Adam Smith devotes book IV of The Wealth of Nations to refuting an economic ideology he labels “mercantilism”. If you watched last night’s debates, you see that even today, mercantilism remains the commonsense economic worldview of the median American voter.
Both Obama and Romney spent time complaining about China. They probably both know better, but they also know Americans will punish them for telling the truth. After all, bad government is our fault, and honest candidates don’t stand a chance.
On the issue of China, here is more from Libertarianism What Everyone Needs to Know.
What would libertarians do about the rise of the Chinese economy?
The main libertarian reaction to the rise of the Chinese economy is to rejoice. Fifty years ago, Mao Zedong forced forty million or more Chinese people to starve to death. Almost everyone in China was desperately poor. Later, Deng Xiaoping, the de facto leader of China from the late seventies until 1990, permitted a range of bottom-up reforms. He let local municipalities decide how to invest, allowed foreign investment and capitalist markets in special economic zones, and significantly re-privatized farming. Agricultural and industrial output quickly increased. Though China did not (and hasn’t yet) become rich, it went from famines to food surpluses. From a humanitarian point of view, this is wonderful. We should want everyone everywhere to be rich and happy.
Yet most Americans would balk at this. They see China as a dangerous competitor, even though, as Paul Krugman wrote long ago, competitiveness is a dangerous obsession. But David Ricardo’s idea is, well, difficult.
Nations are not competing firms. Nations do not compete the way Toyota and Honda compete. “We” are not competing with “them”.
What do economists think about international trade?
Economists have long said there is usually no stronger of an argument to restrict trade between countries as there is to restrict trade between individual cities or between individual people within the same country. Trade is trade. It makes as much sense to protect America from China as to protect New York City from Newark.
Economists repeatedly stress—and everyone repeatedly ignores—that international trade is nothing special. From an economic standpoint, increased American trade with China is not much different from increased Virginian trade with Maryland.
Trade is usually a positive sum game.
Should the government use quotas or tariffs to make us buy domestic goods? …one reliable, if imperfect, test that something is a positive-sum game, or at least not a negative-sum game, is this: if given a choice, do people want to play it? If we have to chain people to the bargaining table to keep them from walking away, then we have to suspect we’re not playing a game everyone can win.
Still, some people worry that the Chinese economy will “overtake” the American economy. On its face, that’s like worrying that the Fairfax, Virginia, economy will “overtake” the Falls Church, Virginia economy. But part of the issue here is that people don’t understand the difference between cutting-edge and catch-up growth.
…do not be fooled by high [Chinese] growth rates. The US economy has never grown as fast as the Chinese economy grows now. But the US and Chinese economy are different. China experiences what economists call “catch-up growth”. It had a poor, isolated, and dysfunctional economy. Now, it can copy good business practices, institutions, and technological innovations used in other countries. It thus grows very quickly. The US is at the economic frontier. It cannot enjoy catch-up growth. It has no one to catch up to. For it to grow, it cannot copy others. It has to develop new ideas and technologies.
To understand the difference between cutting-edge and catch-up growth, imagine what would happen to the US economy if Star Trek’s Vulcans traded us their warp drives and particle generators for our corn. The American economy would grow much faster than the Vulcan economy. The most economically illiterate Vulcans might then complain that the American economy would overtake the Vulcan economy.
Ah, you object, but if the Chinese get rich, won’t they use their money to build up their army and take over the world?
… as the economist Frédéric Bastiat said, if goods do not cross borders, troops will. China is prosperous because it sells stuff to Americans. Economic interdependency reduces the probability two countries will go to war, because it increases the amount they have to lose by fighting.
On this point, in A Brief History of Liberty, Schmidtz and I discuss how the desire for economic self-sufficiency or to avoid imports tends to lead to war and empire. For example, consider Athens:
Athenians increasingly began to seek economic self-sufficiency (autarkeia), which, for better or worse, they viewed as making them more free (by minimizing their dependence on international trade). The drive toward autarky led gradually to the formation of an ‘Athenian empire,’ as Athens gained supremacy over its allies in the Delian League (formed in 478/7 bc against the Persians) and began to gather more resources so as to be ‘self-sufficient.’
What sort of foreign policy goes with mercantilism? A feverish one, Plato might have said; and 2000 years later Adam Smith, moral philosopher and Plato scholar would have agreed. If one believes that to buy foreign products is to be a loser in a zero-sum game, then one will want to acquire foreign products by some means other than paying for them. By the same token, if one believes in self-sufficiency as an economic ideal, then merely avoiding trade with neighboring countries will not be enough. One will want to acquire their land and their working populations, thereby moving closer to the ideal of national self-sufficiency. If one is a mercantilist, one begins to think of military might as a first resort, and of voluntary trade as a last resort. Mercantilists do not treat either game as mutually advantageous. They see trade – paying to import wanted goods – as a way of losing, and the military alternative as a way of making the other side lose. So, partly in the name of protecting domestic indus- try and promoting self-sufficiency as an alternative to international trade, and partly out of a desire for glory, mercantilist European states began building empires.