognized; her biographer Slack says that she paid her bill and took her son to other doctors. His leg did not heal properly and, after years of treatment, it had to be amputated.

     Regardless of her bank balance, no sane man would regard Hetty Green as “wealthy.”

     Compare the above story of Hetty Green to mercantilism in international trade. When all the monies of the world were backed by some commodity – usually either gold or silver – the mercantilist approach to economics regarded “a favorable balance of trade” – i.e., the quantity of money in “the nation’s” hands – as its “score” in the game of international trade. The objective was to maximize that “score.” Once again: why?

     He who holds a static view would argue that a large national monetary balance equates to economic power: the ability to secure favorable terms on future purchases. But what does that mean? And what are its implications for the mercantilist policy of “export lots, import little” that preceded such purchases?

     The lunacy of mercantilism’s premise that “money is wealth” could not be plainer. Yet nearly every country on Earth nods to such thinking to some degree, usually with import tariffs. The greatest demonstration of such thinking and its consequences arrived with the 1930 Smoot-Hawley Tariff Act. This extremely punitive tariff affected a great many imported products, and provoked retaliatory tariffs from America’s international trading partners. Those tariffs guaranteed a worldwide depression.

     Yet the Smoot-Hawley Tariff Act was by no rationale “necessary.” It was not itself a retaliation for tariffs imposed by other nations. Rather, it was at base an attempt to protect the relatively young Federal Reserve system from exposure for its fraudulent nature. As an analysis of that dynamic would take thousands of words, I’ll save the subject for another day.

     A tariff must always be answered with a counter-tariff. The failure to do so creates an imbalance that can destroy the affected industries in the-non-retaliating nation. That can put powerful upward pressures on both inflation and welfarism. Ironically, both those measures deepen and prolong the problems they purport to address. For testimony, we have the New Deal.

     To sum up this brief exposition: Money is not wealth. The belief that money is wealth is a species of insanity. Neither is “a favorable balance of trade” favorable to anyone except the companies whose products are “protected” by mercantilist policy. Those companies make out like bandits at the expense of the rest of us. That a government should put itself in league with such companies says nothing good about the policymakers within that government. Either they know nothing about economics or economic history, or their decisions are driven by corrupt, venal motives.

     More anon.


Andrew Pryzant said...

I had a good acquaintance much like Hetty Green (a real estate tycoon). He died having failed to spend (or give away) any of his enormous wealth and left it all to a distant relative. He could have spent it on himself and his poorer circle making merry but preferred to keep the score high and shop at the salvation army store.

Linda Fox said...

I am going to argue that Trump's tariffs don't aim to start a tariff war, but to stop one. The subsidization of commerce in China and other countries amounts to a situation that is in effect similar to a tariff. That is, to give an unfair advantage in trade to the products of one's own country. In the case of China, it is combined with industrial spying conducted by the government, deliberate price undercutting designed to destroy other nations' industries, and production of counterfeit products (many of which are indistinguishable from the original, but made in cut-rate ways that cause product failure, in the case of technology).

I would argue that Obama's destruction of the CA agriculture system was a deliberate act of sabotage designed to benefit Mexico and it's large-scale producer. We are now stuck with crops sprayed with dangerous pesticides, and contamination with bacteria, in the case of fresh produce.

Linda Fox said...

producers, plural

Francis W. Porretto said...

Oh, quite correct, Linda. As I said in the article, a tariff must be met by a counter-tariff. Or as Dogbert once said to Dilbert, "Nothing doing, buster! I'll drop my rolled-up newspaper when you drop yours." (:-)