Mercantilism

Posted by PITHOCRATES - May 14th, 2012

Economics 101

Wealth is the Stuff we use our Talent and Ability to Make

Mercantilism gave us the United States.  For it was because of these policies that the British established colonies in North America.  And it was those same policies that led to American Independence.  Because those polices pissed off the Americans. 

The mercantile system came into being as nation states arose from feudal estates.  Kings arose and consolidated these estates into larger kingdoms.  Then one king arose to consolidate the kingdoms into a nation.  Creating Spain, France, the Netherlands, England, etc.  Enlightened thinking and better technology created food surpluses.  With food surpluses a middle class of artisans arose.  And manufactured goods.  People met in markets to trade their food and goods.   These markets grew into cities.  All of this economic activity created wealth.  Food.  And manufactured goods.  That we bought with money.  Often silver and gold. 

There was wealth.  And there was money.  Two different things.  Wealth is the stuff we use our talent and ability to make.  Food and manufactured goods, for example.  And the more food and manufactured goods a nation has the wealthier that nation is.  This is a critical point.  And the mercantile policies ultimately failed because those policies mistook money for wealth.  But money is not wealth.  It’s a temporary storage of wealth.  To make our trading of food and manufactured goods easier.  By reducing the search costs to find people to trade with.  Which is why the barter system failed in a complex economy.  It just took too long to find people to trade with.  Money solved that problem.  Because you could trade what you had for money.  Then trade your money for what you wanted.

England used the Positive Flow of Bullion to Finance the Building of the Royal Navy

Mercantilism focused on the money.  And used wealth to accumulate it.  Instead of the other way around.  The way most advanced nations do today.  These European nations accumulated money with international trade.  Beginning in the 15th century they started looking at the balance of trade between nations.  And did everything they could to maintain a positive balance of trade.  Meaning they tried to export more than they imported.  Why?  Well, nations often did trade with each other.  So they owed each other money.  And when you settled your account if other nations owed you more than you owed them there was a net flow of money to you.  Bullion.  Silver and gold.  Which is what they wanted.

To maintain a positive balance of trade the government actively intervened into the economy.  It set up monopolies.  It provided subsidies for manufacturers who exported their goods for bullion.  It placed tariffs on imports.  Or simply blocked the importation of any goods that they produced domestically.  They set up colonies to harvest raw materials to ship back to the mother country.  Which would use those raw materials in their factories to produced higher valued finished goods.  That they would export.  Especially to their colonies.  Which were convenient captive markets for their finished goods.  On the mother country’s ships.  Through the mother country’s ports.  Where they, of course taxed it.  Guaranteeing that at every step of the way they added to the positive bullion flow back to the mother country.

And it worked.  To a certain extent.  England used that positive flow of bullion to finance the building of the Royal Navy.  Which proved invaluable in the wars that followed in the mercantile world.  For mercantilism is a zero-sum game.  For every winner there had to be a loser.  Which is why this era was an era of world war.  To wrest control of those colonies.  And those sea lanes.  Great Britain came out the victor.  Thanks to their Royal Navy.  But it wasn’t all good.  For Spain found gold in the New World.  And they took it.  Shipped it back to the Old World.  Just like a good mercantilist would.  Which caused problems in the Old World.  Because money is not wealth.  It’s a temporary storage of wealth.  And when they inflated their money supply it took more of it to hold the same amount of value it once did.  Because there was so much of it in circulation.  And what happens during inflation?  Prices rise.  Because the money is worth less it takes more of it to buy the same things as it did before.  So by hording bullion to create wealth they actually destroyed wealth.  With wealth-destroying inflation.

With the Boston Tea Party the Americans Renounced Mercantilism and Demanded Free Trade

Spain was one of the greatest mercantile nations of the era.  But they quickly became a shadow of their former self.  Even though they had more bullion than their European neighbors.  For it turned out that those mercantile policies hindered economic growth.  Which is the true source of wealth.  Economic growth.  Where people use their talent and ability to create things.  That’s where the true value lay.  Not the money that held that value temporarily.  All those mercantilist policies did was raise domestic prices.  And allocated scarce resources poorly. 

It turned out free trade was the secret to wealth.  For free trade can increase wealth.  For both nations.  Thanks to something we call comparative advantage.  Instead of both nations manufacturing all of their goods they should only manufacture those goods that they can manufacture best.  And trade for the goods they can’t manufacture best.  This more efficiently allocates those scarce resources.  And produces a greater total amount of wealth.  By allowing people to buy lower cost imports they have more money left over to buy other stuff.  Increasing the overall amount of economic activity.  Which is why when Great Britain adopted free trade in the 19th century the British Empire went on to rule the world for a century or so.  And led the Industrial Revolution.  By creating wealth.  Goods and services people created with their talent and ability.  That changed the world.  And ushered in the modern era.  Something no amount of bullion could do.

But before Britain adopted free trade they were struggling with one of their belligerent colonies.  Their British American colonies.  Who were unhappy over taxation without representation in Parliament.  And the mother country forcing them to buy only British tea shipped on British ships at higher prices than they could get from the Dutch.  The British thought they found a solution to their problem.  By permitting their British East India Company monopoly to ship their tea directly to America without passing through an English port.  The tea was cheaper because of this.  But it also would set a precedent for taxation without representation.  Something the Americans weren’t about to accept.  So they threw that tea into Boston Harbor.  What we affectionately call the Boston Tea Party.  Renouncing mercantilism.  And demanding the right to engage in free trade.  Which they got after winning their independence.  And the mother country would follow suit in a few decades.  Because they, too, would learn that free trade was better than mercantilism.

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Marx, Engels, Communist Manifesto, Capitalists, Bourgeoisie, Proletariat, Private Property, Soviet Union, Iron Curtain and East Berlin

Posted by PITHOCRATES - May 1st, 2012

History 101

Nationalism, Socialism and Communism forced a more Fair, Just and Equitable Society onto the People

Karl Marx and Friedrich Engels published the Communist Manifesto in 1848.  Launching a war against capitalism.  And private property.  Intellectuals and those in academia loved this stuff.  And labor leaders.  Because it was a path to power.  Especially for those who could not create wealth.  Unlike the great wealth producers.  Like the industrialists.  The entrepreneurs.  Small business owners.  The productive middle class.  That is, the capitalists.  Who work hard and achieve success.  By using their talent and ability to create wealth.  Moving up the economic ladder.  Creating income inequality.  The ultimate sin of capitalism.  According to Marx and Engels.  Intellectuals.  Academia.  And labor leaders.

In the Communist Manifesto Marx and Engels single out the accumulation of private property as the source of all our problems.  The capitalists, the bourgeoisie, have an insatiable appetite for private property.  They just can’t get enough of it.  And therefore oppress their workers, the proletariat, to maximize their property.  By paying them less and less to maximize their profits.  So they can use those profits to buy more and more property.  Which keeps the proletariat in perpetual and abject poverty.  And concentrates all the wealth into the few hands of the bourgeoisie.  And the only way to correct this great inequity was through a worker’s revolution.  Where the proletariat rises up and takes the private property of the bourgeoisie and gives it to the state.  So it belongs to everyone.  Especially to those who did not create it.  A very popular idea among those mired in perpetual and abject poverty.  Who are easily swayed to support this more fair, just and equitable distribution of other people’s wealth.

These progressive views enthralled Europe.  Especially after the Industrial Revolution created some appalling conditions for workers.  And they took this opportunity to put them into practice.  It was the 19th century that gave us the ‘fair’ political systems of nationalism, socialism and communism.  That began the process of transferring wealth from the capitalists to the anti-capitalists.  Precipitating the economic decline of Europe.  Making America the new economic superpower.  Which still maintained the principles of free market capitalism throughout the 19th century.  Until the anti-capitalistic teachings of Marx and Engels took hold in the progressive government of Woodward Wilson.  Bringing back the federal income tax Abraham Lincoln used to pay for the Civil War.  But unlike Lincoln Wilson had no intention of repealing it.  The federal income tax was here to stay.  As progressives began building that more fair, just and equitable society.

The Soviet Union Depended on the West for Food because their Forced Collectivized Farms couldn’t Feed their People

But the equitable movement in America was not as intense as it was in Europe.  Or Russia.  Which was taking the teachings of Marx and Engels to their logical end.  They had a worker’s revolution.  They became communist.  And forced that more fair, just and equitable society on their people.  Whether they wanted it or not.  And those who objected they systematically killed.  Or exiled to a Siberian gulag.  For Joseph Stalin’s rise to power was brutal.  As was the Soviet Union.  Even making a deal with Adolf Hitler to split Poland after the Nazi-Soviet invasion of Poland that launched World War II.  Then Hitler double-crossed their Soviet ally and attacked the Soviet Union.  And the Nazis nearly overran them.  The Nazis were in Leningrad (present day St. Petersburg).  At the gates of Moscow.  And in Stalin’s city.  Stalingrad.  The Soviets were unable to resist the Nazi onslaught.  The only thing that saved them was material aid from the capitalist West.  The Soviet T-34 tank (the best in the war).  And, of course, the millions of Soviet people the Soviet generals could throw into the Nazi killing machine to wear the Nazis down.

No one suffered like the Soviet people did during World War II.  The US and the UK each lost about a half million people.  A terrible loss.  The Soviets, though, lost about 25 million people.  A number that just numbs the mind.  This was the second Russian invasion that had brought an enemy to the gates of Moscow.  The first were the French a century earlier under Napoleon.  There wasn’t going to be a third.  Wherever their armies were at the end of World War II they pretty much stayed.  Turning Eastern Europe into a communist bloc.  And to make the Soviet Union a mightier nation they embarked on a rapid industrialization program.  To make it a modern power like those great nations in the West.  But unlike them they were going to do it the ‘smart’ way.  With their command economy.  Where their brilliant state planners would marshal their resources and do what the free market economies did in the west.  Only instead of taking about a century their Industrial Revolution would take only 5 years.

With no industrialists, entrepreneurs, small business owners or a middle class it fell upon the state planners to industrialize the Soviet Union.  As well as feed the Soviet people.  Well, they industrialized the Soviet Union.  But never brought it up to par with the industrialized West.  Worse, they couldn’t feed their people.  Despite having some of the most fertile farmland in all of Europe in the Ukraine.  The Soviet Union depended on the West for food.  Because their forced collectivized farms didn’t work like Marx and Engels said they would.  And they didn’t work in China, either.  Where another brutal communist dictator, Mao Zedong, killed tens of millions of his people by starving them to death.  By forcing a more fair, just and equitable society onto the Chinese.

Time Froze behind the Iron Curtain and People Lived pretty much Forever in the 1940s

At the end of World War II, like at the end of World War I, no one wanted to think about war anymore.  Winston Churchill, though, did.  For he saw what the Soviet Union was doing.  And saw the spread of their communism as a threat to Western Civilization.  He gave a speech at Westminster College in Fulton, Missouri, in 1946.  And said, “From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe.”  There was now an Eastern Europe.  An East Germany.  And an East Berlin.  All behind the Iron Curtain.  All in the Soviet sphere.  All communist.  Where they all suffered under a more fair, just and equitable society.  Whether they wanted it or not.  And they clearly did not.  For the Soviets had to build a wall in Berlin to prevent those in East Berlin from escaping to West Berlin.

The intellectuals, academia and labor leaders loved Joseph Stalin and the Soviet Union.  They thought communism was the enlightened future.  Probably because they didn’t have to live in it.  But what is surprising is that a lot of college students have this affection with communism.  To this day they still wear t-shirts emblazed with the beret-wearing Che Guevara.   Who helped Fidel Castro bring that more fair, just and equitable society to the Cubans.  Who have been trying to escape it ever since by practically swimming to Florida and free market capitalism.  But the college students and their professors still yearn for a Soviet-style economy in the United States.  And condemn capitalism as they sit in coffee bars sipping their lattes.  Enjoying social media on their smartphones.  Wearing the latest fashions.  Enjoying the latest movies.  The newest music.  And dream of that more just society.  Where they redistribute wealth fairly and equitably.  And the rich pay their fair share.  Just like in East Berlin.  Where life was fair.  But it was nowhere as enjoyable as in the unfair West.

Time froze behind the Iron Curtain.  When West Berlin enjoyed the best Western Civilization had to offer in music, fashion, food, entertainment, etc., East Berlin didn’t.  For they were frozen in the 1940s.  Western music was decadent.  So instead of rock and pop music you listened to classical music.  Instead of the latest Hollywood movies you went to the ballet.  You didn’t watch Western television.  Read Western books.  Or newspapers.  No.  You only saw things approved by state censors.  And that were patriotic.  Why?  To prevent their people from seeing how much better life was on the other side of the Iron Curtain.  Where they enjoyed the latest and the best of everything.  Whereas inside the Iron Curtain you went to the black market for any real luxuries.  Like a pair of blue jeans.  Which they didn’t sell in East Berlin.  Because they were decadent.  Why, they wouldn’t even sell a t-shirt with a communist icon on it.  Because you just didn’t wear something like that in the 1940s.  But college kids will attack capitalism.  And support the fairness of socialism and communism.  Even though the things they enjoy come from free market capitalism.  And are simply not available in the communist command economy.  Because the accumulation of private property is the greatest sin of capitalism.  And not allowed under communism.

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Market Economy, Command Economy and Market Failures

Posted by PITHOCRATES - April 30th, 2012

Economics 101

Money replaced the Barter System making it Easier to Trade Freely and Voluntarily

We did our first economic exchanges in a market economy.  Agricultural advances gave us our first food surpluses.  These food surpluses gave people free time.  To do other things besides growing food.  Like developing an alphabet and writing.  Mathematics.  A code of laws.  And we made material goods.  Like pottery.  Farming tools.  Processing olive oil for lamps.  People who were good at making one thing made a lot of that one thing and traded with other people.  Who were good at making one thing themselves.  These people met.  And traded.  Freely and voluntarily.

Free trade.  A key element of the market economy.  Where people freely met and traded the things they made.  With other people who are freely trading the things they made.  Free trade came before money.  We bartered our first trades.  Trading goods for goods.  We then created money to make our trades easier.  Reducing the search time to find people to trade with.

Money is something that can store value.  Which allowed people to trade their goods for money.  Then they took that money and traded it with someone else.  To get something they wanted.  Money allowed people to spend less time finding people to trade with.  Because you didn’t have to find that one person that had what you wanted AND was willing to trade it for what you made.  Money allowed us to advance beyond the barter system.  Which proved more and more inefficient as we produced more and more goods.

Because of Market Failures the Government taxes to Provide Public Goods and Eliminate the Free-Rider Problem

As we produced more and more goods our standard of living rose.  We had more things in our lives that made that life easier.  More comfortable.  And more enjoyable.  Civilizations with a bustling market economy were great places to live.  Because there were a lot of nice things to make life better.  Which other people saw.  From beyond the civilization.  And they wanted what they saw.  And they took it.  By force.  Raiding parties would enter a developed civilization and rape, murder and plunder.  So to enjoy the amenities of an advanced civilization required the ability to protect your civilization.  Which led to one of the first market failures.  The failure of the market to provide city defenses through the free and voluntary trading of people engaged in economic activity.

We call it a market failure because building city defenses and creating an army are things the market economy can’t provide.  One person can’t make a fort or an army.  And trade it with someone else.  It’s too big.  It takes a lot of people and a lot of effort to make these things.  But it doesn’t take everyone.  If everyone else is contributing one person could skip contributing.  That person would still be able to enjoy the benefits of that fort and army.  Living in safety.  And enjoy living in safety for free.  Something we call the free-rider problem.  The fort and army are examples of public goods.  Things the free market can’t provide.  Or that the free market fails to provide.  Not that the market is broken or operating poorly.  It’s because people rarely act freely and voluntarily to benefit other people.  Because any time and money spent doing this is time and money taken away from their own families.  Which would bring hardship to them.  So the government provides these things that are necessary AND cause personal hardship to individuals to provide.  The government forces everyone to contribute.  Which minimizes the hardship each individual must bear.

Some in power like to take this further.  And call things that people can provide for themselves that benefit only themselves public goods, too.  Such as health care.  Higher education.  Housing.  Food.  Everything the people can buy for themselves by working to earn the money to buy these things.  And when they do they alone enjoy the benefits of these goods.  These goods they incurred hardships to obtain.  By working to earn a paycheck.  Or sacrificing other things to have these things instead.  It’s their call.  Their choice.  A choice they enter freely and voluntarily.  Therefore these things are not public goods.  But that doesn’t stop some people from acting like they are public goods.  Usually to help them win an election to office.  Or to overthrow the government.

A Command Economy reduced Economic Activity and Introduced a Police State

Civilizations with a bustling market economy were great places to live.  If you had talent and ability.  If you did then you could work hard and trade your talent and ability for a paycheck.  That you could use to trade for other things in that bustling economy.  Those with great talent and ability would be able to trade these for great paychecks.  Those with less talent and ability would be able to trade these for lesser paychecks.  Which, of course, caused income inequality.  Which is a handy thing to exploit if you want to seize power.  So you can enjoy the best things the civilization has to offer.  When your talent and ability only can trade for one of those lesser paychecks.

History is full of people trying to seize power.  So this is nothing new.  What was new was the way these people seized power.  By using the teachings of Karl Marx and Friedrich Engels.  As they wrote in the Communist Manifesto.  Who attacked market economies.  And capitalism.  Saying that the new middle class, the bourgeois, maximized profits by exploiting the working class.  The proletariat.  Which they said was unfair.  And that the only way to make things fair was to destroy the very concept of private property.  Because only the bourgeois accumulated private property.  The proletariat had none.  And only got poorer and poorer while the bourgeois got richer and richer.  Under their system, then, nothing belonged to the person.  Everything belonged to the state.  If you created something with your talent and ability it belonged to the state.  And then the state determined how to distribute the fruit of your labors.  Basically according to the rule ‘from those according to ability to those according to need’.  Those with the greatest need got the most stuff.  And those with the most ability worked the hardest.  Well, you can just guess how that worked out.  Everyone tried to show as little ability as possible and the greatest need as possible.

Because people weren’t the masters of their talent and ability anymore they couldn’t trade freely and voluntarily.  Which meant there was no longer a market economy.  Instead there was a command economy.  Where the government made all the decisions.  What to make.  How to use resources.  Where people lived.  Where they worked.  And what prices they paid for the things in the state-run stores.  Which had shelves full of things no one wanted to buy.  And empty shelves where the staples went (soap, toilet paper, etc.).  Because the government decided what to bring to the state-run stores.  And in what quantity.  Not people trading freely and voluntarily.  Which reduced economic activity.  Reduced living standards.  And introduced a police state.  Because anyone who had a chance to escape to a market economy did.  Which is why the East Germans built a wall in Berlin.  To keep their people from escaping their command economy.  And going to the market economy across the street.

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