Adam Smith’s Wealth of Nations (1776) was written to refute mercantilism’s economics of regulated foreign trade. Still, we find conservatives who say they favor the free market, yet who adopt the arguments of mercantilism.
These people cannot think straight. I mean this literally. They cannot follow economic logic. It befuddles them. They resent those who offer such arguments.
I received this letter yesterday. It was in response to my article on the flow of capital. I regard the crucial capital as entrepreneurial vision. This is consistent with the Austrian School of economics, which places entrepreneurship at the center of the market process.
He rejects economic logic. It is all sophistry.
I have written to you before, only to receive ridicule in return. I’ve written about the subject of this article of yours, “capital flow.” You economics professors get lost in sophistry. You know too much, or know too many intricate details. Economics, in reality, (ask Henry Hazlitt) is simple. The foundation of an economy is wealth creating industries, e.g., farming, fishing, forestry, mining and other extraction industries, but most of all, manufacturing. Adam Smith had this figured out two and a half centuries ago. Everything else in an economy builds upon these wealth creating industries.
Adolf Hitler, who didn’t have a PhD in economics, also had it figured out. When he became Chancellor, the German economy was at the point of collapse, so he established the economic policy of “autarky” for Germany, meaning that anything that Germany needed, which could be manufactured in Germany, would be manufactured in Germany, regardless of the cost to do so. This policy created so many “wealth creating jobs” that within two or three years, Germany went from 30% unemployment to a labor shortage, and the Germany economy boomed.
You ridiculed my last e-mail to you asserting that American manufacturing must be protected by a tariff to prevent this obscene “offshoring” which is hollowing out the American middle class. The true extent of the damage done is masked by an ever increasing national debt. This, of course, is unsustainable in the long run, and it is just a matter of time before the entire edifice collapses.
Tariff’s, Mr. North! Also, a Hitlerian policy of autarky. That’s what’s needed if we are to avoid becoming a third world country.
He says that I have previously responded with ridicule. No doubt I have. I think Pascal was correct: “And let me add, fathers, that this may be done without any breach of charity either, though this is another of the charges you bring against me in your publications. For, according to St. Augustine, “charity may sometimes oblige us to ridicule the errors of men, that they may be induced to laugh at them in their turn, and renounce them.”
I do not need to resort to ridicule here. All I have to do is quote him verbatim.
My correspondent says:
Economics, in reality, (ask Henry Hazlitt) is simple. The foundation of an economy is wealth creating industries, e.g., farming, fishing, forestry, mining and other extraction industries, but most of all, manufacturing. Adam Smith had this figured out two and a half centuries ago. Everything else in an economy builds upon these wealth creating industries.
Hazlitt did indeed say that economics is simple. This is why he rejected tariffs. Chapter XI is titled: “Who’s ‘Protected’ by Tariffs?” Writing of Adam Smith’s attack on tariffs, Hazlitt wrote this:
But whatever led people to suppose that what was prudence in the conduct of every private family could be folly in that of a great kingdom? It was a whole network of fallacies, out of which mankind has still been unable to cut its way. And the chief of them was the central fallacy with which this book is concerned. It was that of considering merely the immediate effects of a tariff on special groups, and neglecting to consider its long-run effects on the whole community.
Then he added this:
For the erection of tariff walls has the same effect as the erection of real walls. It is significant that the protectionists habitually use the language of warfare. They talk of “repelling an invasion” of foreign products. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion
are like the tank traps, trenches, and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army.
So, however easy economics is, my logic-rejecting critic thinks that Hazlitt is on his side.
Then he says this:
The foundation of an economy is wealth creating industries, e.g., farming, fishing, forestry, mining and other extraction industries, but most of all, manufacturing. Adam Smith had this figured out two and a half centuries ago. Everything else in an economy builds upon these wealth creating industries.
But Smith wrote his book to argue that tariffs are an economic liability.
He adopts the view that forestry and mining are creators of wealth. Everything else is a delusion, especially ideas. Ideas remain a threat to wealth, especially the ideas of economists. Raw materials are the basis of wealth.
Question: why do Third World nations expprt mostly raw materials? Why do people in service-oriented economies live in luxury, and those in resource-exporting nations live in poverty?
He invokes Adolf Hitler. Hitler did indeed get people working. He set up a command economy that told people where to work. It told them what wages they would receive. And it directed production. Hazlitt noticed this, too. In Chapter X, “The Fetish of Full Employment,” he wrote:
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.
My correspondent concludes: “Tariff’s, Mr. North! Also, a Hitlerian policy of autarky. That’s what’s needed if we are to avoid becoming a third world country.”
We see here the essence of the critics of free trade. They would not want to be tossed into a paper bag with Hitler — bad PR, you understand. But my critic is correct: Hitler’s policy was autarky. Then he used military force to create a free trade zone within the autarky of his Greater European Co-Prosperity Sphere, also known as libernshraum.
MISES ON AUTARKY
On page 3 of Ludwig von Mises’ book, Omnipotent Government: The Rise of the Total State and Total War (Yale University Press, 1944), he wrote:
When the domestic market is not to some extent insulated from foreign markets, there can be no question of government control. The further a nation goes on the road toward public regulation and regimentation, the more it is pushed toward economic isolation. International division of labor becomes suspect because it hinders the full use of national sovereignty. The trend toward autarky is essentially a trend of domestic economic policies; it is the outcome of the endeavor to make the state paramount in economic matters.
Autarky was the policy of the Nazis. So was geographical conquest. These were linked policies, Mises wrote.
In this age of trade walls and migration barriers, of foreign exchange control and of expropriation of foreign capital, there are ample incentives for war and conquest. Nearly every citizen has a material interest in the nullification of measures by which foreign governments may injure him. Nearly every citizen is therefore eager to see his own country
mighty and powerful, because he expects personal advantage from its military might. The enlargement of the territory subject to the sovereignty of its own government means at least relief from the evils which a foreign government has inflicted upon him (p. 5).
Autarky is the policy of domestic economic central planning. In a section on “Autarky” in Part II, Chapter III, Mises wrote:
Interventionism aims at state control of market conditions. As the sovereignty of the national state is limited to the territory subject to its supremacy and has no jurisdiction outside its boundaries, it considers all kinds of international economic relations as serious obstacles to its policy. The ultimate goal of its foreign trade policy is economic self-sufficiency. The avowed tendency of this policy is, of course, only to reduce imports as far as possible; but as exports
have no purpose but to pay for imports, they drop concomitantly (p. 72).
Protectionism and autarky always result in shifting production from the centers where conditions are more favorable–i.e., from where the output for the same amount of physical input is higher–to centers where they are less favorable. The more productive
resources remain unused while the less productive are utilized. The effect is a general drop in the productivity of human effort, and thereby a lowering of the standard of living all over the world (p. 73).
(To read the rest of my article, click the link.)