Tuesday, January 15, 2008

Mercantilism

The argument in favour of free trade says that in any voluntary exchange we part with our money or goods for goods or money we value more. Otherwise we wouldn't do it. Of course, when we think something is worth more than what we have, we could be wrong, assuming there's such a thing as absolute value, which there might not be. Simple enough.

Jeff Randall is worried that China

has more than $1,000 billion in its vaults. In other words, Beijing could fund the UK's entire 2008 budget in cash.
But it presumably follows that America has Chinese-made goods it values more than the $1,000 billion of cash it parted with to get them. Randall doesn't mention that.

Perhaps that's because those goods will wear out and become valueless, whereas that's not going to happen to the dollars in its banks. No, they'll become valueless, or at least less valuable, because the dollar has been falling on the currency exchanges, not least because if it wants some more (fiat) money, the US Fed will just print some more, thereby devaluing every dollar the Chinese hold.

It's a neat trick, in a way. I pay you £100 for something, but if I feel like it I can print money so that, compared to a baseline value of a basket of fruit, or vegetables, or even one of gibbering economists, you now only have £80. Or £50. Depends how much I print.

That seems to be the theory. So why is Randall worrying? It's not like he doesn't know all this. And it's not as though I do. I'm just parroting stuff I've been reading, which has all been refreshingly light on figures.

I'd be obliged for any pointers to some kind of empirical evaluation of the competing cases of free trade and mercantilism.


UPDATE: I do understand that mercantilism is normally a way of protecting the interests of the rich, and damaging those of the poorer. Thus, when Peter Mandelson imposed quotas on Chinese shoes entering Europe, he was benefiting a small number of shoe manufacturers and their employees in Europe and damaging their (no doubt poorer) Chinese equivalents as well as every European who wears shoes and now has to pay more for them.

What I don't understand is the cumulative, longer term effect of China accumulating all that gelt, and America or Europe accumulating vast mountains of cheap shiny grey shoes.

2 comments:

dearieme said...

If people really believed that free trade was pernicious, they'd abolish free trade between West Sussex and East Sussex, Essex and Middlesex, etc. They don't, but they see opportunities for lining their pockets by intefering elsewhere. They get off with it because the electorate, on this issue, is deeply stupid.

Tim Worstall said...

Think about the true meaning of being "wealthy". Longer life, better fed, better shod....or the more usual meaning, of having lots of money in the bank (ie, potentially buying a longer life, being better fed, better shod).
Which is actually prefereable? Being so or potentially being so?
One way of looking at free trade v. mercantilism (this will give the screaming abdabs to any real economists of course) debate is that in free trade we *are* rich. The Chinese with their $ 1000 billion are only potentially so.