‘The fundamental principles of mercantilism and neo-mercantilism are: direction of economic life by the authorities; the belief that money is wealth; exports are better than imports (thus protection and subsidies must be given to exporting industries); similarly tariff barriers on imports and the belief that a country can prosper only at the expense of others.’ (Faustino Ballve, 1956)
There is no lack of economists who express their disapproval of mercantilism, but who unfortunately agree with all or most of its principles as set out in the above quotation. This is redolent of Lewis Carroll ‘believing in six impossible things before breakfast’.
Even free market-leaning economists and journalists often fall into this fundamental trap: for example ‘mercantilism is bad but exports trump imports’.
An associated fallacy at the heart of Keynesianism is that unemployment is due to saving. Yet the result of increased saving is a shift from consuming towards capital formation, which itself creates employment of the same magnitude, with the benefit of greater production further down the line as the newly created capital equipment is put to use.
This is so obvious that even Keynes must have seen the fallacy, and indeed according to his intimate friends he was on the point of making a public declaration of this, but unfortunately died without having done so. This failure was an enormous boon for the politicians of this world who are still peddling a voodoo doctrine because it suits their own ends. It is very sad that the press, which is supposed to guard and promote our freedom, is for the most part peddling the same dope.
It was therefore with great sadness that I recently read two successive articles in the Daily Telegraph by its excellent and front ranking economics journalist Jeremy Warner, on 11th and 12th of August. Sadness, because the implication is that most of the press - let alone the politicos - is not going to change its general stance any time soon.
Mr Warner’s underlying point seems to be that the root cause of the debt crisis around the world is‘calamitous trade imbalances’ whichmean that‘creditor and debtor nations are ripping each other apart’. Thus we need a ‘global solution’ via another G20 summit – this despite the fact that the previous one was nothing but a junket for the politicos. Thus also China needs to ‘abandon its mercantilism’ by ‘increasing the value of its currency’. Presumably by so doing it will increase its imports and reduce exports. But the idea that more exports than imports is ‘favourable’ is wrong. Indeed from the viewpoint of the country receiving a balance of imports clearly the consumers are better off. What on earth is the point of working to give your hard-won production away? The sole reason for exporting goods is to pay for imported goods.
Nobody would worry about a ‘trade imbalance’ between say Lancashire and Yorkshire, concerned that another War of the Roses may be on the way. In fact there is always a balancing item in the shape of an increase or decrease capital items, i.e. lending or investment. If this lending and investment is counted as ‘trade’ as it surely should, then the whole problem disappears in smoke!
So it would be absurdly stifling if all countries had to put themselves in a straitjacket of equating ‘exports’ and ‘imports’ (thus leaving out lending, borrowing and investment) year in and year out. This whole idea is so clearly nonsensical that one can only marvel at the political nous and influence of exporters. Of course Chinese exporters, German exporters and exporters around the world want a leg up, as do lots of other interest groups. But that does not make the leg-ups sensible. The German government may also want to help the Euro by propping up other countries, but German citizens, who would pay for it, adamantly do not. At some point the citizens will surely win, and rightly so.
In other areas, Mr Warner appears to have reverted to Keynesianism (not surprising because Keynesianism and mercantilism are joined at the hip). Having referred a few months ago to the Keynesian economist Paul Krugman as ‘the great Paul Krugman’ he suggests that ‘in uncertain times the private sector stops spending and investing and saves the consequent surplus instead.’
But saving is investing; it enables companies to reduce some of their immediate consumer output and build further capital formation so as to produce more consumer goods later. Savings and investment are synonymous – even hoarding money under the bed has the same result via deflation – and saving is particularly necessary after a false boom. Mr Warner appears to be oblivious of the role of interest rates in the complex trade-offs between (a) consuming now and (b) saving now and enjoying later the greater fruits due to investment in capital equipment in the meantime.
This knowledge gap is surprising because Mr Warner is aware of F. A. Hayek who made the above paragraph crystal clear in his book Prices and Production.
Please Mr Warner, give us a glimpse of the real you. And if Hayek’s explanation of the crucial role that free-market interest rates play in the balancing of immediate consumption versus less production now but much more consumption later then please write about it and its consequences for interest rates directed by a central bank – a central bank that, like the large majority of central banks around the world, was formed to wage wars, and emphatically not to abolish market interest rates. It is the latter that will always be calamitous.