Wednesday, June 13, 2018

Adam Smith says POTUS is wrong on tariffs and trade

Who dares to take issue with President Trump's desire to raise tariffs on steel, aluminum and a wide range of goods America imports from its friends and allies, and thus provoke a trade war? Adam Smith, that's who!

Mr Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment era. He is best known for two classic works: An Inquiry into the Nature and Causes of the Wealth of Nations (1776) and The Theory of Moral Sentiments (1759). The former, usually abbreviated to The Wealth of Nations, is considered his magnum opus and the first modern work of economics.

Adam Smith was a classical liberal -- the good kind -- and a firm believer in free trade. In The Wealth of Nations, he argues for three foundations of modern economics, viz.:
  1. pursuit of self-interest - It's OK to look out for Number One
  2. division of labour - It's folly to have everyone build his own house when different people can be employed to dig the foundation, do the framing and put the roof on
  3. freedom of trade - I give you something you want, and I get something I want, which goes back to the first principle. 
The Wealth of Nations is a huge book -- huge in its impact on political thought and, unfortunately, huge in size -- over 900 pages even in an abridged edition. Everyone who fancies himself [or herself! Ed.] a thinker refers to Adam Smith, but few actually quote him because few have read this literally magnum opus. P.J. O'Rourke has done so, or skimmed through it at least, and has produced a remarkably slim "Best of Adam Smith" book called On the Wealth of Nations (Douglas & McIntyre, 2007), from which I've drawn this passage (from Book 4 of the original work). The words of Adam Smith, himself, are shown in italics.

Smith disdained trade retaliation: "Those workmen...who suffered by our neighbours' prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods."

And Smith gave the lie to claims that tariffs protect working stiffs: "To lay a new tax upon them...and because they already pay too dear for the necessaries of life, to make them likewise pay too dear for the greater part of other commodities, is certainly a most absurd way of making amends."

As for all our money going overseas, Smith had shown in book 2 of Wealth why this doesn't harm an economy: "we must not imagine that it is sent abroad for nothing." And Smith was referring to gold bullion. Gold always has some value.... The American money that the Chinese are getting is fiat currency that could turn into wastepaper at any time.

By holding dollars and dollar-denominated securities, China is buying our debt. Smith had declared, "A man must be perfectly crazy who...does not employ all the stock which he commands, whether it be his own or borrowed." If Americans think they're using all the capital they can get their hands on "in the way that they judge most advantageous to themselves," they'd be crazy not to be in debt.

As I pointed out in "MAGA to MAAA - Walt explains President Trump's 'trade war' strategy", WWW 1/6/18, Making America Great Again doesn't necessarily involve Making America Alone Again. Reverting to the protectionism of a hundred years ago will almost certainly be counter-productive. If POTUS persists in making war on America's allies (no matter how irritating their leaders may be), it will not end well. Lifetime pct .986.

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