THE BEAR'S LAIR The return of Thomas Mun
By Martin Hutchinson
China's recent announcement that it would use its US$2 trillion of foreign
reserves to boost its companies' overseas acquisitions tells us that its
economic beliefs are neither those of Adam Smith, nor of Karl Marx, but of the
17th century mercantilist Thomas Mun. It is becoming clear that in economics,
unlike in "hard" sciences, old belief systems never die.
Mun (1571-1641) wrote a classic magnum opus England's Treasure by Foreign Trade.
Published only after his death in 1664, it was nevertheless very influential.
Mun had been a director of the East India Company, and, unlike earlier
theorists, believed that foreign trade was beneficial. However, he didn't hold
with any high-faluting nonsense like comparative advantage or maximization of
global economic welfare. For Mun, the purpose of foreign trade was to export
more than you imported and, consequently, amass a huge store of foreign
"Treasure," which
you could then use to found colonies that would take control of natural
resources.
To further this objective, countries should: cut back domestic consumption as
far as possible; increase the use of land and other domestic resources to
reduce imports; encourage the export of goods made with foreign raw materials;
and export goods with price-inelastic demand because profits would be greater.
Mun's theory made sense in the 17th century economic jungle - and today it
obviously makes sense to China. The country's currency, the yuan, is
undervalued, so exports consistently exceed imports. Domestic consumption is
kept low and savings high, both of which suppress imports. In industries such
as automobiles where consumer demand is inevitable, foreign manufacturers are
forced into domestic joint ventures, so that domestic manufacturers can be
developed to replace imports. Domestic agriculture and resource extraction
efforts are intensive.
China has set up free-trade zones, in which foreign parts are assembled into
goods that are then exported. Finally, the country has amassed a gigantic store
of $2 trillion of "Treasure," which is now to be used to assist in foreign
acquisitions. Those acquisitions are not to be on Wall Street, as Prime
Minister Wen Jiabao helpfully explained, but in natural resources, where China
can assure itself of exclusive raw materials supplies for decades to come.
It's not often you see an economist's ideas put into effect with such
precision. "Practical men, who believe themselves to be quite exempt from any
intellectual influence, are usually the slaves of some defunct economist" said
John Maynard Keynes, but he probably didn't expect the economist to be almost
370 years defunct, nor the slavery quite so deferential. William Gladstone's
Britain never followed Adam Smith's theories with such precision. Neither was
Clement Attlee's Britain so scrupulously faithful to the teachings of Keynes
himself. Certainly Josef Stalin's Russia played fast and loose with the
teachings of Karl Marx, as did Mao Zedong's China.
It indeed has to be doubtful whether any member of China's current State
Council has read Mun with any care. Wen himself is a geologist by training. One
vice premier, Li Keqiang, has an economics PhD, but he got it at Peking
University in the 1980s, so probably did not have Mun high on his reading list.
Two other vice premiers, Hui Liangyu and Zhang Dejiang, have economics first
degrees, but Hui got his at Jilin Party Provincial School while Zhang aced the
economics syllabus at Pyongyang's Kim Il Sung University. Neither institution
is known as a haven of Mun studies.
Still, to us practical men, the interesting question is not where the Chinese
leadership got its exquisite understanding of Mun's theories, but whether they
are likely to work.
For Adam Smith, writing a century later, Mun's nostrums were clearly
inadequate. "If a foreign country can supply us with a commodity cheaper than
we ourselves can make it, better buy it of them with some part of the produce
of our own industry, employed in a way in which we have some advantage," he
wrote. China does not believe this. China preferred to force GM into a joint
venture in China that even now, 12 years after the joint venture's foundation
and with Buick sales volume in China higher than in the US, makes China's
citizens pay $32,200 for a base model 2010 Buick LaCrosse - 16% more than its
US price of $27,835.
Thus in Smith's time the ideas of Thomas Mun had come to seem hopelessly
primitive. With the supply of natural resources essentially infinite, countries
maximized their wealth by exploiting their comparative advantages, whether
through cheap natural resources, as in British coal, through high quality
agriculture, as in French wines, or through high-level mechanical ingenuity, as
in German manufactures. Whether a country ran a balance of payments surplus or
deficit was of little short-term consequence, and unless a country ran out of
money altogether, "Treasure" was of no consequence at all. It was Smith's
economics that brought the world the Industrial Revolution and the enormous
advances in global prosperity that marked the 19th and 20th centuries.
There is, however, some evidence that Smith's economics are ceasing to work so
well, and that we may be re-entering the world of Thomas Mun.
The key problem is natural resources. In Smith's time, with a global population
of only 1 billion and little industrialization, the global supply of resources
was almost infinite. Today, however, when we have allowed global population to
bloat to 6.8 billion, there are signs that the global resources supply may be
becoming disturbingly finite. Under Smith's economics, that isn't a problem; if
one resource becomes scarce its price rises, and the world switches to an
alternative. If, however, we are now dependent on a few critical resources for
which alternatives are not readily available, price signals alone may not
prevent us from depleting those resources altogether, causing catastrophic
disruption to our economic life.
China clearly believes this is about to happen. That's why it is attempting to
appropriate control of oilfields, mines and so forth in emerging markets,
providing itself with secure sources of supply that will allow its economy to
continue to flourish in a world of scarcity. Mun would surely have approved. In
the dog-eat-dog world of 17th century mercantilism, a $2 trillion hoard of
"Treasure" would find ready use in such activities, whether through formal
colonies, or, as in China's case, merely through exploitation agreements
backed, if necessary, by the People's Liberation Army.
In reality, China is probably a few decades premature. Oil, the world's most
critical natural resource, is still in ample supply if the price is high enough
to bring offshore drilling, oil shale and tar sands into operation. Other
natural resources may certainly find their prices driven up by the rapid
industrialization of China and India, but there is no sign of their rising
prices being due to any absolute global scarcity - not yet.
Nevertheless, over the coming decades we are in danger of reverting to a Thomas
Mun world, in which prosperity depends on hoarding sources of natural resources
and "Treasure." That will be a world significantly poorer than our own, in
which the price mechanism no longer carries much weight and innovation is
stifled by the dead hand of the government bureaucracies that dominate economic
life through their direction of nations' economic policies. While initially a
Mun world might survive fairly comfortably, the long-term economic
prognostication for it must be truly grim.
There are two possible escapes from this future. One is the 1950s' dream of
space exploration, in which technology advances to the level where we can
garner resources from other worlds, and if necessary dispose of surplus
population in galactic colonization. However, 40 years after Apollo 11, our
advance to that future seems much less certain than it did. Indeed, we are in
reality no closer to it than were Jules Verne's fantasy astronauts of 1865, who
shot to the moon from the barrel of a gigantic Florida-based cannon.
The other possibility is to return to the world of Adam Smith, in which global
population was around 1 billion, so that resources and environmental problems
posed little constraint. In such a world, natural resources would be abundant
for centuries to come, so China's economics would be wholly foolish, and the
free market would reign supreme. Government policy would no longer be relevant,
and private sector companies would build new technologies and possibilities in
a world of globalized free trade. Environmental constraints such as global
warming would also pose little threat, since the carbon emitted into the
atmosphere by the global economy would be a fraction of its current level.
Returning to a global population of 1 billion would be difficult, but it may be
more practicable than a gigantic interstellar exploration program. If so, it
may form the only viable exit from the inexorable approach of the world of
Thomas Mun.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-2009 David W Tice & Associates.)
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