by Dirk Ehnts, Econoblog101
UK prime minister David Cameron held a speech this week that according to the Guardian that was "months in preparation". Here is the main part:
He said the need for domestic reform was being driven by the pace of global competition. "Those who defend the case for an ever bigger state and ever bigger spending, or those who say we don't need to radically reform welfare or education, they're fundamentally saying we can ignore these leaner, fitter countries who are breathing down our neck."
The Cameron statement is quite interesting. This social Darwinist point of view of countries competing for markets historically has been called mercantilism. Wikipedia says on the subject:
Mercantilism is the economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion. Mercantilist theory varied in sophistication from one writer to another and evolved over time. Favours for powerful interests were often defended with mercantilist reasoning.
What defeated mercantilism was Adam Smith (The Wealth of Nations, 1776) and his idea of the specialization of labour. Later, Ricardo added that countries should benefit from trade because of comparative advantage, and in the 20th century it was Heckscher and Ohlin that made that point again. Trade should generate a win-win situation. Of course, the balanced current account that is assumed in those models is critical. If reality shows huge current account imbalances than the models can and should not be applied to reality.
Summing up: the UK - and other European nations - have returned to the doctrine of mercantilism. This is a major defeat for progressive economists and economics as a discipline. It will also endanger the European project as it is unlikely to bring either peace or prosperity to the European people. Instead, it will bring more social and economic insecurity as governments prepare to pull back from the provision of essential service like health and education. A race to the bottom regarding regulation, wages and protection of workers is something which Europe cannot win.
I see this kind of reasoning by politicians like Cameron as a smoke screen behind which the society is dismantled. Lower taxes for the rich, fewer opportunities for the poor. Shift the blame to foreign countries if people protest. Economics is politics. Bad politics equals bad economics and vice versa.
Before you think that there is no alternative: yes, there is! Even with a negative current account, gains from free trade can be reached through higher productivity instead of lower wages. So, increase the productivity of your population! Make sure that your people are healthy and show up at work (health care system), that they do not get caught in a vicious circle once they are unemployed (social security), that they have an incentive to work so that they have enough to eat and some more during old age (pension system) and that they get a proper education (education system). If you think that the private sector can provide all these things, go ahead and try your luck. However, that does not seem the way that Mr Cameron wants to go. Instead, lower wages and less government spending are his magic potion that solves all the economic problems of the UK.
The people of Spain and Greece have been subjected to this experiment. They are voting with their feet:
MADRID — The number of Spaniards leaving the recession-wracked country was up 44 percent in the first six months of 2012 compared with the same period last year, the National Statistics Institute said Tuesday. (Huffington Post)
Most young Greeks are considering abandoning the country, as Greece is in its fifth year of recession with unemployment nearing a record 22 percent, an opinion poll showed.
Fifty-three percent of 444 men and women aged between 18 and 24 said they might emigrate, while 17 percent are ready to leave the country, according to a survey by Focus Bari for Panteion University in Athens. No margin of error was given.
Seventy-six percent said emigration is the best way to cope with the country’s financial crisis while almost seven out of 10 of those polled said they have been significantly affected by the crisis. (Bloomberg)
What we see in Europe now is a political crisis that has brought about policies that repel the social progress made since the Age of Enlightenment. Political reforms have nothing to do with international trade. They are about redistributing wealth from poor to rich. That is not what Adam Smith had in mind:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.
The Wealth Of Nations, Book IV Chapter VIII, v. ii, p. 660, para. 49.
When one as weighty as Adam Smith rolls over in his grave, the ground must tremble. There might be an earthquake now in Canongate Churchyard.