A Tale of Two Centuries

by Derryl Hermanutz

The two centuries referred to in the title are not consecutive.  I refer to the nineteenth and twenty-first centuries. The article by Michael Pettis in Foreign Policy that was highlighted by a GEI News article yesterday (Sept. 9) gave an excellent review of current account balance issues in a light that is not understood by the mass of citizenry, most media and definitely not by politicians.  The world reserve currency status of the U.S. dollar, which is a source of pride to most Americans and those in government in particular, is actually a curse in many regards rather than a blessing.Pettis recounts how the world in general, and the Chinese in particluar, are able to use the single nation currency reserve  situation as an opportunity to manipulate their currency valuation to benefit their production and merchantile interests.

Pettis masterfully shows how the manipulation actually proves to be an over-consumption coersion for the U.S. and an over-saving force for China.  It is extremely interesting that this very type of economic distortion has been well studied and understood for nearly two centuries.  It has also been largely ignored.

In 1841 Friedrich List wrote “The National System of Political Economy“.  List criticized the “popular school” of economics that was (and is) based on Adam Smith’s twin pillars of division of labor and free trade.  List argued convincingly that it is not the mere possession or acquisition of wealth that makes a man or a nation rich, but the development of the man’s or nation’s “productive powers”.

Reserve currency status allows the U.S. to import beyond its means, while competing nations develop their powers of production and sell their surplus to the US.  Powers of production are a “social” phenomenon that depend as much on the nation’s cultural, religious, educational, legal and governmental systems as on the purely “material” means of production and exchange.  List’s thinking could be a valuable counterfoil to the current “popular economics”, which is individualistic market fundamentalism. Our popular economics is myopic and serves only the interests of merchants and traders while hollowing out the foundation of our wealth, i.e. our powers of production.

Here is how List described the conundrum provided by the opportunity for production and merchantile gain of one power at the expense of economic destruction of another:

Into what mistakes the prevailing economical school has fallen by judging conditions according to the mere theory of values which ought properly to be judged according to the theory of powers of production, may be seen very clearly by the judgment which J. B. Say passes upon the bounties which foreign countries sometimes offer in order to facilitate exportation; he maintains that ‘these are presents made to our nation.’

Now if we suppose that France considers a protective duty of twenty-five per cent. sufficient for her not yet perfectly developed manufactures, while England were to grant a bounty on exportation of thirty per cent., what would be the consequence of the ‘present’ which in this manner the English would make to the French?  The French consumers would obtain for a few years the manufactured articles which they needed much cheaper than hitherto, but the French manufactories would be ruined, and millions of men be reduced to beggary or obliged to emigrate, or to devote themselves to agriculture for employment. Under the most favourable circumstances, the present consumers and customers of the French agriculturists would be converted into competitors with the latter, agricultural production would be increased, and the consumption lowered.

The necessary consequence would be diminution in value of the products, decline in the value of property, national poverty and national weakness in France. The English ‘present’ in mere value would be dearly paid for in loss of power; it would seem like the present which the Sultan is wont to make to his pashas by sending them valuable silken cords.

Pettis has brought this logic forward 170 years into the early twenty-first century.  The more things change, the more they stay the same.  And all the while the victims of ignorance remain oblivious.

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