True Wealth

I used to be a strong proponent of free trade, until I read “How Rich Countries Got Rich … And Why Poor Countries Stay Poor” by Erik Reinert. His exposition is a tour-de-force, covering the actual history of trade, tariffs, and how England, France, and Germany used them to become wealthy.

$11.99 on Kindle, used copies from $2.21. Someone asked if I could give a summary. Reinert points out that opposition to free trade is not a new idea. He provides, in an appendix, a most interesting document from the year 1684 by an economist named Philipp von Hörnigk, with the lovely title

Nine Points on How to Emulate the Rich Countries

How do you get rich? You do what the rich countries do. What I’m going to do is put Hörnigk’s text inset and bold, with my comments interspersed. Here’s his first point.

First, to inspect the country’s soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered. Every useful form of plant under the sun should be experimented with, to see whether it is adapted to the country, for the distance or nearness of the sun is not all that counts. Above all, no trouble or expense should be spared to discover gold and silver.

It is interesting that although Hörnigk’s main thrust involves manufacturing, because it has a greater return, his first point is to look at what can be grown in the country. Plus gold and silver, of course, as that was real money in 1684.

Second, all commodities found in a country, which cannot be used in their natural state, should be worked up within the country; since the payment for manufacturing generally exceeds the value of the raw material by two, three, ten, twenty, and even a hundred-fold, and the neglect of this is an abomination to prudent managers.

Agriculture and extraction (mining, logging, fishing) both suffer from diminishing returns. You can increase the yield of your gardens with fertilizer. But each additional pound of fertilizer brings smaller and smaller returns.

Manufacturing goes the other way. Mechanization and economies of scale allow greater returns than either agriculture or mining.

And in particular, manufacturing using your own products from agriculture or extraction is crucial. Manufacturing can increase the value of your raw agricultural products by ten-fold or more. This is why manufacturing is more important than either extraction or agriculture-the value multiplier of manufacturing is very large. You want to add the value in your own country, and to keep the jobs in your own country.

Third, for carrying out the above two rules, there will be need of people, both for producing and cultivating the raw materials and for working them up. Therefore, attention should be given to the population, that it may be as large as the country can support, this being a well-ordered state’s most important concern, but, unfortunately, one that is often neglected. And the people should be turned by all possible means from idleness to remunerative professions; instructed and encouraged in all kinds of inventions, arts and trades; and, if necessary, instructors should be brought in from foreign countries for this.

Next, he says, focus on the people—education, and encouragement of entrepreneurship, training, good stuff.

Fourth, gold and silver once in the country, whether from its own mines or obtained by industry from foreign countries, are under no circumstances to be taken out for any purpose, so far as possible, or be allowed to be buried in chests or coffers, but must always remain in circulation; nor should much be permitted in uses where they are at once destroyed and cannot be utilized again. For under these conditions, it will be impossible for a country that has once acquired a considerable supply of cash, especially one that possesses gold and silver mines, ever to sink into poverty; indeed, it is impossible that it should not continually increase in wealth and property. Therefore,

Here Hörnigk is cautioning against the very situation we have today, a huge trade deficit with the rest of the world. Bad idea.

Fifth, the inhabitants of the country should make every effort to get along with their domestic products, to confine their luxury to these alone, and to do without foreign products as far as possible (except where great need leaves no alternative, or if not need, widespread, unavoidable abuse, of which the Indian spices are an example). And so on,

This fifth point is where the question of free trade starts to be discussed. Hörnigk is very emphatic that trading your wealth for foreign products when domestic products are available is a foolish move.

Sixth, in case the said purchases were indispensable because of necessity or irremediable abuse, they should be obtained from these foreigners at first hand, so far as possible, and not for gold or silver, but in exchange for other domestic wares.

When he says “at first hand”, he means without middlemen, directly from the producers. He’s also clear that what is important is the net trade deficit, and that if you can sell an equal value of goods overseas, that is preferable to just spending your wealth on imports.

Seventh, such foreign commodities should in this case be imported in unfinished form, and worked up within the country, thus earning the wages of manufacturing there.

Here he’s making the point again about manufacturing. If you have to import something, import raw materials and make the finished goods yourself.

Eighth, opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form, so far as this is necessary, and for gold and silver; and to this end, consumption, so to speak, must be sought in the farthest ends of the earth, and developed in every possible way.

Here is “globalization” in a different form. Hörnigk is looking at global markets for the country’s products.

Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin.

And this holds good, even if the domestic commodities are of poorer quality, or even higher priced.

For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

This is a critical point, because it speaks directly to the main argument in favor of free-trade. This argument is that free trade leads to lower prices for consumers. They are correct. It does.

But as Hörnigk points out, it’s better for the country to pay two dollars for a local product rather than one dollar for the Chinese version … and that is why Hörnigk says that “no importation” should be allowed of products if there is sufficient supply and quantity at home.

The net effect of free trade on the US has been two-fold. The first is the loss of thousands and thousands of manufacturing jobs. Manufacturing, as Hörnigk points out over and over, is critical to the ability of the country to produce and hold on to wealth.

The second is the loss of our wealth through a large and ongoing trade deficit.

People look at me strangely when I say that when I was a kid in the fifties, the US ran fine with almost no overseas trade at all, and that we had no  trade deficit with the world until the 1970’s. But it’s true. The trade deficit in 1992 when NAFTA was signed was around zero … and from there, we started hemorrhaging our wealth overseas.

This is why Hörnigk says:

For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

In my last post on the subject entitled Why Free Trade Isn’t I talked about the Honiara Nail Mill. I described the loss of the mill to free trade. It is true that nails from the funky little local mill were more expensive than nails from the shiny new mill in Singapore, and under free trade it could not compete.

But the cost of free trade to the Solomons is immense. The cost is the loss of a manufacturing sector in the Solomon Islands, and that sentences the islands to an eternity of being nothing but a poor country that is just a producer of raw materials and nothing else.

Anyhow, that’s the basic story. However, I cannot truly do Reinert justice, and I encourage you to get the book from your local library if you cannot afford it.

Best wishes to everyone, free-traders and protectionists alike,

w.

My Usual: If you comment on someone’s work, please QUOTE THE EXACT WORDS THAT YOU ARE DISCUSSING, so we can all understand just what you are talking about.

Further Reading: There’s a fascinating review of “How the Rich Got Rich” at the same Amazon site. It’s the first review, just under top section. It’s actually a concordance and obviously a work of love. It lays out the basic ideas of the book, with page numbers … amazing.