Implementing market-balanced trade
"Friedrich List does not refute Adam Smith. He generalizes Adam Smith."
Mercantilism is hard. Tariffs are one possible element of a successful trade policy. While tariffs worked well in East Asia in the second half of the 20th century, they worked badly in Latin America at the same time. Tariffs do not guarantee success.
In this paywalled post, I’ll explain the generalized trade framework known as import certificates, a Warren Buffett proposal which flamed out in the Senate in 2006. This is mainstream Gray Mirror—a rare take. The idea is not mine or Buffett’s, but much older.
The key win of market-balanced trade is that the policymaker sets the level of balance, and the market implements the level of balance. There are no arbitrary tariff numbers. (China’s currency-manipulation scheme does something similar in a different way.) So MBT has a clean quality which has been lacking in the new administration’s measures.
If you cannot afford to peek behind the paywall, just read National System of Political Economy, by Friedrich List. While List died in poverty, his ideas were embraced both by Wilhelmine Germany and postwar East Asia—where anyone can see the result, both in statistics and with their own two eyes.
It is erroneous to say that List refutes Adam Smith. List himself takes great pains to deny it. Given Adam Smith’s assumptions, List tells you, he is completely right. But his assumptions amount to denying the existence of nations. Smith is not studying political economy, but a special case of political economy: cosmopolitical economy, economics for a planet made up of a single nation.
Einstein did not refute Newton—he generalized Newton. Friedrich List does not refute Adam Smith. He generalizes Adam Smith. Newton’s equations work perfectly well at low speeds. At high speed, we need Einstein. Smith’s theories work perfectly well in a politically unified world. In a politically disunited world, we need List.
This is not to say that List’s ideas always work—they are tools to be used properly. What is important to understand is not the tools, but the framework behind them.
The fundamental idea of mercantilist trade policy is that the nation is a firm. The goal of this firm is to maximize the value of its assets—to improve the land and its people, and augment its treasury.
These are very different economic metrics than we use in these rotting United States. The statistics we use—“growth,” “inflation,” “unemployment,” etc—are artifacts of the axial age of 20th-century economics, the 1930s to the 1950s. Like many elements of our political language, these concepts did not exist before the New Deal. Yet our ancestors had trade, finance, and political economy—and seem to have done well at them, at least judging by the buildings they left us.
What does it even mean, for instance, to improve the people of a country? Well—has China not improved her people—along with the buildings and factories on her land? Certainly, but… how do you measure that? Regulatory changes post 1865 have severely complicated this econometric problem. But it is a problem of metrics, not of reality. Not everything real is measurable—yet the immeasurable remains no less real.
We can say that, in general, human beings are improved by work; and the best work to improve them is work at the limit of their human capacity for skill. This effect is not in any way measured by “growth,” and measured very imperfectly by “unemployment.” The value of buildings and factories can be measured by price. But even here, markets finds it hard to measure the beauty of a building. The immeasurable is everywhere, for those with eyes to see.
Once we start treating nations as firms, we have a huge variety of tools from the world of capitalism to diagnose and improve their ills. Corporate assets can also be hard to value. Cash flow, however, is impossible to fake.
If we equate the “value of the land and its people” with the common good, we see quickly that a trade policy which turns a profit (like China’s) is probably going to correlate better with the common good than a trade policy which makes a loss. There’s a reason we associate trade deficits with decaying countries—the same reason why we associate chronic losses with decaying companies.
A profit? Welcome to the most fundamental principle of mercantilist trade policy: for a mercantilist, the balance of trade is the P/L. A trade surplus is a profit. A trade deficit is a loss. President Trump, of course, seems to understand this instinctively. It’s quite possible that he understands trade better than all economics professors. Unfortunately, this may not mean he understands it all that well—the fundamental paradox of the second Trump administration, in all its greatness and retardation.