A NEW WORLD OF ECONOMICS * ECONOMICS FOR THE NEW WORLD
It’s here! Gold: the Final Standard
Gold: the Final Standard and Gold: the Monetary Polaris are now available in FREE eBook form!
John Tamny offered a wonderful review of Gold: the Final Standard. Click here to read.
March 18, 2018
I thought that I would chew over the idea of “economic nationalism” for a bit, to see if we could find something useful in it. The neo-liberal free trade/no borders consensus is a little too easily promoted by many today, apparently without much thought. I am generally in the neo-liberal camp, but I wanted to think about it.
For some reason, “nationalism” is a naughty word these days, but all that it means is that one feels an allegiance to one’s “nation.” The main reason for the badmouthing of “nationalism” seems to be that it is the primary alternative to “globalism,” which is, of course, promoted by globalists, and we all know who they are.
A nation is a group of people with a shared culture and ethnicity. However, I don’t think a nation is really genetic, but more of a shared idea or a sense of allegiance — certainly in the U.S. case. I think that black Americans can be part of the essentially white American nation, for example. But, you don’t get to be part of it just by saying so — you have to share the values and cultural traits that define the nation. In the post-WWII era, we have the “nation-state,” in which state lines are intended to reflect the borders of ethnic groups. This is in contrast to the pre-WWII pattern of empire, in which state lines would expand to include other nations, who were typically in a subjugated state. Before 1940, Britain ruled over India, the Dutch ruled Indonesia, and the U.S. ruled over the Philippines. Globalists generally want to suppress the idea of national identity, as it interferes with their program of combining everyone into an undifferentiated mongrel stew, without enough shared values or culture around which to form concerted, organized action.
For our purposes, “economic nationalism” just means that economic policy should benefit the nation, which we will take to mean: the citizens of the country. Certainly state policy should benefit state citizens. We shouldn’t intentionally harm others in other countries, but we do not have an obligation to aid those elsewhere at our own expense. In practice, “economic nationalism” tends to mean tariffs and trade restrictions, and immigration controls. People have written a lot about tariffs and protectionism over the centuries, so I won’t rehash that too much here. The only industries that need to be protected are those that are not internationally competitive. The result is that customers must pay higher prices, which is not necessarily better for the “nation” as a whole, although it might be good for some industries.
In practice, not many countries can even consider restricting foreign trade very much. Most countries are rather small, and do not produce a wide range of items that must be imported. To pay for this, they must also export something. In the past, the Soviet Union attempted something like economic autarky, separating itself from the outside world. It was conceivable only because the landmass was so large. Today, the United States could consider such a thing (especially as fossil fuel imports are not so important now), but it would not be so easy for other countries. Even China, which is as large as the United States, I don’t think could consider a policy of separativeness today. Certainly Italy, South Korea, or Singapore could not. Thus, a high degree of trade is already a given, for these countries. Historically, there is not much record of countries having any success with a go-it-alone policy. All the great success stories, from Japan to South Korea to Germany to China, had significant international trade. The United States might be an exception here, due again to its large size: the pre-1913 era had high tariffs, which subdued trade. European countries got around this via empire — typically, countries within the empire had free trade.
Nevertheless, let’s consider a situation in which the economy consists of wine and cheese. We have domestic wine producers, who trade with domestic cheese producers, so that each enjoys both wine and cheese. It looks like this:
Now, we could put the producers in different countries, so it looks like this:
Wine (Country A) <=> Cheese (Country B)
OK, no big deal.
But, what happens when we go from the first to the second? We end up with this:
Wine (Country A) <=> Cheese (Country B)
+ unemployed former cheese producers
We also have a loss of capital value. All the capital (production capabilities) that were used to make Cheese in Country A have now become worthless.
Wine (Country A)
+ unemployed former cheese producers
+ capital now worthless
In a sense we have a loss of capital in Country A.
The solution, you could say, is for the former Cheese producers in Country A to now make wine. Then, they could trade their increased volume of wine for more cheese from Country B:
2x Wine (Country A) <=> 2x Cheese (Country B)
But, to do this, we need capital. We need to invest, to increase the winemaking capabilities of Country A.
The other thing that tends to happen is that, when a wealthy country does not have an advantage in easily tradeable goods, investment tends to center on things that are not easily traded. This is mostly domestic services, such as hotels/restaurants/travel-related, education, real estate (construction of buildings of value) or things like that. Capital goes to wherever it makes the highest return, and if the highest return is no longer in competing in the difficult international cheesemaking industry, it goes somewhere else. But again, we need more capital to expand the industries where the return on capital is higher, and thus absorb the unemployed former cheese producers.
At some point, I would like to do a little research into the present state of knowledge regarding domestic capital creation. But, in general I find that countries with a high rate of net domestic capital creation also have a high rate of investment. I say “net” capital creation, after subtracting two prime uses of financial capital that do not result in any investment in new productive capacity: consumer debt, and government debt. The consumer debt tends to be netted at the consumer level. A “low savings rate” typically expresses the net accumulation of financial assets by household savers, minus the net accumulation of financial liabilities from consumer debt. In other words, one way to increase the “savings rate” is not to save more, but to borrow less. The endless promotion of consumer debt in the U.S. is quite destructive, in my opinion. This is true on the individual level, and also, to nobody’s surprise, on the collective level.
I also find that a lot of domestic investment is the result of personal and friends/family money. You don’t really have access to venture capital or bank debt unless you are quite large and established, or are in a specific industry that attracts venture capital interest, notably tech-y stuff. We have all heard that small businesses are the big job creators in the U.S. economy. This is simply a matter of scale. A large, established company cannot grow very much, because it is already very large. It either has dominant market share in that industry, or has very tough competition with other companies that have dominant market share, and are in no mood to give it up. But, continued incremental advances in productivity allow large companies to produce the same amount of goods or services with less labor. Thus, big companies become job-losers. A small company, however, can easily grow five, ten, or fifty times larger. A lot of employment comes from small companies that get larger, but never become very large. These are the tens of thousands of companies that have perhaps less than 1000 employees each, many of which got started with a little bit of personal capital.
The alternative to this is protectionism — to erect a tariff wall. This has a lot of problems, the first of which is that one can reasonably expect all other countries to respond with similar tariffs. Thus, any advantage gained by protected domestic industries is matched by disadvantages to exporters. But, it was the exporters who were able to compete on international markets, while the protected industries could not. Also, to the extent that exporters are also the customers of protected industries, they now have higher costs, and are thus less competitive. You are coddling the mediocre parts of the economy while hurting the best parts. Another problem is that people are going to be aware that they could buy the same thing cheaper from a foreign supplier, which would obviously bother people. This sort of thing was a major complaint of the South before the Civil War, which had a major agricultural export industry in cotton, tobacco and other products. Northern industrialists wanted protection of their manufacturing industries, which meant higher prices for Southerners, and also retaliatory tariffs on Southern products from foreign countries.